Odd Lots - What Will China’s Economy Look Like In 10 Years?

Episode Date: October 22, 2018

China has a plan for how it wants to transform into a modern economy. But the future of China’s economy is complicated both by internal factors like debt-fueled growth, as well as external challenges like a potentially drawn out trade war with the U.S. On this week’s Odd Lots, George Magnus, author of “Red Flags: Why Xi’s China is in Jeopardy,” explores these pressures and more. See omnystudio.com/listener for privacy information.

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Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg Television, Radio, and wherever you get your podcasts. Hey, Oddlots, listeners. It's Joe and Tracy here. We've got a couple of quick editors notes for you. One is our recent guest, Craig Wiggins, misidentified the company Aurora as building to scale. That was around the 1454 mark in the cannabis episode. The correct company is Afria. And one more note for you before we begin. We actually recorded this episode on the week of October 8th, and we refer to some events that were taking place that week, notably a pretty big market sell-off globally, but especially in China.

Welcome to another edition of the Odd Lots podcast. I'm Tracy Alloway. And I'm Joe Wisenthal. So, Joe, I just want to double check, but you realize that I've moved to Hong Kong, right? I not only am I aware of the fact that you've moved to Hong Kong. I am incredibly jealous. that you now live in Hong Kong because that's one of my favorite cities in the entire world with some of my favorite food. And I think I'd be to come out and visit you in a few weeks in Hong Kong. So I'm actually personally excited to benefit from the fact that you moved out there.

Yes, and I promise to take you to some amazing restaurants. But in the meantime, one of the most exciting things about being in Hong Kong has to be writing about and observing the China story. And Hong Kong obviously is a special administrative region in its own right, but it's a good vantage point from which to observe everything that's been going on with the Chinese economy. And as you know, this is becoming more and more important given that the U.S. seems to be on the verge of a trade war with China. Wait, so we're not talking about Chinese food on today's episode. No, but we should probably do that. we should do a odd lots food spinoff, but we're not doing that today. Today we're going to...

No, but I... Go on. No, no, I just, just all jokes aside, I'm interested for reasons beyond the food and you're absolutely right, that it just feels like there's a moment where understanding what's going on in China feels particularly important. Right. And I should say, we're recording this in a week that's been particularly terrible for China. Chinese markets and Chinese assets. When I left the office today, the Shanghai Composite was down something like 5%. Tencent, the big internet giant that we have here, had at one point dropped about 7.7%. So it really feels like Chinese markets are bearing the brunt of a lot of the trade war pressures. But beyond that, one thing I've learned just from being here for a few weeks is

that, of course, there is this ongoing question about China's economic adjustment and whether or not the aspirations of China's rulers, the Chinese Communist Party, are going to actually be compatible with modern capitalism. Right. It feels like with China or at the intersection of a short-term story and a long-term story. So the short-term story is maybe tensions with Trump, although that may turn into long term. There's the market sell-off, other sort of things like that. And then the long-term, there's the efforts to restructure the economy, the effort to become really important in a bunch of big technological areas, which we've talked about before on the show. And so part of the question in my mind that I'm trying to wrap my head around is to what degree do the short-term pressures sort of stymie the long-term efforts?

Right. That's actually a really good way of putting it. the intersection of a short-term and a long-term story. So we actually have the perfect guest to talk about this today. Not only is he a sort of a long-running China expert, but he might actually be the coolest economist that I know. The last time I saw him in person, he was wearing a leather jacket and jeans, and he was on his way to Glastonbury.

So pretty cool. I'm pretty excited. All right. So our guest for this episode is George Magist. He is now an independent economist. He is also research associate at the China Center at Oxford University and SOAS. He is also the author of a new book called Red Flags, all about the pressures facing China and its ruling authorities.

And he is the former chief economist at UBS. So George, thank you so much for joining us today. Well, thank you for having me. So, George, I guess just as an initial question, Maybe for our listeners, you could walk us through how you became a China expert in the first place. Yeah, sure. So I think my first visit to China, actually, was in 1993 when I was a kind of a rookie foreign exchange economist at a UK merchant bank that went by the name of S.G. Warburg, which later was taken over by Swiss Bank Corporation, which eventually merged with UBS. And so that's how I kind of became kind of chief economist at UBS.

And then China was very then definitely not just the kind of a place that I used to go to pitch at the People's Bank of China and the state administration of foreign exchange for FX business, but also a much more kind of meaningful kind of investigations into what made the economy tick and so on. But I think my big break, so to speak, came when actually I took a step away from management, functions at UBS and had much more time to look at serious issues like what was going on in, you know, the financial crisis and subprime mortgages and the economy on the other side of the world, which is China. And I really have spent the last kind of 10 or 15 years, I'd say, just trying to penetrate what is really a kind of a very opaque and still untransparent

economic and particularly political system. I feel like at best I have, I'm sort of a tourist when it comes to understanding China. I mean, I don't even know if I'm that good at understanding the U.S., but at no point have I ever felt like I had a particularly good grasp on what's really going on. I have some vague idea that they want to restructure their economy and that they have overcapacity in some legacy industrial, state-owned sectors. There are concerns about real estate bubbles, and they want to lead. in tech. And after I list off that, that I'm kind of coming to the end of my feel for the Chinese economy. What does it take to understand China? Is it repeated visits? Is it repeated conversations? Is it a granular understanding of the data beyond the headlines? Because I kind of feel

like I'm not alone. I suspect many American commentators really have only the most vague sense of how the Chinese economy really works. Well, one, Joe, I think you're probably being rather modest. Two, I mean, it is quite a serious effort, really, to try to understand a country that basically doesn't really work in the same way that our Western economies work. But I would say that, you know, a good place to start is people need to understand a little bit about China's history and about how it got to where it is today. So obviously, during the early years of the People's Republic under Mount Zittung, I mean, China actually grew quite quickly, but it was still a pretty impoverished.

place. And nothing really changed in terms of its catch-up on the rest of the world until Deng Xiaoping came to power in the end of the 1970s, beginning of the 1980s. And then things started to really move because he was basically renowned, or certainly people attribute to him, the phrase that, you know, I don't care if it's a black cat or a yellow cat, so long as it's a cat that catches mice. And that was the kind of his way of basically saying to the Communist Party that, you know, we have to be prepared to experiment with things that we haven't done before, particularly the marriage or the interaction between, you know, a state-run economic system and the use of market mechanisms. So people need to understand a little bit how that happened.

And also how we've kind of reached a point now. And I don't really mean in 2018, because I I think this has been brewing for about five or six years. But it's a point that I call in the book the end of extrapolation, because whatever we thought we knew about China over the last 30 or 35 years, I don't think you can kind of extrapolate that on a spreadsheet and say, well, because it's done this for the last, you know, three or four decades, we think we can probably, you know, push this forward into the future. And this is what China will look like in 2030 or 2040 or 2050.

Because I think it has reached that point where it needs a big, makeover, a big transformation. And you know, you don't have to take my word for it because in 2007 and 2011, so this is before Xi Jinping came to power. So this was when Hu Jintao and Wenjibao were the president and the Premier of China respectively. And Wenji Bao notoriously said in both of these years that the Chinese economy was unstable and uncoordinated and unbalanced and needed to change. And even as recently, recently as last year at the 19th Party Congress, he said that the economy was unbalanced and inadequate to meet the people's needs for a better quality of life. So everybody agrees, including the Chinese leadership, that it needs a transformation, it needs a makeover. And so what we're all trying to get to grips with, really, is how to try to understand what's required and whether this government really has the wherewithal and the nowce to be able to make it happen.

So I have a sort of step back question, which is, do we have a good idea of where the Chinese government actually wants to get to? Like, is there a clear vision of what they want their economy to look like in 10 or 20 or 30 years? Yes, we do have an idea. In fact, the 13th five-year plan, which is now sort of actually getting towards the last couple of years of its kind of limit. I mean, does lay out kind of guidelines and signposts for how to develop China into a modern economy with modern industries and moving away from its kind of traditional reliance on heavy industry like steel and coal and chemicals to something that's a little bit more familiar to us in terms of more service-producing industries, more consumer-oriented sectors and so on. And I was going to say the sexier bit, but actually what I mean is the kind of more interesting bit about China's vision, really came about in 2016, so not that long ago, when AlphaGo, as many people may remember, beat the reigning world champion of the game Go. And this shocked the Chinese into basically saying, we want to be the world masters at artificial intelligence by 2030. So, or 2035. And in between time, there was also a very important industrial strategy called

Made in China 2025, which happens to be basically the butt of the White House's objections to China's trade and industrial policies. And this sets out very clear, quantitative, top-down targets about China's aspirations to be where it wants to be. Where it wants to be, be in 10 key sectors like, you know, biomed and electric vehicles and green energy and so on by 2025. So they definitely do have a very clear, top-down vision about what they want to achieve and the kind of the time scale on which they want to do that by. But in a way, that's kind of the easy bit, right? You can say, you know, I want to be Superman, but you don't really know how that's going to happen or what you need to do to make that happen. And this is kind of what we're all trying to disembowl, really, about Chinese policy at the moment.

I hadn't realized that the Elphago victory was such a wake-up call moment. We had another episode where we talked about the Maiden China 2025. But one question that I have, so you mentioned, okay, there was this incident. they're like, all right, we want to lead in AI. So they set out the national priority that we want to be a leader in artificial intelligence. What happens then? So they set the priority. What specifically do they do to implement it? Well, in the first place, you know, it starts with with targets, right? So they say that, you know, we want to be a world leader or we want to have market share of, you know, 65 percent or 70 percent or 75 percent. or we want to reduce our dependence on, you know, American semiconductor companies because we want to develop these industries ourselves.

In fact, that happens to be a very live issue for China, particularly since the incident that we had earlier this year when the United States basically sort of restrained ZTE from being able to access products. and that was subsequently kind of softened up. It was a national security issue at the time over ZTE's relationships with Iran. But it starts off really with the prioritization of Chinese companies gaining or winning market share in specific industries and sub-sectors. And then there is a whole raft of industrial policies

that range from subsidies to tax benefits to, the facilitation of, you know, university research departments with, I mean, nominally private companies like, for example, Baidu and Tencent and Alibaba and Xiaomi. So there are, you know, with all the kind of leading tech companies in China to basically help them along their way to achieve these targets. I mean, in a way, I mean, some of these companies are private, or we think of them as private. But actually, then, they're kind of not private in the way that we think about private companies in the West because the chief executives and the boards of these companies know precisely which side of the, you know, which side their bread is buttered on. And, you know, they wouldn't

do anything to fall foul of the government. And they basically, you know, receive benefits and favors and procurement privileges from the government. So they are nominally. They are nominally private, but not kind of private as we think of them. I'm Francine Lacquois, an award-winning journalist, and I've got a new podcast, leaders with Francine Lacqua from Bloomberg Podcasts. I've interviewed everyone from Heads of State to fashion icons about the news of the moment. But I've always been curious, who are these people as leaders? I don't think there's one right way to be a leader. Make decisions. A poor decision is always better than no decision. Listen to new episodes every other Monday. Follow

leaders with Francine Lacroix, wherever you get your podcasts. So I want to zero in on the corporate story a little bit because on the day that we're recording this, we did just see a very big sell-off in Chinese stocks. And it's kind of unusual. This came in the midst of a global sell-off, but it was a little bit surprising because Chinese stocks had already fallen by quite a lot before today. They had really borne the brunt of some of the jobs. trade war concerns. So some people were surprised that they fell out of bed today as well.

What's going on here and are Chinese companies as vulnerable to the trade war fears as the market seems to be implying? Well, this particular week in which we're doing this recording is it's been quite a little bit complicated because the previous week, the Chinese had been on holiday. So there's been a little bit of a catch-up going on because markets have been weaker following very robust US economic data and revised interest rate expectation. So there was a little bit of catch-up going on. But you're absolutely right, Tracy. I think there's an ongoing concern that even though the trade conflict hasn't really compromised the Chinese economy or Chinese companies in any material way as yet. And by the way, if it has, then it's probably been offset by the easing of

lending and interest rate and bank reserve policies that have been taken this year. But there is an ongoing feeling that cumulatively the trade war will have an effect on the Chinese economy, aggravating what is already a slowing down in investment and to some degree, to some degree, also in the consumer sector as well. So there is, for example, quite close attention paid. It's always difficult to know what to make of it. But just as it is in the United States or in the EU, for example, people pay a lot of attention to the purchasing manager indices. These are kind of surveys of major companies and medium-sized companies about sentiment that come out usually at the first couple of trading days each month.

And the ones that came out at the beginning of October, which is now just about kind of eight, nine days away behind us, were notable really because they were quite weak when you look at the components that are about export orders. Okay, that's kind of what we would expect to see if tariffs are starting to have an effect. They were quite weak when it came to employment. Now, that's quite important, really,

because obviously the legitimacy of the Communist Party, you know, basically rests amongst other things, but certainly importantly, on, you know, the achievement of sustainable growth in living standards and prosperity without interruption in which high levels of employment are really important. So if the labour market is weakening, then that's obviously something we need to kind of pay some attention to. But there were other indications in these surveys that things are not going all that way. for the economy. And I think the trade conflict is something which, you know, cumulatively, as I say, will have an effect not only on the Chinese economy, but it might, if it's protracted, it might have an effect on the construction of supply chains and the location of businesses

by foreign companies who may feel that it is judicious to diversify or move some activities he's out of China. So these things could be cumulatively quite important. George, I want to talk more about the trade war tensions in a second. But Tracy started off her question asking about the stock market. And something that I'm always sort of curious about is how important is the stock market in China? And I ask because I think it's very important here for a number of reasons in the U.S. because a decent part of the population owns stocks. It is a rising stock market can spur more investment. Does people want to flip startups onto the public market. There's all kinds of reasons to watch the U.S. stock

market as a decent barometer for other bigger trends in the U.S. economy. Does the Chinese stock market play that same role, or is it not as good of a gauge into what's going on? No, I mean, it isn't as good a gauge. I mean, it's not widely owned by Chinese households in the way that stocks are held either directly or through 401K plans or other forms of pension assets. So ownership by citizens of the Chinese equity market is not wide. And it doesn't have the same kind of role in terms of equity, capital raising for companies and wealth ownership as it does in the United States, for example. I don't really think it has the kind of economic effect

or can have the kind of galvanizing or destructive economic effect that it might do in Western countries. So I guess I'm curious, but if you were to characterize the Chinese economy at the moment, how would you do so? Is it strong? Is it weak? Is it going through a trend?

transition period. What does it actually look like to you? I think it's definitely going through a transition, I would say, Tracy. I mean, it's yet another transformation. It's waiting to happen, but we don't really know what the end game is going to look like. So the basic transformation is from an economy that has become far too dependent on credit creation to keep growing, far too in which misallocation of resources and misallocation of lending has featured all too prominently and which needs to basically restructure away from its overly heavy dependence on capital investment and credit to a greater reliance on more open service-producing industries and the consumer. So this is the kind of transition which the Chinese call it rebalancing.

So this is the kind of transformation China's got to try to go through. But it's very, very early days. And we're already starting to run into a few issues with the whole de-leveraging cycle. which began with great seriousness at the end of 2016. I think the Chinese leadership became very cognizant of the fact that they could not carry on with this sort of overly heavy dependence on credit creation. And they've been partially successful in limiting the growth of lending to companies and in cleaning up some of the more egregious forms of risk

in funding of that lending. In other words, through overnight and very, very short maturity deposits in the interbank market and through products that have become known as wealth management products. So they've been quite adept at doing that up to a point. But at the same time, they haven't really been able to get a strong grip on containing the growth of debt by local governments, which are really important agents in the economy, and household debt, which previously was actually rather tame, is now on a bit of a tear. In fact, the ratio of household debt to income in China, as of about June of 2018, was almost 120%. So, you know, it's a mixed scorecard. And during the course of this year, 2018, we've seen lots of

exhortations by the People's Bank of China and the regulatory agencies to banks, to lend more to export companies, to small companies, to local governments to spend more on infrastructure or issue more bonds to fund infrastructure. Reserve requirements for banks have been cut four times. Interest rates have come down. So there's kind of accumulating evidence that actually the Chinese authorities don't really like the consequences of de-leveraging. And of course, it's not a good thing, you know, to have to put your economy through a wringer, to wash, you know, leverage out of the system. But if you don't do it when times are good, you have to do it when times are bad. And the worry is that if the authorities are now kind of backing away from de-leveraging a little bit,

that it just exacerbates the problem down the road and it defers the rebalancing for a long time to come. So how much of this pause on rebalancing or these exhortations to banks to lend more and to continue the credit-driven growth model? How much are they in response to trade war-led slowdown and thus sort of gets at the question of whether the tensions with the U.S. and other parts of the world are sort of disrupting the long-term plans? Yeah, my view is I don't think the trade conflict to date has really had a marked effect on what the authorities probably think is going on in the economy. And if it has had any effect, it's probably been compensated for by the easing of monetary and financial policy, including, by the way, the depreciation of the yuan, which has dropped by about 8% since the spring, pretty much. offsetting the latest round of 10% tariffs, which the White House announced in September or early October, for the moment at least. But I think it will become a bigger issue, particularly as the tariffs go up to 25% on the 1st of January 2019. And also, if President Trump decided to

broaden the implementation of punitive tariffs to the whole of imports from China. Right. George, I wanted to ask you about this, because when we talk about the things that China could possibly do to offset a slowdown in its economy, there are a couple of things that usually come up. You know, one of them is always the U.S. Treasury issue. China owns a lot of U.S. treasuries. They're a major creditor to the U.S. and there's the this underlying theory that at some point they could possibly sell off those holdings, basically to make a point about U.S. policy. And then there's also the Renmin B issue that you just alluded to.

They could always devalue their currency, either in an obvious or a slightly more stealthy way. But there's also a greater fear that maybe at some point China might try to overturn the US dollar's supremacy in the global financial system. How realistic are either of those threats? Well, I mean, to the extent that anybody can predict how things are going to evolve, I think the Chinese would give them both very, very serious thought from the point of view of, do we really want to do this with all the consequences that they would entail? Because actually both of these policies, which, so either selling US treasuries and or allowing the Yuan or the MNB to depreciate much more aggressively, would be causes of self-harm and domestic instability, I think.

So the treasury issue is an old chestnut. We've been here many, many times. before in the last kind of five to seven years. And we should remember a couple of things. One is that the Chinese have a great deal of pride in their foreign exchange reserves. I mean, they did peak out at about $4 trillion in 2014. They're now kind of hovering at around $3 trillion. So I don't think they would treat this very lightly. And I think that there's no guarantee that selling US treasuries would actually achieve the results that they would want other than just to make the White House really angry. So during 2015-2016, when the Chinese were going through a mini-financial crisis,

when they were going through this, they bled about $5 to $700 billion worth of U.S. dollar reserves without really impacting the treasury market at all. Okay, so we could say that times were different then because the Fed wasn't raising rates and the economy wasn't as strong. And so if China did sell its treasury holdings or some of its treasury holdings now, they would be doing so into a falling market when, you know, people expect the Fed to keep on raising rates and so on. That's true.

So it could have, you know, a more significant effect. But I think it's like what happens if the first $500 billion worth of sales don't work? You know, do they keep on doing this? I mean, there is a level of reserves below which they will clearly not want to go. And I think it's quite dangerous because it could quite easily trigger, well, instability and lack of confidence in Chinese financial markets and actually induce capital outflows at a time when they're trying to stop that happening. The same applies with the currency depreciation. So I think at the moment it's quite...

ironic really, but Treasury Secretary Steve Munition has basically said a few things during the IMF meetings going on in Bali about, you know, China's manipulation of the currency and so on and so forth. If the Chinese actually did float their currency, it would probably drop like a stone. And I think at the moment the Chinese are doing whatever they can to basically keep it from depreciating. politically, of course, they could change that policy. They could decide that if the tariffs are going up as are scheduled to do, and because of the impacts of the domestic economy and tariffs and trade conflict and so on, that if they wanted to compensate by depreciating the renmin B much more aggressively,

that they could allow a depreciation of maybe 5, 10, 15%, something like that. It would be unprecedented, I would say, in certain. in recent times. And I think it would also be highly destabilizing for China, for emerging markets, for China's rhetoric about wanting to be the leader of globalization as the United States retreats. So none of this stuff would really work if China were seen to be, you know, embarking on a competitive devaluation. Would it happen politically anyway? It's possible. I don't think we can rule it out. But it's not really something that I think China, as leaders who are quite cautious and they do crave stability. I don't think they would be very

aggressive in allowing that to happen. Depreciation was probably going to happen anyway, but I would say it will be measured. George, you mentioned earlier that you do think we're in for a protracted U.S. China trade war. There seemed to be two dimensions to the U.S. China tension. So the president, when he talked, and I'm talking about the U.S. President, President Trump now, when he talks, when he talks about China, he tends to focus a lot on the bilateral trade deficit and wanting to balance out the numbers. And that's usually how he seems to think about the world. And most people, many mainstream economists don't give him a lot of credit for that viewpoint fairly or unfairly. On the other hand, there is a more sort of sophisticated and widespread backing for the

idea that something must be done to sort of counter China's industrial policy. that things like the force transfer of technology are patently unfair and at least in spirit violate the rules of free trade, and that something must be done to sort of counter what we were talking about earlier, the Made in China 2025 initiative and various endeavors by the country to become a dominant player in these industries. Ultimately, is there a path in your view for China to continue its technological and industrial pursuit? which might be a little bit more qualitative and also satisfy the demands of the U.S. Is there a middle ground or are these sort of fundamentally diametrically opposed goals? Well, I mean, they are pretty fundamental on both sides, actually, and it's quite difficult,

I think, to see how either side could actually back down. and say that their goals have been met because that would not be the case. And certainly, you know, China will not contemplate actually any kind of intrusion on what it would regard as its sovereign right to have whatever industrial policies it deems to be appropriate. And at the same time, you know,

the United States has clearly recognized that, you know, China as an adversary in technological matters, but also closely related that to military matters and the industrial policies that underlie both of those narratives, really. This is a serious issue where, you know, you can't really compromise. And I think in some respects, I think we should, you know, basically say that whatever we think about tariffs is a policy or as a tool, but the concept of actually calling China out on some.

of its practices actually is certainly a defensible position. So is there a middle ground? Well, obviously the atmospherics would have to calm down first. I imagine, you know, and I'm just guessing here, but I imagine that in the end, the United States will accept that it cannot change China's industrial policy, but the Chinese may eventually decide that there are certain things that they could do about intellectual property protection, about market access. And I don't just mean rhetoric, which is kind of what we largely get after, you know, meetings between senior officials or used to get them when they were having meetings. But IPR protection, market access, a willingness to engage and to see where there might be

some kind of mutual advantages in agreeing on, you know, different types of, concessions for industries. I mean, I think the technological and military issues are existential. I think it would be a mistake for either side to kind of to back off, so to speak. And I think, you know, probably America's and the West's best kind of hope of countering China is actually to invest more in, you know, technological leadership to counter. But I think there, I think, I hope there would be a middle ground where, you know, both sides are prepared to kind of back off a little bit and compromise. I mean, that's the only way you get to the middle ground. But I think the atmospherics have to cool down a lot from where they are at the moment,

which is pretty feisty. So, George, you mentioned the E word existential questions, basically. I have an existential question, which is that I'm acutely aware that all three of us are outsiders, basically peaking in to the Chinese system in varying degrees. Obviously, you have a better vantage point than either Joe or I do. But I'm wondering, we've had Western commentators who've been warning about pressures on the Chinese economy for decades now and people talking about how the debt-fueled growth

is going to collapse. We've seen the Chinese economy struggle at various times, but we've been pretty far off of a collapse. So I guess my question is, to what degree should we think about Chinese exceptionalism when it comes to the economy? Is there a way that China can actually buck what we think are intrinsic rules that take place when economies operate? So the answer to that is, I mean, it's a typical kind of economics answer, isn't it?

It's sort of yes and no. So there are bits of Chinese acceptable. if you want to call it that, which I think we do have to recognize. And it's why a lot of the kind of the calls that sometimes have been made in the last kind of five or ten years about, you know, it's about to collapse, it's about to implode, etc., have persistently proved wrong. And that is because the Chinese have a very kind of marked system of control and have and can deploy tools which most Western governments can't. because of the role of the state and the role of the party in the economy. So I, you know, I mean, I've spoken before myself about the possibility that China would kind of come to what a lot of people have kind of now colloquially called a Minsky moment, which is a sort of a point where

leverage becomes far too high and causes some kind of financial policy or financial system reaction. And, I mean, I think it is at that point. But I don't think that. think it's different from the rest of us, and I don't think this is a charge about, you know, you Westerners, you think about things in a different way. I don't think that really holds water because the misallocation of resources from excessive reliance on credit has to be paid for one day by consumers, by governments, by creditors, by companies, you know, whatever the system of governance you have, whether or whatever the system of governance you have, whether it's a kind of a free market system or whether it's a state-controlled system. And what we call

kind of financial deepening, which is when, you know, financial assets and liabilities grow at a multiple, a big multiple of the rate of growth of the economy for years and years on end. That cannot go on ad nauseum without giving rise to bubbles, speculation and financial risk. And I honestly believe that this is the point that China is at, when I say at the moment, I don't mean, you know, in October or November 2018, but, you know, for the moment, meaning for the next couple of years, two or three years, and that what the most likely manifestation of all of this as it gets resolved is a protracted period of much lower economic growth than we've been accustomed to. That's the big call in my view. It's possible that China could have a,

a much bigger financial crisis. If you think about, you know, our own 10 years ago, something along those lines, I think it's less likely because I don't think China will allow any major banks or financial institutions to go bust. And so the likelihood is that there'll be repression, financial repression, and they'll basically sit on and try to kind of evergreen the bad loans and the misallocated lending for as long as possible, but, you know, not even centrally controlled economies can do that in perpetuity. So my feeling is this has all been building up. A lot of people have had premature calls of collapse and the

calls for collapse themselves have been wrong. But, you know, that there will be a payback for all of this, I think is inevitable, China or not. George, I want to ask one real quick question before we go. So Tracy mentioned at the beginning that you go to festivals like Gloucels. Astonbury, the music festivals, but I'm sure you also go to lots of conferences and panels where elite thinkers and bankers and economists gather and talk about serious issues. And I'm curious, when they look at what's going on in the U.S. with our political paralysis and our president, and they look at what's going on in the U.K. dealing with Brexit, and then they look at China with these multi-year plans and this extraordinary investment into the United States. And,

things like clean energy and artificial intelligence. Have you sensed a swing in terms of sort of elite viewpoint about the merits of a more centrally planned system? Oh, I think that's definitely, it's a good question, and I think that's definitely something that has, or, you know, has worked its way into public discussion and political debate. Well, I would say it's not, you know, look, the Chinese have this great model, you know, let's just copy it. I don't think I don't think I hear a lot of that. But I do hear a lot of debate now about where should the lines be between what we think the private sector is capable and willing to do and where we think the government or public authorities need to step in to make things

happen or to facilitate things happening more quickly. But I do think that people have just kind of looked at our own experience in the financial crisis and the build-up to it and since, and looked at the alternative kind of governance systems, which obviously we see all around us now, and a lot of governments and countries have basically flirted with or done more than flirtation with autocratic forms of government and started to sort of ask questions about, you know, where those red lines should be. And should we be a bit more. more accommodative about what the role of the state or the role of public sector agencies might be in trying to deliver better outcomes that we all kind of want.

All right, George Magnus, I'm afraid we're going to have to leave it there. Fascinating discussion. Thank you so much for being with us today. That was George Magnus, the author of Red Flag's Why She's China is in Jeopardy. Thank you. So, Joe, I thought that was a really interesting conversation. about the future of China and your question at the very end about whether or not China's exceptionalism has kind of caused some people to think about the benefits of Western democracy

is sort of spot on. It feels like there's just sort of this pendulum of ideas that swings back and forth. And we're at this period where a lot of elites and intellectuals and economists in the West are fairly disgusted by what they see in the U.S. and they sort of yearn for some of the more directed economic approaches that they see in China, particularly when it comes to investment in technology. But I always, you know, like I said, it feels like it's a pendulum. And that maybe I don't know whether we've swung all the way to one side,

but I don't think that it'll stay that way forever. And at some point, it'll probably swing back in the other direction. Well, I will say that any China bowl that you talk to in Hong Kong, One of the big components of their China bull argument is usually China is a command economy and it's able to order a bunch of people around or pull a bunch of levers to engineer the outcome that it wants, which is something that you never hear about in Western societies. No, absolutely not. But then again, in five years, we might be hearing. China is a command economy and technology never flourishes when there's not more market competition. petition and they're going to misallocate and pick winners and losers wrong. So, you know, what they say today about how China is able to stave off downturns and all this stuff, it may not be what they say five years from now. Yeah, but it does feel like we're getting to a bit of a

crunch point where whatever happens over the next two or three years is going to bolster someone's argument one way or another, right? Tracy, when I come to visit you, can we go across and go into China or will that not work out? Well, we can try. That's all I'm going to say. Okay. All right. Well, I'm looking forward to seeing you.

Yeah, it'll be good. There will be lots of Chinese food, I promise. All right. On that note, this has been another episode of the Odd Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Allaway. And I'm Joe Wisenthal. You can follow me on Twitter at the stalwart.

And you should follow George on Twitter. He's at George Magnus 1. And definitely follow our producer, Tofer Forges. He's at Forges T, as well as the Bloomberg head of podcast, Francesca Levy, at Francesca today. Thanks for listening. You can get the news whenever you want it with Bloomberg News Now. I'm Amy Morris. And I'm Karen Moscow here to tell you about our new on-demand news report delivered right to your podcast feed. Bloomberg News Now is a short five-minute audio report on the day's top stories. Episodes are published throughout the day with the latest information and data to keep you informed. Yes, there are other products like this from a variety of news organizations,

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