Here are the show notes to this week’s Leaked Lunch podcast with former UBS chief economist George Magnus.
Show Notes:
- 0:00-4:40
Introduction / Chat about Chinese food. - 4:40-9:50
George’s career; start in UBS, explains his career move and how he came to focus on China. - 9:50-15:25
Starts on historic Chinese FX reform drive. - 15:30-18:30
Chinese political context: The rise of Xi. How the power of Xi does not come from the presidential office but from his other roles in the Communist bureaucracy. Xi’s rule change for the presidency is about the maintenance of these other roles indefinitely. - 18:30-19:45
Are nuances about Chinese politics accurately reflected in the mainstream? - 19:45-22:10
Trade wars as class wars – reference to Michael Pettis and Matt Klein’s book. - 22:10-25:10
Deglobalisation. George says that companies had already been eyeing the politicization of the business environment in China negatively, but the critical ‘Rubicon’ for deglobalization from China occurred in February 2020. - 25:10-28:20
Discussion of the Chinese economic model, which is based on internal and external circulation, strategic industrial self-dependence. George speaks of the clash between focusing on internal vs external demand, that the Chinese government continues to rely on this as a way of showcasing Chinese elite sentiment to their economy generally. - 28:20-31:00
On the political risk element of the Chinese internal economy. George says the CCP does not care about the demand side. There is an over-reliance on infrastructure investment and regional investment initiatives. George claims China needs a root and branch reform. China’s political problem is they know they need change, but maybe don’t have the political capacity to change without giving up the CCP’s goal – to rule without challenge. - 31:00-33:00
Impact of COVID and Zero Covid policies on existing Chinese economic model. - 33:00-35:40
Can we trust the numbers coming from China? George says there could be problems with the numbers coming out of Wuhan. Generally, most stats coming out of China are good – but some like GDP are clearly not good and manicured. - 35:40-42:40
Can China come back from the Beijing Olympics fiasco? Questions regarding the Sino-Russian entente. George compares Sino-Russian agreement to the agreement between Germany Italy and Japan in WW2 to fundamentally change the world order. “They see the current time as the perfect moment to exploit what they see as the decline of the western world”. - 42:40-49:10
Back to Chinese self-reliance and the tensions in this concept – despite this self-reliance objective, they’re extremely reliant on the West for niche things (asset and wealth management, for example). They then comment on the similar tension with regards to their (allegedly socialist) treatment of workers, which is poor, as compared to Western worker treatment which is much better. Izzie questions whether this tension is a by-product of the Chinese being far more traditionalist and Victorian, almost. Then George goes into the issues in the Chinese welfare system and how it is at risk if the economy falters. - 49:10-52:00
How exposed is the West to Chinese real estate economic troubles? The impact of Chinese real estate problem is going to be with companies who facilitated the construction industry in China. George says the Ghost towns stopped being an issue as many of them started working. Nevertheless, vacancy rates are around 20 per cent across China. Commercial real estate is feeling the pinch now too. - 52:00-55:00
On-the-ground perspective in China, Izzie’s friend loves their life in Shanghai. George claims that the normal tourist destinations in China do make you feel like it’s a successful and developing modern country – and the economy has advanced and it is working, though it does have issues that will get worse over time. - 55:15 – 57:30
What is China’s ambition? Being prosperous by 2035, to prevail as the global power by 2050? Is that realistic, extrapolating from China’s economy? George says no. But the massaging and manipulation of NGOs and multinational orgs by China is real. - 57:30-1:00:00
About-turn in perceptions of China. Did Trump do it? George: yes. Though maybe it was inevitable because of Xi Jinping’s personality of hardening the CCP, and because China’s economic heft is unique; Russia is not like that and never will be. China is a commodity, industrial, service, and demographic giant and competitor to the West. China wants to reform the global system so that it favours them more. - 1:00:00-1:04:00
Have western institutions been infiltrated by Chinese influences? - 1:04-1:07:30
Can we compete with the China-Russia-India power bloc? - 1:07:30-1:10:10
Indian demographics. George says India is a demographic darling – their young working population is set to grow in 40 years by as much as the entire eastern and western European young labour population. Demographic dividend passing to India – the challenge becomes one of enough jobs. - 1:10:10-1:16:20
Demographics – are we suffering from overpopulation or underpopulation? How do you square a demographic problem with the green agenda? Depopulation is a global phenomenon. George says per capita income is the most effective contraceptive. - 1:16:20-1:21:20
Climate change impact on childbirth and the impact of economic hardships on demographic growth. Is the only solution for the West immigration as Vince Cable claims? George is sceptical – immigration is a political can of worms. - 1:21:20-1:27:00
Is stagflation good for productivity? George is bullish on productivity. If what we’re experiencing in tech advancement is as dramatic as we think, we will see productivity enhancements as tech improvements trickle into industry. - 1:27:00-01:30
Innovation – what about where innovation can’t really happen? - 01:30-1:32:20
Crypto. George is a nocoiner – thinks crypto was born of QE and the low-interest rate environment and will run up against a wall when that started to change. Doesn’t see it as more than a source of speculation. George is taken by the BIS’ idea of money as a public good, should go against the idea that money can be made private, cut off, decentralised for a public society. - 1:32:20-1:37:20
What does George think of CDBC’s and China’s role in these developments? George says CBDCs are coming down the track for sure – digitalisation of money is on the way. Izabella talks about the de-neutralisation of money. - 1:37:20-1:41:15
One Belt and Road. Firstly – loans are way down. Secondly, they’re not investments but loans that are then used to pay for Chinese development. However, Chinese companies’ difficulties with the Belt and Road initiative means the lending has significantly slowed and the Chinese are shifting priorities to the Health Silk Road – creating public health facilities across China, or the Digital Silk Road, building network infrastructure and phone systems and taking Chinese tech standards into different countries. - 1:41:15-1:47
Taiwan. Since Taiwanese politics are moving further from a voluntary change to accommodate China the logic suggests the Chinese only have the option of bullying or invasion (or patience). Would China want to risk near-certain risk of confrontation with US for it? The upside of a Taiwanese invasion is narrative building for the CCP. George notes that Taiwanese semiconductor factories could just be burned scorched earth style. George thinks that if a window is presented where China can successfully force the Taiwanese issue with lower military cost, that’s something they might seize. Would the Taiwanese fight? George thinks they will try. - 1:47-1:49:10
The potential effectiveness of sanctions vs China. George says China spent more on semiconductors than energy last year – and they can’t make the best semiconductors yet (they only make about 20 per cent of their own semiconductors and they are low-end). If you did sanction China on the tech that China is the most dependent on it and it would hurt them a lot. - 1:49:10-1:54:25
Pained about how compromised his colleague chief economists were and how much worse it has gotten. The discourse in the banking analyst world has become very dry. - 1:54:25-2:02:30
Inflation. George says he underestimated the demand bounceback since Covid but is well aware of the supply chain disruptions which are long-standing. Says the recalibration and regionalisation of supply chains and production are costly trends which are going to stick. The legacy will be higher inflation for the future. Who should we listen to? George: Not the BoE – though there is a window to control the wage-price spiral, the ongoing general strike atmosphere means we are in danger of spiralling out of control. - 2:02:30-END
Economic reform. George says if you really wanna improve the economy, you have to introduce supply-side policies; more competition, more industrial policy. Restructuring away from consumption spending and towards the investing side of the economy – away from the forever cycle of tweaking this interest rate to these basis points and back. Talks of how regionalisation of global supply chains is also an opportunity.
