Inside China’s Growth Dilemma ft. George Magnus

[00:00:00] George

You can be really successful in doing the kinds of things that China does, but without really making much of a mark on ultimately the things that are going to find you out. If you can’t solve the problem of inequality, and labor force dynamic, and income growth and debts, capital misallocation, you have to solve these problems eventually or you suffer from the consequences. And I think that’s the big danger as far as I see it in China.

[00:00:43] Intro

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Here’s your host, veteran hedge fund manager Niels Kaastrup-Larsen.

[00:01:38] Niels

Welcome and welcome back to another conversation in our series of episodes that focuses on markets and investing from a global macro perspective. This is a series that I not only find incredibly interesting as well as intellectually challenging, but also very important given where we are in the global economy and the geopolitical cycle.

We want to dig deep into the minds of some of the most prominent experts to help us better understand what this new global macro-driven world may look like. We want to explore their perspectives on a host of game changing issues and hopefully dig out nuances in their work through meaningful conversations.

Please enjoy today’s episode hosted by Alan Dunne.

[00:02:23] Alan

Thanks for that introduction, Niels. Today I’m delighted to be joined by George Magnus. George is a Research associate at the China Center in Oxford University and at the School of Oriental and African Studies in London. He was Chief Economist and then Senior Economic Advisor at UBS Investment bank and while he was there, he served as the Chair of the Investment committee for the Pension and Life Insurance Fund. Earlier in his career he worked at SocGen (SG), Warburg, and before that at Laurie Milbank and at Bank of America. George, great to have you on. How are you?

[00:02:54] George

I’m pretty good Alan, thanks for having me.

[00:02:57] Alan

Great. Well, you’ve worked at some big names in in the banking world and your career spans many decades. What got you interested in economics in the markets in the first place?

[00:03:09] George

Well, to be brutally honest, it was an accident. I got thrown out of class A level at school for not resisting the temptation to chat during English lessons. And the only other A level that I was kind of interested in, to do, that was available to me, really, was economics. I took it twice and got an E. And so, I kind of fell into economics a little bit by accident.

But by the time I did my master’s degree actually at SOAS, yeah, I was quite interested in development economics in particular, and aid and trade and that whole kind of argument. Yeah, and then I kind of went to study in the US at the University of Illinois, and then came back and worked for the government for a while as an economics writer, so writing basically economics propaganda for the British government… not propaganda, you know, but just kind of pitching what the UK economy was all about, and the insurance industry, and the budget, and so on, and so forth.

And then I started off with my first job, actually, that was with Lloyds Bank, as an economist. And yeah, I just kind of never looked back from there, really.

[00:04:25] Alan

Very good. And you’ve obviously had some senior roles, particularly at UBS, as the chief economist there and then senior economic advisor. But obviously, as you’ve transitioned towards the latter part of your career, you very much focused on China. What, really, was it about China that motivated you to really focus on that?

[00:04:47] George

Well, my first exposure to China really was when I was with Warburg, and we used to send, or the company used to send small bands of people to Beijing to go and pitch for their foreign exchange business. And this is, you know, back in the sort of early ‘90s really, or late ‘80s, early ‘90s. So, this was pretty small-scale stuff at the time.

So, I just kept on going back to China and it was always a little bit on my kind of portfolio. I mean, my principal interests really for many, well, for decades really, was obviously the economics of developed markets and, you know, the US, UK, Europe, etc., etc., Japan. And then after the financial crisis, which, as calls go, I had a pretty good financial crisis. But it was, obviously, as everybody remembers, it was a pretty scary time. But when we came out of the financial crisis in like 2009, 2010, I mean, everybody’s doing QE, everybody’s got balance sheets inside out. The focus is huge, ubiquitous. There’s not a lot of space, really. And I’m thinking, really, what’s the next big game in town for economists?

So, this is kind of after the financial crisis when, you know, China was starting to flex its muscles a bit, even before Xi Jinping came to power. And yeah, I thought China was going to be the next big story. And here we are.

[00:06:23] Alan

Very good. And it certainly has been a big part of the narrative. I mean, as an economist, when you’re looking at China, is it a different set of skills than when you’re looking at, say, the U.S. economy?

I mean, from the perspective of the data, the amount of data we get from the US, high frequency data that is reasonably reliable (I think people would say)… Whereas with China, there’s always skepticism about the data. I mean, how do you think about approaching China from an economic analysis perspective?

[00:06:56] George

Yes, it’s interesting, really. I mean, obviously there’s a sort of a facetious answer to that, which is, with Donald Trump firing the head of the statistics service, or whatever it was, of the employment numbers, I mean, it was starting to resemble a little bit like, oh yeah, this all looks very familiar from years and years of studying China.

Okay. I think there’s still a world of difference. And the statistics in China, I mean, there are ubiquitous quantities of statistics, micro, macro, top down, bottom up. A lot of the macro stuff isn’t really very helpful anymore and some of it never was, you know, like GDP. But it’s difficult to know how to deal with it. I think it’s interesting because, in some respects, China doesn’t fit the script of your kind of run of the mill, kind of economics 101 rookie, who grows up to look at the economy in a certain way. Well, China’s achieved some extraordinary things with a toolkit that we wouldn’t really recognize.

So, they don’t have rule-of-law. They have lots of laws, but they don’t have a rule-of-law. They don’t have property rights in the way that we understand them. I mean, they have institutionalized rules, laws, and regulations, over the years and decades, which made a big difference in predictability and an analytical method. But the Chinese system gets by on kind of social relationships between families, between firms and local governments, and special relationships that exist.

In other words, it doesn’t work exactly on the same kind of playbook as it does in a developed economy or even many emerging and middle-income economies. So, it is a little bit different in that regard.

Having said that, I don’t really have much patience with the idea that, you know, China’s economy works on different rules to Germany, or Italy, or you know, Malaysia, or whatever. The laws of supply and demand are the laws of supply and demand, and you can’t really mess with that.

And, you know, what economists really do, which is they look at how systems, basically, hang together and where they become functional and dysfunctional. And we’re trained to basically look for the things that actually work and don’t work. I think it’s a pretty standard toolkit.

And indeed, sorry, this last point, it’s been quite interesting to see, especially during the last 10 years, how a number of Chinese economists who are brave souls, really to be honest, because you can get arrested or punished for speaking your mind. But some of them actually have become quite vocal, on Chinese social media, in terms of trying to explain, from their perspective, what they think is wrong with the Chinese economy and what they think the government ought to do about it. And it’s not dissimilar, really in many respects, from the way that many of us in the west kind of look at China as well.

[00:10:27] Alan

Okay, interesting. Well, we might get to that. I mean, maybe just to set the scene where we’re at currently with the Chinese economy and maybe just go back a few years. Obviously, we had, you know, I suppose towards the, the latter part of the last decade and into this decade that the China real estate bubble that seemed to go on forever. And then as we got into kind of ‘20, ‘21 or so, you know, there was a shift towards common prosperity from Xi, anti-tech, anti-education sector.

There was kind of a conscious effort to deflate the property bubble; red lines, three red lines, an anti-corruption campaign. And all of that kind of culminated with Evergrande and the bursting of the bubble. China went into a deep slowdown. They’ve been grappling with that. We obviously had significant stimulus announced last year.

Things have stabilized, it seems, looking at it from the outside. Where do you see it now in the context of that adjustment? Are they starting to come out of it, or bouncing along the bottom, or how would you characterize where the economy is now?

[00:11:37] George

It is certainly true to say that there is no such unitary thing as the Chinese economy. You might say this about lots of places in the world, but in China’s case, obviously, there is an incredible dichotomy between a modern sector with world class companies, global brands, and electric vehicles, and batteries, and solar, wind turbine, you know, all of this kind of stuff.

We know who these companies are, you know, the internet of things, sort of cellular modules is dominated by about a half a dozen Chinese companies. DeepSeek obviously achieved notoriety recently, but for very different reasons. It was founded by a hedge fund proprietor. So, not quite the same sort of industrial model that many other companies have basically been following.

But China basically has this duality. It has a modern sector, advanced manufacturing, the envy of the world in many respects. And you know, all basically this is part of the government’s big plan, really, to dominate what Xi Jinping calls the fourth industrial revolution, which is basically, if you want to take it up to the appropriate level, I mean, this is the way in which, you know, China thinks it’s going to reclaim its position of dominance in the world and elbow aside the United States and the West.

Okay, so this part of the economy; dynamic modern, probably some firms are pretty productive. And you know, obviously, there’s no question that China is innovating in its own specific way. This is about, I don’t know, 10%, 12% of the economy. These are the so called ‘strategic emerging industries’, as they’ve been identified during the last 10 or 15 years. And then you’ve got the rest of the economy which actually is ‘in deep doo doo’, to be honest.

So, it features misallocation of capital, the limitations of debt capacity, because a lot of local governments and SOEs basically shouldn’t carry more debt (but have to keep issuing debt in order to keep current on current payments and amortization), demographic decline, stagnant productivity, waste, corruption, loss. This is all basically part of the non-modern economy which has required stimulus every single year since COVID, and even before that sometimes.

So, going back to the Chinese statistics, which we were talking about a few minutes ago, I mean if the Chinese government really believed their economic statistics, they wouldn’t be stimulating the economy every year in the way that they have done or had to in order to hit unrealistically high growth targets.

So, there’s this dichotomy and there’s a kind of an issue. There’s no reason why the two phenomena shouldn’t live side by side for a considerable period of time, as, indeed, I always (and lots of other people) highlight the Japanese case, 35, 40 years ago, where they had a kind of a modern industrial sector that was the envy of the world.

But these islands of technological excellence, as I describe them, existed in a sea of macroeconomic trouble, and imbalances, asset bubbles, and so on. And then I think, in some respects, the same is true of China in the 2020s. How does this all end? I don’t really know.

I mean there are similarities with Japan but there are sufficient dissimilarities that it makes prediction really, really difficult. But we know a couple of things are true. A, that you can have this dichotomy of two things being perfectly true. You know, great modern sector and a kind of troubled rest of economy.

And the second thing is that, just because you’ve got industrial might and world class companies, it doesn’t mean they can solve your macroeconomic problems. In fact, they probably can’t because the link between these two separate parts of the economy is industrial policy on an unprecedented scale.

And you know, the Chinese spend more on industrial policy than any country in the world on defense. So that gives you kind of a little bit of an idea about just how, how scaled up this issue is.

So, the economy is motoring along at what the government says is about 5% per annum. It’s not really 5%, it’s kind of an artificial 5%. It’s underlying potential rate of growth probably no more than about 3% or 3.5%. And yeah, part of it is very successful. Some of it is not.

[00:16:56] Alan

Yeah, I mean, obviously, as you say, industrial policy has been a big focus and it seems to be that China has reverted to type in terms of an export oriented economic policy. Obviously, for a long time, the great hope would be that the economy would rebalance towards a consumer led economy or more service type economy which always seems to be something that’s going to come along in the future. I mean, how realistic is it to expect that to happen at some stage in the future or not, do you think?

[00:17:33] George

Just a couple of things here, to tweak the question and answer a little bit rather than to anything else. I still think China kind of presents with investment-led growth rather than export-led growth. Definitely was true after joining the WTO in 2001. China did have export-led growth. But since the financial crisis, really, it’s been investment-led growth. Now Chinese exports…

[00:18:01] Alan

Has that not shifted? I mean the roads to nowhere, and all of that seems to…

[00:18:06] George

Yeah, yeah, absolute, I mean definitely, certainly this year exports have been booming. But the main issue, really, because trade is actually a smaller proportion of GDP now than it was, say, 10 or 15 years ago… We should not confuse China’s balance of payment surpluses, which are enormous. The trade surplus is probably over US$1 trillion, manufacturing surplus probably almost US$2 trillion. We shouldn’t confuse the trade surplus with export-led growth because, really, what’s happening is exports are booming and imports are in the tank. The import growth in China, in volume terms, is basically flatlining or negative.

So, what’s happening in China is that there’s a weakness of domestic demand, specifically, household consumption. I mean, it’s been a feature since, certainly since COVID, and it’s not gotten better despite government initiatives to try to change it. So, we’ve had changes in childcare payments, changes in or increases in pension payments. We’ve had this sort of cash for clunkers equivalent where you can cash in your old consumer durables for new ones because the government subsidizes the exchange. And there have been countless measures to try to bolster the property market and force up property transactions, and reduce inventories, and so on.

So, it’s not like the government has been inactive. But I think it’s gone past the point now where incremental changes in policies that affect consumption are going to be enduring or effective. And so, what really, I think, needs to happen is the entire model (the economic development model of the PRC) would have to change towards something that emphasizes household income growth, consumption, services, and so on, more than it does now. And to do that you have to have, I think, something which the CCP (the Chinese Communist Party) can’t offer, which is political reform.

Because once you change the distribution of economic power away from the state towards households and consumers and private firms, implicitly you’re changing the distribution of political power as well. And the one thing the CCP will not do is compromise that.

A raison d’ etre is to rule unchallenged. The Party leads everything and nothing is going to interfere with that.

A final point on this is that we’ve just had the sort of bare outlines of the 15th Five Year Plan, which was agreed at the 4th Plenum of the Central Committee last week. And since then, we’ve had a communique from the fourth Plenum, a proposal from the Central Committee which goes into a little bit more detail, and an explainer from Xi Jinping himself. This is normal practice. We won’t see the plan in full until next spring at the National People’s Congress.

But the emphasis of the plan is unquestionably on industrial policy and economic security. Everything else is secondary. Having said that there will be some fiscal… I mean, it is proposed that there will be some fiscal support for the consumer and household sector, and public goods and services. We shall see to what extent that happens and how quickly it’s introduced.

But I’m quite skeptical that there’s going to be a meaningful shift in the direction of economic policy or in the economy in the near predictable future.

[00:22:11] Alan

Yeah, I mean, obviously you mentioned various fiscal measures. I mean there’s a suggestion that a lot of the policy has been directed towards boosting the stock market as a means of boosting wealth and sentiment.

Is that something that might have a meaningful impact, do you think?

[00:22:29] George

Not really. I mean, they tried this in 2014, 2015 and it all ended rather badly when there was a sort of a botched depreciation of the exchange rate and the leverage in the stock market became untenable. And actually, even before the foreign exchange policy snafu, the stock market already kind of had snapped.

This time round the government, I think, has been a bit more careful and they certainly put kind of their weight, should we say, or their rhetoric, certainly, behind a kind of a buoyant stock market. And I think that, to be fair, the stocks of companies that have benefited in other countries related to AI and technology, they had lagged behind in China. And the government’s posture towards private firms has certainly softened compared with what it was in 2021, 2022.

So, there’s definitely been a bit of catch up here. I mean, households don’t own a lot of equity. I mean most household savings are held in the form of property or bank deposits. So, it certainly helps a bit, certainly the urban middle class, if the stock market is doing better. But I don’t think the impact on the economy or on consumption, for that matter, is going to be that big.

I mean, just to give you one estimate, the decline in property prices, since 2021… Okay, it depends whose numbers you use. If you use the National Bureau of Statistics, then on average house prices or property prices have come down by about 20%, 25%. Private estimates suggest that it might be more than that, maybe more like 30% or even 40%.

So, the estimate of the destruction of household wealth obviously varies depending on which measure of house prices you want to use. But you know, we’re talking really about a destruction in household wealth that might amount to something in the region of about 20% to 33% of GDP.

Obviously, you know, in Ireland and Spain and parts of Britain and the United States, I mean, we know what that feels like.

[00:25:13] Alan

And obviously, I mean, we talked about different tools used in the west and in China. I mean, the standard response to that, in the west, was quantitative easing, money printing as well, you might call it, or may not, but certainly liquidity and asset purchases, QE. China has been happy to accumulate a lot of debt but not print a lot of money.

I mean, what is their philosophical thought process around QE and that type of policy?

[00:25:45] George

Certainly, we haven’t had a sort of comparable situation where the People’s Bank of China has been hoovering up copious amounts of bonds from the public. But at the same time, you know, they have other ways in which they are basically trying to pump credits into the economy. And they can do it directly through…

I mean, obviously, the banking system is pretty much exclusively state owned, not all of it, but most of it. And the big banks, and most kind of smaller banks, as well, will be beneficiaries of local government guidance programs on credit and subsidized credit, which the government helps to propagate.

So, I mean, despite the fact that the growth of credit has actually slowed over the last, like 5 to 10 years, from 15% to 18% per annum to something like 7% to 8% per annum, you have to put that in the context of what’s happened to nominal growth in the economy. I mean, the money value of GDP has only grown by about 3.6% in the last year. So, if credit is growing at 8%, there’s a generosity about that which continues to lead to a situation where the credit multiplier, or the credit intensity of GDP, is still rising quite quickly. So, they haven’t done QE in the way that we did it, but they’ve got other ways. They’ve had other ways of trying to maintain buoyant monetary conditions and liquidity conditions.

[00:27:33] Alan

Who’s borrowing that money then, if credit has still grown at 7% or 8% of GDP?

[00:27:40] George

Yeah. I mean, the principal borrowers are local governments.

[00:27:44] Alan

Okay.

[00:27:45] George

I mean, I think it sort of varies. It’s kind of a moving feast. But there may be about a dozen. There are 32 provinces in China, about 11 or 12 of which these local governments, at the very high level…

Local government goes from province, to city, and to community, and village, and so on, and so forth. But the local governments are, really, the agents. They deliver the economic growth that China sets targets for.

So, you have this kind of structure of hierarchy of local governments, many of which, actually, are at or close to the point where they can’t really borrow anymore… or they have to borrow in order to pay amortization on their loans.

So, they’re debt constrained but they do keep borrowing. And they have these off-balance sheet entities called local government finance vehicles which everybody keeps saying that they need to be brought under control but they’re still kind of beavering away and borrowing money.

So, a lot of the money is ending up in local governments, obviously, because they need it sometimes to stay solvent, sometimes to meet the programs for infrastructure which they’re required to implement regardless, and to meet the demand for public goods and services, of course.

[00:29:17] Alan

Okay, so, you mentioned kind of parallels with Japan, but differences. I mean when you’re speaking there it sounds very reminiscent of Japan and you know, well, certainly in the private sector; zombie banks or zombie entities.

The kind of the impression I’m getting from you is that, in this kind of non-dynamic sector, a lot of entities are kind of struggling along on life support but not being put out of business, but still part of the economy.

[00:29:51] George

Yeah, So, the similarities really, in a nutshell, obviously is you have this kind of dynamic modern sector, envy of the world, etc., etc. But you also have kind of a macroeconomic backdrop against that, or sort of the overall kind of macro environment is much more circumspect. It presents with imbalances, with asset bubbles, with misallocated capital. There are vested interests between government entities and corporate interests that are resistant to change. There’s a reluctance to introduce political reform. There are governance issues which are blockages really.

I mean, in some respects, obviously, Japan, for all intents and purposes, was a one-party state, much more so, maybe in the past, than it probably is today. Even though today, obviously, the LDP still is a big party. But this kind of substitution of control over, you know, you have cutthroat competition, but you have very, very specific controlled by central government or by government entities. I mean, lots of things, basically, are replicated, in a way, in China, today that featured in Japan.

The big differences are, Japan’s corporate sector was up to its ears in debt. Whereas, in China, that’s not the case except for SOEs and local governments. The private firms, to the extent that we recognize them as private firms, are probably in a much better position than they were in Japan.

Japan never had capital controls. China is never going to get rid of them, as far as I can see. So, you’ve got, effectively, a more closed economy operating behind capital controls, outward capital movements. You’ve got a range of policy tools which are probably broader than the ones that the Japanese had. And, you know, just sheer size of China gives it an opportunity to absorb shocks in ways which maybe the Japanese didn’t have the asset bubble in real estate, probably worse in Japan than it is in China. But anyway, we may be kind of arguing (not arguing), but we may be kind of trying to sort of separate out too many kind of minutiae here.

I mean, there are plenty of similarities that should make us concerned that this dichotomous economy in China will, one day, have to reach some kind of closure. We really don’t really know which way it’s going to go.

[00:32:49] Alan

I mean, you talked about the importance of the industrial policy and the focus there, and obviously you mentioned the huge trade and current account surplus.

So, this is obviously something that’s antagonizing the rest of the world, particularly the US. The negotiations on tariffs have been ongoing for a long time, but various highs and lows along the way. How do you see that playing out? Do you think there’s a… well, maybe who’s got the stronger hand? And how do you ultimately see it playing out?

[00:33:23] George

Obviously, we’re speaking now in advance of what is billed to be a meeting between Xi Jinping and President Trump during the APEC conference, in days to come, amid speculation that there’s going to be some kind of a deal or some compromises and trade deal. And I think that’s possible, quite likely to happen. But I think that we shouldn’t be too deflected by that. I mean, it’s not going to be a game changer. It’s not going to change the fundamental adversarial relationship between the US And China.

It’ll be good for as long as it lasts. And it may last, you know, a few months, it may last a year or two, I don’t know. But, obviously, it’s a big problem, I would say, compared with the first Trump administration. Beijing has learned a few lessons about how to deal with Trump, and they’ve obviously got a kind of a playbook against which they’ve been willing and able to use leverage against the United States, particularly on the subject of rare earths, which I think everybody knows about now.

And even if they agree not to exercise that control for a year, which is the speculation, there’s no question that they would use it again if they needed to or wanted to. And at best, it’ll take time for the United States and other countries in Europe, for example, to build up their own processing capacity.

I mean, for China, this might be a wasting asset because they don’t control the supply of rare earths, but they do have a monopoly pretty much over the processing. Which means that, if we were to spend the money on processing rare earths, we can find supplies. That leverage which China has, you know, may not endure ad infinitum.

But I think the Chinese have also kind of realized that they can have an impact on their relationship with America and others by exercising leverage. And if they can find leverage in other industries or other products, I’m pretty sure they will..

But it is a problem, I think, for China. I mean, if industrial policy poses problems for, you know, a kind of a nice, rosy, soft landing of the economy at home, which it does, it also poses a problem because China is dependent on the rest of the world for getting rid of the overcapacity at home, exports and so on, so forth. And even if the exports to America have dropped like a stone, which they have, you know, transshipment and rerouting through third countries has compensated to some degree, and increased exports to the EU and to Africa, for example, are certainly on fire, really, in 2025.

And this is not something which I think people and other countries, particularly emerging countries, are going to be totally comfortable with if it happens, you know, for the foreseeable future. Because China already accounts for about a third of global manufacturing, they can only increase that share at somebody else’s expense.

So, whether it’s Brazilian steel or Turkish EVs or, you know, Indonesian textiles, or whatever it happens to be, I mean, countries will feel that their reliance on cheap Chinese imports is undermining their own industrialization and industrial plans at home. So, I just don’t think this can continue without more trade friction.

[00:37:25] Alan

Obviously, the US has taken that stance, but as you say, other emerging economies, like the likes of Brazil etc., I mean, they’ve got the benefit, I suppose, in terms of cheaper industrial goods coming in. I mean, is this somewhat linked to China’s previous year? You mentioned Africa and China was active there in the Belt and Roads Initiative, is that still as much of a feature of the landscape? You don’t hear as much about it these days. Are they still as active on that front as they were?

[00:38:01] George

I think it is. I think it’s just the character has changed. I mean, during its heyday, which was from 2013 to about 2017, the Belt and Road Initiative was predominantly about lending. It was about financing of infrastructure projects all over the place which were to the benefit, of course, of Chinese, infrastructure construction companies. But those numbers have kind of fallen away quite significantly since then.

But the BRI is still important to China. A, it’s Xi Jinping’s foreign policy project. So, you know, so long as he’s in charge, it’s going to be important. But it’s important because of accessing raw materials. It’s important because of selling consumer goods and technology goods. It’s important because of the bifurcation of technology in terms of standards, protocols, and the decoupling, effectively, of markets because of data privacy or data regulation laws, and so on, and so forth. And of course, it’s also important because of governance initiatives.

So, Beijing has launched four major governance initiatives about development, security, civilization, and government itself. The last being actually the Global Governance Initiative, which was released or announced, actually, within the last year. I mean, in general these are targeted towards the so-called Global South, whatever that is. But actually, within the Global South, of course, the Belt and Road Initiative countries, have almost a sort of a pride of place. And obviously, it’s expanding all the time with new countries added, and new countries applying for membership, and so on.

So, this is really a sort of a way in which I think China wants, particularly, emerging in middle income countries to align their political narratives around that of China and to be receptive to commerce, trade, investment, cultural exchanges, people-to-people exchanges. And this is really the Chinese way of trying to reframe the institutional and governance basis of the global system.

[00:40:48] Alan

Okay, and is the ultimate goal for these economies to be increasingly export destinations? Is that a key part of the idea?

[00:40:58] George

Well, many of them already have China as their principal trade, I mean, the main export market. And so, I think trade is the glue, or a glue that binds them together with China. It’s quite interesting, really.

I mean, you know, Trump, at the moment, as we speak, is in Asia and he signed, I don’t know, all sorts of agreements with Malaysia, and ASEAN, and other countries as well. I mean, there is this sort of promiscuous relationship, which a lot of countries have, with both America and China.

Some of them are obviously aligned lock, stock, and barrel with what we call the CRINKs, which is China, Russia, Iran, North Korea. Some of them are aligned, you know, lock, stock, and barrel with the United States. But maybe some of those alignments have stressed because of the reciprocal tariffs, and so on, and so forth.

But there are a lot of countries in the middle, particularly in Asia, I would say, but also in Latin America where, you know, they are both economically dependent or, you know, reliant on trade with China, but from a political and security point of view, much more comfortable with the United States, warts and all.

So, yeah, this is, I mean, it will be for the foreseeable future, and this is going to outlive Trump and probably Xi Jinping, but I think for the foreseeable future this will be a battleground for the two big powers to fight over is the loyalty or, you know (loyalty is perhaps the wrong word), but the alignment of these countries with that.

[00:42:56] Alan

Yeah, you mentioned, at one point, their capital controls and you felt that obviously they’ve been a feature of the Chinese approach and you suggested that that would continue to be the case. I mean, we’re in a world now of concerns about the dollar’s reserve status. Your investors are looking, you know, what are the alternatives – gold, euro, renminbi?

Renminbi has always been put forward as obviously the one that would ultimately topple the dollar, but we’ve never really progressed. And obviously, with capital controls, it prevents the full internationalization of renminbi. What is the Chinese perspective on this? Clearly, they would like to see the dollar’s role diminish a bit but they’re not pushing the yuan forward as the alternative.

[00:43:42] George

Not as obviously as they have been in the past although, in the documentation that’s just come out following the fourth plenum, there are certainly references, which I suspect we will see repeated in the 15th Five Year Plan, about promoting and accelerating the internationalization of the renminbi. So, they talk about this in very general terms, I would say. And it’s certainly something which they would be… I don’t think they actually want the renminbi to basically replace the US dollar because they don’t want all the obligations that come with it. And it would be entirely inconsistent of course, for them to embrace this whilst having a system of capital controls in situ which, as I said, I don’t think that’s going to be diluted at all.

Well, there’s a lot of rhetoric about this which I’ve been kind of pushing back against for as long as I can remember. I mean it’s quite difficult for you to (I don’t mean you)… I mean it’s quite difficult for China to replicate the role of the US dollar with the renminbi unless they allow foreigners to accumulate claims on them.

Which means that the Chinese either have to run large trade deficits in perpetuity or they have to have free and open capital movements so that foreigners can acquire those claims. So, neither of those two things are going to happen, right?

I mean, I’m not saying ever, because the government of China could change and, you know, leadership can change. But for the foreseeable future, and certainly while Xi Jinping is in power, these things are not going to happen.

So yes, I think we are seeing incremental changes in the usage of the renminbi in commerce. For example, for the purposes of invoicing. For example, as a denomination for swap agreements between some central banks and the PPC. And, for example, in payment systems, helped of course by China’s own CIPS system which, it’s not an alternative to Swift, as some people make out, because it actually uses Swift. It’s an alternative to CHIPS which is the payment system, the US dollar-based kind of payment system.

So, there are incremental changes taking place there. This is true. So, we are moving to a world, or we are going in a world, really, where the dollar’s relative position has been declining. But ironically, the major beneficiaries, according to the BIS, that does an annual survey of all of this, the major beneficiaries have been the Aussie dollar, the Can. dollar, the Swedish krona, and a couple of other currencies, but not the renminbi. And a lot of the statistics that get kind of bantered around about how much of Chinese commerce and trade, denominated in renminbi, is basically Hong Kong based trade and Russia based trade.

So, a lot of the statistics that purport to show, you know, rising levels of renminbi, and commerce, and trade with China, it comes either because of the redenomination of trade with Russia following the Ukraine war, but also via Hong Kong, with a lot of Chinese companies round tripping, you know, their invoicing, and payments, and kind of operations.

So yeah, I think it’s something that is remarkable (remarkable in the sense of merits a remark rather than fantastic). It’s remarkable, but it’s not really something which is… I mean, if you were a dollar, you wouldn’t be particularly worried about it yet. Which is not to say that the Americans couldn’t one day have a Suez moment, you know, if they really kind of screw up on international relations or, you know, lose a war or something like that. But for the moment, I think that most of us talk about…

I mean, internationalizing the usage of the renminbi is fine, but ultimately what matters is not how you invoice your trade or how you pay for it, but how surplus countries hold their balances. Mostly they hold them in US dollars of some description.

[00:48:35] Alan

I mean, the other element of this is Hong Kong. You touched on the Hong Kong system and we’ve kind of gone from, at times, the Hong Kong dollar being under pressure to having kind of excess liquidity in Hong Kong in recent times as well. I mean, is there a long-term plan there for alignment with the renminbi or not? Or will the two systems stay running in parallel for as long as we can see?

[00:49:00] George

Yeah, I mean, you know, for what it’s worth in the long term, whatever that is, I mean, I can’t really see the reason why China might not want to basically incorporate Hong Kong, in its fullest sense, as an integral part of the mainland. And so, it wouldn’t make any sense to have an Hong Kong tolerance on bet.

But to be honest, this is a little bit theoretical, I think real time, which is, you know, our time, I think China still feels there’s a value. I mean, it’s long ago Hong Kong ceased to have any kind of economic significance for greater China because it’s been overtaken by so many other places and by the greater Bay Area itself in toto. But I think from a financial and commercial point of view, Hong Kong still fulfills quite a number of advantages for the PRC and for the People’s Bank as well.

[00:50:08] Alan

Just shifting gears a bit. I mean, in terms of the China’s Communist Party’s standing in China now, you know, this is something you hear of there was a Spectator magazine article recently talking about, you know, how secure is Xi really. And these kind of suggestions come up from time to time.

But you touched on how they had this anti-technology, anti-capitalist stance of years ago, which has softened in recent times. I mean, obviously, the objective for the CCP is to remain in power at all times. Has there been a shift there? Do you sense that they’re operating differently, or what’s your read on that?

[00:50:54] George

Well, I think, yeah. I mean, it has been… I was going to say an exciting time. I mean, it certainly was a rather feisty period of weeks leading up to the fourth plenum, because there was a lot of speculation that Xi Jinping was under pressure. You know, he got rid of eight or nine senior members of the PLA, eight of whom were in the Central Committee, one of whom was in the Politburo.

People thought that, you know, maybe power is becoming more diffuse in China. Maybe Xi Jinping is kind of figurehead. I think this speculation is going to keep cropping up time and time again. And until it’s real, I think we just have to assume it’s just speculation because, I don’t know, for whatever reason.

Certainly, it doesn’t feel now, a week after the plenum, that there’s been any kind of real change in the power structure that we can see. So, yeah, I mean, Xi Jinping’s firmly in power. I mean, we are coming up to… So, he’s been in power now, so, the first period was 2012 to 2017, the second period to 2024, this is the third one which runs until 2029. So, by 2026, by next year, maybe 2027, it’s quite possible that the party may be thinking, and he may be thinking about succession.

It’s not a shoe-in that he’s going to stay in situ until he’s removed or until he is too ill to carry on. I mean, it’s quite possible he could prepare for his own succession. So, there’s kind of everything to look out for, really.

But I don’t think there’s any kind of slippage or lessening of the preeminence of control in China, from him and from the upper echelons of the party. I mean, the political structure of China looks to me about, you know, as firm as ever, really, to be honest.

[00:53:24] Alan

Obviously, any conversation around China, Taiwan has to be mentioned. Again, any observation there? Speculation is always, you know, to the forest of what will ultimately happen or how it’ll play out. But any insight as to if or when China may ultimately move on Taiwan?

[00:53:47] George

We know that Xi Jinping kind of wants what he calls the reunification. Okay, that word itself is highly charged because it’s questionable, in fact, deniable, that Taiwan was ever really part of the PRC for any length of time anyway. But we know that he wants to see this resolved, you know, kind of on his watch kind of thing. Which suggests that, you know, there is a kind of a vague clock ticking.

I’ll leave it to kind of military experts, really, to make the judgment as to whether the PLA is in any shape or form at the moment, particularly given the leadership changes, to make a move on Taiwan. I mean, against that, you know, it’s not always been the case that autocratic powers or even democratic powers, you know, are prepared for conflicts which they find themselves having to fight. So, whether that’s an issue or not, I’m not really sure.

I’m pretty sure that the Chinese would much rather there was a sort of an osmosis in Taiwan in which, you know, through maybe some Chinese efforts from the mainland that the mood in Taiwan changes over time to become less hostile to unification or maybe even favorable towards it. Obviously, the risk of military or blockades or something like that, clearly that risk is real and we have to live with it. But I just, yeah, I don’t really have any insight as to whether it’s increasingly likely or decreasingly likely. It’s a possibility.

[00:55:31] Alan

So, I mean, to sum it up. It sounds like, from an economic perspective, I mean, you’ve run a parallel with Japan and noted the differences. But I guess the key thing is the size of this dynamic side of the economy versus the stagnating band. It seems like, overall, you’re probably more pessimistic than optimistic. Is that fair to say?

[00:55:51] George

I think so. I mean, in some discussions that I’ve had with some of my friends and colleagues, we talk about whether China is at a precipice or plateau. I think it’s probable that they are on a plateau. I think the underlying momentum of the economy is much more sluggish, save only for their industrial prowess.

And I don’t think we should use industrial prowess as a benchmark as to whether they are succeeding or failing as an economy, because Chinese have always been entrepreneurial. The Chinese have always surprised with their ability to cope with adversity, containment, export controls, whatever it happens to be.

And you know, they have their own ways of innovating, and evading what they regard as containment, which they’re proving to be not successful with, not in everything – in then in some things.

So, you can be really successful in doing the kinds of things that China does, but without really making much of a mark on ultimately the things that are going to find you out. If you can’t solve the problem of inequality, and labor force dynamic, and income growth, and debts, capital misallocation, you have to solve these problems eventually or you suffer from the consequences. And I think that’s the big danger, as far as I see it, in China.

[00:57:31] Alan

Okay, very good.

Before we wrap up, we always like to get some perspective from people as to things that have been helpful during their career or advice you would give to people starting off if they wanted to get more proficient on macro and China analysis. Any things? I know you’ve written a book yourself, so I’m sure you would give that a mention, but anything else?

[00:57:54] George

Well, I mean, I think that the literary stuff and the writing comes a bit later. I sometimes do it a little bit less now, but I certainly have been sort of on the circuit of going to talk to A level students at schools in the UK about if they want to develop a career in economics, or going to the city, or finance, whatever. I mean, I think finance is probably a much different place now from what it was when I was a kind of a rookie economist.

And I think it’s probably more restrictive and, you know, there are compliance departments that are bigger than goodness knows what else. But I think, I think getting your hands dirty… If you want to develop an economics career, obviously you can go to work for the government of your country if you want, and they’ll train you pretty well.

But I think working in finance is a great place to go. It’s pretty unforgiving if you get it wrong and if you continue to make mistakes. But it’s very spiritually and materially very rewarding if you succeed. And I think it’s very exciting as well. So, I wouldn’t be tempted to put people off. In fact, I kind of encourage them to just see what it’s like. If you don’t like it, you can always try something else.

[00:59:23] Alan

Absolutely. Well, from all of us who are in the game, I think we all agree with that it is always very interesting.

But George, very much appreciate you coming on to chat with us today. It’s always fascinating to get your perspective on China. And people can obviously follow your work on your own website at georgemagnus.com. And for all of our listeners and Top Traders Unplugged, thanks for dialing in and we’ll be back again soon with more content.

[00:59:53] Ending

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