China’s Challenge – Interview – George Magnus
By Colin Renton – Investment Writer – Baillie Gifford
Colin Renton is an investment writer at Baillie Gifford, having joined the firm in 2007. He is an experienced journalist and a prize-winning short story writer.
Sum up the book in one sentence?
It’s about the challenges facing China, but under the governance of Xi Jinping.
What book changed your life?
JK Galbraith’s book A Short History of Financial Euphoria.
What’s the next big idea?
Data, artificial intelligence and robotics is going to be a huge benefit, but not everybody is going to be a winner.
If you weren’t a doctor, what would you do?
A rock guitarist – I used to play in a band.
Are you a saver or a spender?
At my stage of life, I tend to be more of a spender.
It appears that Xi’s regime is receiving criticism. Is that unusual and what kind of reaction has there been?
It was only about a year ago at the 19th congress of the Communist party that President Xi Jinping was almost deified. Delegates and the Chinese media commented upon the state of his authority, his unassailability, and his ‘Thought on Socialism with Chinese Characteristics for a New Era’. So, that we should have seen some kind of criticism emerging over the last few months is somewhat surprising.
He is facing four big challenges – is one greater than the others?
They are all pretty important because they all require fairly sophisticated and complex solutions. But the most pressing of them, I would say, surround China’s debt and the yuan as a stable and widely-used global currency. I don’t think that China can put them to one side and deal with it in five or 10 years’ time. The other two traps that I talk about are the demographic, or the ageing trap, and the middle-income trap, which is the tendency for emerging countries largely to lose a bit of their catch-up momentum and get stuck as middle-income countries. These things are really phenomena that will play out over the next 10 or 20 years.
Is China heading for the same mistakes that were made in the west?
Until the end of 2016, beginning of 2017, we could have said that China was headed for a very similar rocky ride as we had, with the caveat that because this is a state-owned banking system in China, major financial institutions would never be allowed to fail. But then at the beginning of 2017, the government did embark on quite a serious crackdown.
The growth in lending has fallen away quite precipitously, the riskiness of funding loans by financial institutions has been addressed to a certain extent. On the other hand, the debt has kind of changed its shape really. Instead of the debt piling up on the balance sheets of companies and local governments, it is now a problem in the household sector, with mortgages and consumer loans and also for parts of the government sector that weren’t really included before. So, growth in debt hasn’t really slowed down or reversed.
What is the immediate effect of the trade war and what is the longer-term impact likely to be?
It will probably take between a quarter and a half per cent off China’s GDP growth over the course of a year. But this is almost a rounding error because the policy easing measures that have been announced in 2018 will go some way to offsetting that trade impact and, of course, we shouldn’t forget that the Chinese yuan has depreciated by about 7% since the spring which also goes some way to offsetting the effect.
If it goes further and Trump were to sanction all American imports from China, and if the Chinese were to retaliate by targeting the companies that do business in China and targeting the supply chain of companies like Apple, for example, by restricting exports or withholding licensing for the export of certain types of products, this could start to have a much more significant impact on confidence.
Given that China exports more than it imports, if the trade war did escalate, would the impact become more severe on the Chinese economy?
Yes, I think it probably would. I don’t think the trade tariffs themselves would compromise or prejudice the Chinese economy in isolation. Trade is not big enough, even if all the bilateral trade between China and America were subject to punitive tariffs. There would be an effect, I just don’t think it would be big enough to rock the Chinese economy which is $14 trillion. And the state still has ample tools with which it can offset some of the impact. But I do think that the longer it goes on – and it is going to go on because although it is about trade, fundamentally it is about supremacy and industrial policy – the more damaging it is likely to be.
With The Belt and Road initiative, and China investing around the world, should we be wary?
This is the 64 trillion yuan question. Nobody is really sure what the Belt and Road initiative is. Is it a kind of Eurasian development project with wider geographic application because Africa, South America and even the Arctic Circle are now included? Is it a big development project that’s basically going to supplant the IMF/World Bank model of economic development? Or is it primarily a China-centric economic strategy designed to give Chinese banks and Chinese heavy industries a greater development opportunity outside of China, access to raw materials, sale of Chinese consumer goods, penetration of Chinese brands and technology in foreign markets? In my book I have basically tried to balance these arguments and look at them on both sides. My conclusion, I have to say, is that I think it is basically China’s form of contemporary foreign policy.
This interview was first published by Baillie Gifford for Final Chapter (link to www.bailliegifford.com/authors