FRASER HOWIE: My name's Fraser Howie.
I'm an independent analyst on China.
And author of a number of books on the Chinese financial system, in particular, Red Capitalism,
and then before that, Privatizing China.
So I've been in Asia for about 25 years, primarily working in the financial sector-- Hong Kong,
Beijing, Hong Kong, again, and now I'm based in Singapore.
But always with a big focus on China, in terms of my day job, but also my writing and commentary.
It was actually myself, and a co-author, and a colleague at a company called CITIC, which
was the first Sino jointventure securities company set up in China.
About 15 years ago, we started writing about the Chinese financial system, simply because
we saw what was being written by China back then, and this was in the late '90s, 2000
And frankly, we thought it was nonsense.
We were on the ground in China.
We saw what the securities markets were like.
We saw what the stock market was like.
And it was clear that the pundits in Hong Kong were just far too optimistic about what
And then we thought, there's a story to tell.
That got us writing.
It was actually on the back of a report we wrote for the CICC at the time.
And we wrote Privatizing China, which was based on a look at what was then about 15
years of the stock markets in China.
And really, just going right back to basics-- really in the late 70s, when reform started
in China, fair share issuance in '79, and then the development of 4trading through the
'80s, listings-- And they say that was privatizing China.
But then as the knot progressed, we realized that we had more to say, and in particular,
in the banking sector because if you remember-- go back to that time when we were writing
Privatizing China and riding on the stock markets.
The Chinese banking system was basically bankrupt.
In 1999 Zhu Rongji, the Premier at the time, started a big bailout program where they set
up bad banks, asset management companies in China, and we saw that happening real time.
It was a very long process.
And so by '05-'06 you started seeing these, what were just previously, bankrupt banks
being listed, raising multi-billions of dollars.
And we thought, this is nonsense.
These are Chinese banks.
These aren't Western banks.
And they aren't banks in the way we understand them in the west.
And we thought there's a story there.
So that was the genesis of Red Capitalism.
And in Red Capitalism, which was eventually published in late 2010, beginning of 2011,
we went through that history of how banks were reformed in China, how you took a bank
or banking system and you made it into what was, at the time, basically, the world's most
Valuation-- I think it was something like a quarter of a trillion dollars, $250 billion
with all the Chinese banks.
That's an incredible figure remembering that day declaring the system was bankrupt.
So that was the genesis of Red Capitalism.
Interestingly, the bulls thought it supported their case, the bears thought it supported
We didn't write it with any case in mind.
We wanted to tell a story because we felt that, again, so much of the hype, so much
of the headline in China is superficial.
In understanding China, you've got to get away from the facade, the face of China.
China is great at telling a story about how it sees itself.
And a lot of people buy into that because China can be a very opaque and difficult place.
But especially in the stock markets and then in the capital markets in general, that almost
certainly what it says on the tin isn't what's in the tin.
And so therefore, it's important to understand the background to these things, to understand
the accountancy behind it, and this chicanery, quite frankly, in a lot of the financial system.
I think it's really important if you want to understand where we are in China now.
It's what I call the Olympic cycles.
If you look back to the '08 Beijing Olympics, I would still maintain, although the economy
was probably less than half the size it notionally is now, I would say that's the modern high
point of China, frankly.
That If you look before-- the Beijing Olympics, they put on this incredible show.
They built so many subway lines.
They did so many things which no other country allegedly could do.
It was a great catalyst for building across the country.
The economy was booming.
Everything seemed to be going.
Everyone was pandering to China.
And I think that really was a high point.
Of course, that was August in '08.
And then, of course, global financial crisis and we all remember-- or maybe we don't remember
now, but that last quarter of '08 really was dreadful.
Things, literally, just fell off a cliff in that last quarter.
And that was very important in China's case as well because China was hugely affected
I think that everyone, of course, remembers the output or the response to '08, by the
Chinese government, this huge stimulus program, which started off a whole series of events,
which we'll come to.
But I think, remember, before that, and the real reason for that was not simply to keep
global growth going, but China had, was it, the headlines, 20, 30 million people unemployed,
these migrant workers.
This was the mainstay of the Chinese economy that this migrant population was working in
factories along the coast, and that just the downturn in exports, the downturn in the global
economy really impacted China.
And so what you saw there-- and this again was absolutely central to why we wanted to
tell the bank story-- was because the response of this stimulus was basically you turn on
the credit taps.
That after spending the better part of a decade trying to reform the banking system, trying
to make it into something that was something at least approaching a market-based system
where there was some degree of risk control, some oversight, you basically had the rulers
in Beijing reverting to their old practice of using the banks as a piggy bank to basically
And so you turn on these credit taps, and literally any warm body could get money in
And so you had this huge expansion of credit.
And of course you saw, guess what, a big rebound in growth, which should not surprise anybody.
Growth's an output, not an input into these models.
And so you had this huge expansion of credit.
But I think that was the start of something that has taken China, as I say, before those
Olympics, before that last quarter of '08, China was a growth story.
There's no question about it.
It had been 20 years by then of double digit growth.
China could continue to grow for another two decades, three decades, whatever it may be.
And yet, that was a real turning point because China's gone from a debt story-- or from a
growth story to a debt story, which is just staggering.
And I think we forget about this because the growth numbers have still remained high.
And people say, yes, they've fallen from their highs, but hey, they're still doing 6 and
1/2% or 7% if you believe in those numbers.
They say, it's still much better than what the West's doing.
But that's incidental, because the real story in China now is that the reason you're still
getting that growth is because credit is growing at double the rate of GDP growth.
And so that '08, that response, that '09 stimulus, the early stimulus to keep growth going really
set in motion an addiction to debt, and took China-- and let's remember, well, there was
clearly an impact from the global economy.
It wasn't necessarily a crisis per se.
And so it's interesting now that you look and you compare Chinese growth numbers and
the growth, particularly the build up of gross debt in the economy, it gets compared to what
the US is or what the UK is or Japan is or Greece or whatever.
You can take any of these countries.
But these are all countries that have clearly gone through crises.
In China's case, I don't see there's a crisis.
Yes, there's slowing growth.
There's lots of problems with their economy.
There's many areas in China you can look at and say there's real problems.
But in terms of actual real fundamental financial crisis, there isn't one.
There's no real panic there.
There's still a lot of faith in the government.
There's still a lot of resources and capacity of the government they can put to work.
And so, you've had that huge credit build up in spite of a real problem, which really
makes me wonder when I think about future issues, when you think, if a crisis does come
in China, and given what's happening in the States with the new president, you can certainly
see scenarios where you are going to get crises coming, then will China have the wherewithal
But coming back to that stimulus.
So you had a positive response from China in '09.
That obviously was lauded at the time that this would support global growth, support
At the same time, you also had a government who started to acknowledge that there was
fundamental imbalances in their economy, and that this needed to be reformed.
And of course there was lots of nice words and nice talk about this, how we're going
to restructure, we're going to move away from this dependence on fixed asset investment.
and we're going to move more towards a consumer-driven economy.
And here we're eight years on, an Olympic cycle-- two Olympic cycles later, and you
think, this really is quite horrible.
You've effectively had the growth rate halved and the debt double, which hardly is really
a successful formula in many ways.
I think whether China becomes the world's largest economy is almost frankly irrelevant,
because that's just-- that's like just weighing the health or measuring the health of your
kids based on their weight.
There are many other factors that are far more important to think about than simply,
are they simply getting bigger?
Are they growing?
And I think China has continually failed over this past eight years or so to really grasp
that reform process.
And again, this isn't just something from the new leadership.
This is something if you go back to about five or six years, there was a big report
from the World Bank, done in conjunction with the Chinese government, called-- I think it
was China 2030, but need to restructure their economy, move away from fixed asset investment.
And it laid out a whole series of reforms and steps to try and remove this dependency.
But guess what?
As the global economy has failed to recover, as China's own economy has started to stutter
in many ways, there has been a continual dependency on debt.
And so what you've seen in China, you've seen incredible innovation, but in the worst possible
That instead of, whereas at the start of this crisis in '08 you still had 60% of debt in
their economy- - or probably higher, certainly a decade more or so ago, you had 80% of debt
in China basically being from bank loans, very simple.
You can look at the amount of deposits they had, and you looked at their bank loans, and
you control that through a loan to deposit ratio.
So it was very easy to literally turn the tap on and off.
But what you've seen is a proliferation, over the past eight years or so, of broadly called
And I think that doesn't even come close to describing it, because it's such a murky term
But you have had incredible innovation, as it were, of bankers and entrepreneurs and
businessmen figuring out ways to get around systems which are put in place by bureaucrats
to try and limit credit.
And the difficulty is that returns for much of China's business is low, and therefore
they're desperately trying to look for new inventive ways.
At the same time, as rates have fallen in China, you've also got depositors who are
saying, I want better returns.
And so you've had this springing up of-- and we talked about this when we wrote Privatizing
This was really just the start of this process, of these wealth management products, short
term products, guaranteeing better rates which got immediate deposits, which weren't necessarily
carrying it under the loan to deposit ratio.
But again, got around that, that lending restriction.
We got depositors' funds into the hands of those who wanted it.
And in some ways, it's a good sign.
It's a liberalization of the currency or of the interest rate market, which is always
a very important thing in China.
But effectively what's happened is that much of that control over the banking system has
And where we had highlighted this at the end of Red Capitalism, the system now has become
so much more complex.
Whereas you really could think previously of a dozen banks or so controlling the bulk
of the loans, you knew exactly where they were going, and it was very manageable, you
now have a highly opaque system of banks, of shadow banks, of wealth management products,
of trust funds, of corporate lending of what's called entrusted loans-- it's just loans being
siphoned through banks-- wealth management products created by securities companies.
And then mix into that guarantee companies, which have sprouted up to try and guarantee
You have then also things being sold on the internet.
You have pawn shops where-- it's almost endless.
And I keep thinking, I should write down and try and map this whole system out.
And then I though, it's like trying to map the brain, that there's almost so many connections
and nodes that have appeared.
And the difficulty is you don't actually know the connections from one to the other.
And you're so, am I double counting this debt?
Is this a chain of debt that's growing?
Is this new debt?
And so you can actually-- and I read some reports about estimating the size of debt
And I think, I have absolutely no idea if that's true or not.
These are huge numbers.
And again, argued that there must be some double counting there.
Clearly what you see when you actually speak to our entrepreneurs, when you speak to businessmen
on the ground, when you speak to banks, there is, without question, an A lending to B lending
to C lending to D, and this chain and this node of connections.
And then you think, this is clearly worrying.
And it is worrying.
But what no one seems to have any idea about, including myself is, when is too much too
And this is the real problem.
We can talk about this problem.
We can talk about this growing problem in China.
But frankly, I have no idea when the party stops.
And again, you can look back in history.
A lot of cases, you know, the Ottomans probably peaked in the 17th century and they were still
going up until the end of the Second World War.
Things can go on-- bad things can go on for a long time.
I think also that the greatest comfort that China should take in its current debt situation
is that Japan still exists.
For my 25 years in finance, I started following, like many, the Japanese warrant market.
And you know, Japan had problems.
Japan was falling.
And then people thought, there was even people in the early '90s who thought the Nikkei was
going back to 40,000.
But it was actually on the way to 7,000.
And Japan has largely been in recession for the best part of 20 years or more.
And you think, well, why can't China pull off a similar trick- - a different sort of
It's clearly not as rich, clearly not as developed, but you are ultimately still underpinning
so much of this in China, even if you can map this highly complicated system, which
Because into that you've got, is it local government financing?
Is it, like I said, the wealth management products?
Is it the regular bank business?
Is it rich individuals?
Is it overseas funding?
OK, so let's see you map it all.
But who's actually going to be the person to pull their fingers out of the dyke and
let the water fall through?
Because in China, there is this continued belief still that the government will underpin
And to some extent as a working model, I think that probably makes sense.
And again, anyone who is predicting the collapse of China-- first of all, I have no idea what
If your debt's doubled and your growth's halved, that looks pretty much like a collapse in
some ways already.
The bullish case in China has now become it's not collapsing, which is a big turnaround
from where we were five or six years ago.
So, even if you can map all that, I still think, yeah, you've got to look at the politics
here as well.
You've got to look at the mindset, the control of information.
So someone goes bankrupt?
Why should I care about someone else's bankruptcy?
My wealth management paid back.
Wealth management product is very difficult to get someone out in the street protesting
or really causing a stink for someone else's misfortune.
And so therefore I think, how does this really become a systemic crisis?
And it's not clear to me that it does.
Telling me the numbers are getting bigger still doesn't tell me how you get a systemic
What staggers me is that there are so many people-- and again, clever people, lots of
And whether it be economists, hedge fund managers, whatever, lots of smart people who will go
on TV and talk about the economics of the debt issues, et cetera.
And I think, can't really argue with any of that.
I'm not a trained economist.
I may be right, may be wrong.
But what does stagger me is that there is often a willingness or a willful blindness
on the politics of it.
And I think nothing in China-- you simply cannot divorce economics from politics in
And certainly if you're worried about debt situations, and from big picture-- so if you're
looking at the stability of the banking system, if you're talking about the currency, if you're
talking about government debt, if you're talking about local government financing vehicles,
bank bailouts, however you want to propose it, the politics is absolutely essential.
And to think that it's somehow China-- I would say the law of economics works just as well--
if they work at all, they work just as well in China as they do outside of China.
They don't stop at the border.
So in that sense, economics, yes, does work in China.
But at times people think, oh, somehow the Chinese have got their own economics or it
I say, well that's because you're not accounting for it probably, because much of that other
accounting is effectively the politics, and you've got basically the government is standing
And without question, I think that the right view to take, certainly for the moment, is
that the government will stand by.
It's certainly going to stand by the banks.
You're not going to get a Lehman Brothers moment.
One of the big banks, one of the big-- I think they technically have four and then seven
what they call systemically important banks in China.
So none of those big banks are going under.
Smaller rural banks, yeah, that's possible, but they will be merged in something else.
But politics and political support is absolutely essential.
And to ignore that, you do so at your peril.
I think the trouble there is though, I think it was Churchill who said about Chinese politics,
"It's like two dogs fighting under a carpet."
You frankly got no idea what's going on at any given time.
And I think the very rise of Xi Jinping, where you may take the positive stance that this
is a strong, powerful leader consolidating power, and so can push through reform-- you
say, well frankly, that means we had everything wrong about Chinese politics before.
Because before he came into power, the consensus across the board-- there was just no..
China was now a consensus driven leadership by committee type of model.
There was not going to be a strongman again.
That was not going to be a strong political leader.
So basically we have either completely misunderstood things previously to allow Xi Jinping to come
into place, or we just were just simply ignorant of the fact in the first place.
I think the mistake is that, to almost give too much credibility to Chinese political
institutions, that we have seen certain things happen over and over since Tiananmen Square,
so over the past 20 years.
And we have assumed that these are institutionalized processes of smooth transfer of power.
And frankly they weren't.
There was a lot more fighting behind the scenes.
Bo Xilai is an obvious example like that you know.
2011, people were talking about Bo Xilai, as of 2010, as a possible next leader.
Very few people saw the Bo Xilai issue coming.
Those that did were roundly abused to be certain.
No, no, this could never happen in China.
There is no sort of coup coming.
There's nothing like this.
And clearly the behind the scenes machinations were very active.
So while I may say, the politics is important, I'm also going to admit somewhat contradictory
as well, I have no idea what's going on in politics half the time.
And as I say, I think Xi Jinping, by the analysis of five years ago, should never have come
His consolidation of so many titles-- how much power he's got, there's probably some
But certainly of titles, again, should never have happened either.
That was not supposed to be able to happen in this consensus model.
And so, you think, but even with that power, what does he really want?
I come back to even why we started writing.
Even that phrase reformer in China-- he's a reformist.
He's a reformer.
I have no idea what that means in the Chinese-- I do have a-- but what I tell you, it doesn't
mean what we think it means in a Western sense.
And again, it's not just like the Chinese have their own way of doing things.
But these names, just these labels have such different meanings.
And so when Xi Jinping wants reform in the sense that he wants things to run better,
he wants the Communist Party to run better, he wants state-owned enterprises to be more
efficient, he wants less dependency certainly on the US dollar, certainly on the States.
He wants less dependency on foreigners.
He doesn't want Western ideas seeping into Chinese education, and so things like that.
So if that's reform, it's reform.
It's a self-sufficiency that he wants.
But the idea that he wants to embrace free markets in any way, or even embrace the market
as a decisive factor-- which his own documents have said-- I think is highly misleading.
This is a person who wants it-- Reform so often in the West is understood to be economic
reform with the government pulling back, of the markets taking a bigger hold and market
forces taking a bigger hold, of bankruptcy coming to the fore.
Hey, your business is bankrupt.
We're going to bankrupt your business.
We're going to close this.
We're going to sell these assets.
That's not what the Chinese mean by reform.
They're talking about administrative reform.
They don't necessarily want to face all those arbitrary things.
And so when you look at what happens in the markets, I think this is a classic.
It's, let's go back.
So we're at the end of 2016.
Let's go back 10, 11 months and we saw the renminbi collapsing.
It moved a few percent, if that.
It's hardly a collapse.
The renminbi in the past 18 months have moved 10%.
I think the yen did it in about six weeks recently, and sterling did it in about six
So this is hardly major market moves.
But of course for China, these are are major market moves.
And I think if you go back to the beginning of the year, January, February, when the currency
started to get very weak, the panic in Beijing simply wasn't lower currency levels.
It wasn't that the moves had been so significant.
They're all well within any bands they themselves have set.
They're well within historic ranges.
But what they didn't like was they didn't like the market pulling them.
And this, I think, is the real fear.
Because if you start having a market fall, as the stock market did in 2015, as the currency
started to do then later in the year and beginning this year, as anyone who's spent any time
in a market knows, that takes on a dynamic of its own and so on that forces people to
come out and do something.
They have to act because it will be even worse tomorrow.
And that's of unexpected or that unknown reaction, that being forced by the market to do something
is what really worries the Chinese.
Now we're nearly touching seven.
We've already had a PBOC fixing of 6.95 in the past few weeks.
And so in that sense, it's not simply the lower level which is the worry, but it's the
unexpected and the volatile nature of markets that forces people to do things.
Chinese leaders don't like to be forced to do anything.
They certainly like to give the impression they're very much in control.
And they themselves-- This idea, I think one of the things that sticks-- there's a number
of things from, let's say, the past 20 or 30 years in China that stick-- or in Asia
that stick with the Chinese leaders.
1997, the Asian financial crash really stuck with them.
I think they looked at Hong Kong.
They looked at Thailand.
And these sort of headlines, whether they were true or not that a New York hedge fund
manager presses a button and a billion dollars leaves Thailand, and Thailand is decimated
and people are unemployed and factories are closing-- very simple, very tabloid type of
headline, but that's exactly the type of thing the Chinese government are desperate to avoid.
And so that volatility of markets, the unexpected nature of markets is something that they recoil
So, where does that leave the currency?
It's going to get weaker.
I don't think that's really any surprise.
But do I see a great devaluation?
No I don't, because I don't see how that plays into the government's favor.
This idea of taking sort of tough medicine early, getting the worst over with, I think
sadly that's passed.
I think that's the difficulty, that that time has now passed for them.
I think if they were to do that-- And again, we know markets overshoot.
And again, if you were to say if the currency is overvalued-- and I don't really care if
it is overvalued or undervalued, I just know it's not market-driven.
And I'm pretty big on market-driven forces.
So, in that sense, I don't know what the right level is.
But should you devalue 5%?
Is 5% enough?
Well, why 5.0%, 4.9%-- well, 5.1%?
Be a numbers snob, go for 9.9%.
You know, is it 10%, 11%, 12%, 13%?
I don't know, is it 15%?
Maybe it should go to 20%.
Maybe it should go to 8.5%.
I don't know, what's enough?
What's enough and what are you guys trying to signal there?
Because certainly if you were to go back to 8.3, where we were for best part of 15 years
or so, then that sends a very bad signal of course.
That basically almost wipes out the past 11 years of currency movements and currency strength.
And then you think, oh my God, China is like, it's really going back to some almost prehistoric
economic environment as it were.
So I don't see them doing that because I think it sends such a destabilizing signal.
I think instead they're going to waste more reserves, waste a lot of time, a lot of effort
by this slow depreciation.
And it'll come in fits and starts.
It's not going to be a straight line.
But there's going to be some fits and starts on the way down.
The argument that somehow they're wasting reserves, the Communist party has never been
They've been-- it's efficacy, not efficiency.
They achieve what their goal is.
They've got lots of people.
Their entire history is about wasting resources to achieve some arbitrary goal they set on
one day that the next day was no longer important.
My God, this was a country that sent out schoolchildren to clap all day to ensure that sparrows couldn't
land so they would die, thinking that that would improve public health in Beijing.
So in that sense, I get that somehow they're wasting resources.
I don't think that matters to them, because what they're focused on is maintaining control,
and not necessarily being exposed to that market volatility and that whiplash.
Because goodness knows where that could take you.
Because if you lose confidence in the government-- and again, this is what underpins so much
of what goes on in China.
You can talk that, oh yes, they're rebalancing.
The growth rate's coming down.
You could argue their debt's not too high.
But everyone basically falls back on, but the government's in control.
They're still in control of all those levers, whether it's fiscally, whether it's socially,
whether it's the internet, information flow, whatever.
And if you have that sort of shock to the system, then I think that becomes highly destabilizing.
When you're talking about politics and risks of China in the coming years, I think the
risks are ultimately political, not actually economic.
Because the politics-- and again, how can anyone be sitting here at the end of 2016,
while thinking ahead to next year, without thinking about Donald Trump, because the rhetoric
there, that relationship-- which has always been a bit of a love and hate relationship,
going back for centuries-- clearly will change.
It's already started to change.
For better or for worse, we'll find out.
I think though what's very clear is that Trump is clearly going to take a much tougher stand
He's certainly talking tougher on China.
What his stand is on China when he's in power and we've been through six months, a year,
then I'll tell you what it is, because frankly I have no idea what it's going to be now.
But you know he's going to certainly try and be tougher on China.
I think there are a number of things that are worrying about that though.
Not that being tougher on China is a bad thing, because I think if my complaint-- and I've
often been called about, I've been bearish on China.
And I think that's a dreadful term.
I think bulls and bears exist in the stock market.
I think they're dreadful terms with trying to talk about countries or bigger picture
I've always seen myself as a realist in China because I've spent a long time there.
I've worked with Chinese companies.
And I'm very realistic about the real limitations of China, often that China, because of its
sheer size of population, of financial reserves, or whatever it may be, seems to be this behemoth
which seems unstoppable.
And yet the reality of dealing with Chinese companies and often individual Chinese, or
even the Chinese government, is much more fractious and nowhere near as successful as
the big picture would be.
And so when I've been sort of negative and critical in China, it's because I think one
of the first things is to start talking truthfully to China about China and about your relationship
So in that sense, tough talking does no harm.
I think because much of what China-- I think the frustration that people have often with
China is that China doesn't even live up to its own promises, of whether it be reform,
of market opening, market access, and things like that.
So in that sense, there's lots of reasons to be tougher with China.
And that's the good side, if you like, of Trump.
Although, is that what he's going to do?
I don't know.
What worries me more with Trump is that there seems to be-- he's fighting the wrong battle.
He's fighting a battle from a decade ago or from two decades ago, that somehow that the
very basic model of American jobs moves somehow direct from America straight to China, and
that if only we are tough on China, put tariffs on Chinese goods, that those jobs will come
Well, if that simplistic picture was ever true, it's certainly not true now.
And simply putting tariffs on Chinese goods doesn't solve that problem.
So I'm worried that the-- and certainly his economic adviser Navarro, whether his economics
even holds up, many economists would argue.
But certainly his China policy doesn't necessarily seem to hold up.
He seems to paint China as the great evil in the world that's responsible for all ills.
And certainly China has a role to play in many of those ills.
And certainly Chinese policy has certainly contributed to many of those apparent ills.
And there's things we should be tough on China about.
But simply this rather belligerent attitude I don't think is very conducive.
Not that I'm annoyed or worried about upsetting the Chinese.
That's almost an argument for saying those things if you're just upsetting the Chinese
I have no problems with that at all.
But you're not necessarily going to achieve the goals you want.
I think that's what you're-- Trump's wanting-- needs wins, and he needs wins against China.
The approach he's taken, I'm not convinced he's going to be able to do that.
What you have seen as well of course-- and this plays into Trump's worldview, and others--
is it China of course themselves have become more and more belligerent over the past five
years or so.
And this has certainly increased under Xi Jinping.
It's partly been to support their own economy.
And this has come across a wide range of issues.
One of course is of economic and the greater focus on domestic production of certain goods,
of restricting fair competition from foreign companies or forcing foreign companies to
onsource certain activities into China, particularly in the technology space, which is obviously
very worrying given the tight control that China has over technology, et cetera.
So there's those sorts of aspects.
But you've also seen them being nationalistically much more belligerent.
Obviously we've seen that in the East China Sea.
You've seen that in the South China Sea.
And it's China as the bully, China as the big country and you're the small country,
get used to it type of model.
Which, ultimately I think will backfire on China.
yes, we all know China's a big country.
We all know that all the countries in Asia are very dependent on it.
Economically they're very linked with it.
But China is-- I'm not quite sure what it thinks it's setting itself up for, because
it has no friends.
I was once giving a talk in Europe and I said that China has no friends.
And a lady from the Chinese embassy came up afterwards and say, "But that's not true.
We do have friends."
I said, "Well name one."
"We have a friendship treaty with Pakistan."
I went, "Ah, anyone else?"
And she said, "Singapore."
I said, "Sorry, is that a question or a statement?"
And so China doesn't have friends.
It goes out almost out of its way to alienate countries in the region, certainly countries
it should be cooperating with, countries that have large Chinese diaspora as well.
So they have natural affinities with them, but they seem to be unable to build an inclusive
type of model.
And it becomes a very Han chauvinistic model.
And this, I think, is ultimately an underlying weakness in the politics in China.
So, you look at those domestic sort of political issues, that domestic inability to build friendships
and alliances, even within Asia, its natural community.
You then bring into this Trump, who has almost alienated everybody he meets.
And then you think, this is clearly going to be volatile for the coming years.
Being tougher on China, not a problem.
Is Trump the person to do it?
I really have to doubt, because I can't see-- he's a man who revels in his own ignorance,
and seems to have surrounded himself with people who, again, are not necessarily think
that simple solution to complex problems are the way forward.
I don't think that's necessarily is going to be-- it may be good for markets.
There certainly will be volatility, as many of my friends would say.
But it's not necessarily going to be good outcomes I think.
What is interesting-- and obviously I work in finance and I write about the Chinese financial
system, but I don't manage money.
I thankfully don't need to give people advice to what to invest in China, although my default
answer is, I'm sure there's lots of good of good business to invest in China.
But I think what's interesting or when I think about China or how I think about it differently
from others, or many of the people who would be my peers or the readers of Red Capitalism,
that I came to China because I was interested in China.
I didn't come to China for the market because it was a big market or there was a big stock
market or there was business opportunities.
And so I've often thought that's given me some advantage, perhaps, of trying to understand
China or trying to just, maybe, just accept some of the frustrations there.
And I think of this particularly over the past-- since that Asian-- or since the global
So you look at over that long eight years, those two Olympic cycles as I talk about,
and you think about, lots of people have done lots of work on debts and whatever, and this
growing network of debt and all these notes and look at these empty apartment buildings
And I said yes, that's true, that's very nice.
And then they automatically then sort of jump through on to, well this must stop, that this
must come to an end, that default beckons or whatever.
And I think, that's sort of true.
Of course it's true, and ultimately there is a price to be paid.
But I think in China, two of the things that I always think about China-- this is because
I've been interested in China long before the economics of it as it were-- is that China
is the land of the absurd and the arbitrary.
And I think unless you understand or appreciate that China is this absurd country in some
ways that's struggling to become modern, then you come too quickly to these conclusions.
Oh the bank's accounting's all hocus pocus.
The bank must therefore go bust and I'm shorting the banks.
Well why would you do that?
There's no evidence banks are going to go to zero.
There's no short sell report that's going to show-- expose all.
And so you're almost looking for the wrong sort of outcome.
And I think it's understanding this, of the absurdity and the arbitrariness of it, that
you simply, when you do your China analysis, you are left with a lot of unanswered questions.
You are left almost in dead ends.
You think, but surely the next step means-- I say, well it does.
I'm not saying it doesn't.
But who's going to take that next step?
Who's going to force the bankruptcy?
Who's going to ask the difficult question?
In Chinese, when you raise these types of points, Chinese will say to you, semi-apologetically,
but also in earnestness about just apologizing, In China it's like this.
And you think, not again.
And you know it's true.
But this, sadly, is-- and I think if you're an investor, at all sorts of levels, not just
whether you're picking stocks or whether you're doing real business-- and clearly people have
made a lot of money in China.
So it's not as if it's just a complete fiction or fraud.
But you simply end up with a lot of these, like I say, loose ends and unfinished stories,
that often sort of fizzle out in some way, and it doesn't come to a clean bankruptcy
But what you find is that the loss has been socialized in some ways, that someone else
bailed somebody else our or they borrowed from here, and the story morphs into something
And that's very difficult, I think, to explain a lot of the time.
It's a bit like the politics we talked about, the politics and economics being tied up.
But it's often very difficult.
If you focus just on the numbers, yes, the numbers can expose a lot of sort of malfeasance
But that's only part of the story, because there's also then another parallel track of
almost like back as it were or state support or local support that carries on in the background
that allows things to continue.
And everyone sort of plays along with the game.
It's in nobody's interest to pull the rug away in that sense.
So I think once you understand that about China, I think, does it make you a better
Maybe-- maybe you get a bit less frustrated.
Because again, people-- even though I'm in sort of financial markets, I was authorized.
So I consult with various people on all sorts of China topics.
And I remember somebody came here doing a big project, a big property deal, with a big
blue chip Chinese name.
And I was advising him over a glass of wine as you do.
And he said something like, "So, what did you think of my Chinese partner?"
And I said, "Well the first thing you need to understand is that all Chinese partners
are bad partners."
And he said, "Well what did you mean?"
I said, "Well it's not necessarily they're out to defraud you, but they're almost certainly
not what you think they are.
And so even though this is a blue chip name and they're saying they're going to invest
X hundreds of millions of dollars with your property project, do they have approval to
bring the money out of the country?"
"Well they're a big Chinese name."
I said, "Do they have approval to bring--" "We've not asked, but surely they'll be able
to get it."
"Why would they be able to get it?
Aren't you watching the news?
Don't you know how difficult it's getting money out of the country?
Have they got approval to do the project in the first place?"
You mean they may not?"
"Well why would there?
You cannot assume that."
So it's not that they're necessarily lying to you.
They may be very honest about doing this project.
They may have the money in China.
But you don't need the money in China.
You need it somewhere else.
And so I think understanding the framework in which China operates, partly you could
argue is a good deal due diligence.
But it's also understanding how China operates, how entities, how individuals operate, that
will often speak well beyond their capabilities because they'll think something will turn
up, that oh, we'll figure out a way to do it.
And often, of course, they won't figure out a way to do it, which makes it very frustrating
because you think, I'm dealing with a blue chip Chinese name here.
And then actually they are just as beholden to the arbitrary regulations of the government
as anyone else.