The End of China’s Economic Miracle? A Discussion with ‘Financial Times’ Writers

A ChinaFile Presents Transcript

On April 20, 2016, a panel of Financial Times correspondents and editors with China experience, joined by financier and occasional FT columnist George Soros, discussed rural-to-urban migration, wage growth, real estate ups and downs, the increasing debt, and more in a conversation moderated by Arthur Ross Director of the Asia Society Center on U.S.-China Relations Orville Schell, at Asia Society headquarters in New York. The FT’s new original short film, “The End of the Chinese Miracle,” was also screened during the discussion.

Orville Schell: I think it’s fair to say that Jamil [Anderlini]’s film does view this rather extraordinary period of Chinese growth as reaching a kind of end of the play. And I think we’ve been watching over the past 20 or 30 years one of the extraordinary experiments in history. Namely, can an economy that is a Marxist-Leninist economy that comes out of a revolution, can it in effect strip away Marx, keep Lenin, add Adam Smith, and yet cohere in some way that can find a stable angle of repose and go forward? Many of us have felt over the years that there was an instability factor here that sooner or later was going to cause some problems. Maybe we should start by doing Jamil, give you three minutes to give us a sense of what we will see and kick us off?

Jamil Anderlini: This is actually a clever ploy to make you all go on the website of the FT and watch the video for yourselves, and then sign up as subscribers to the Financial Times. This is all planned, thank you very much in advance for your custom.

Kevin Frayer—Getty Images
A day trader plays cards with others as he watches a stock ticker at a Beijing brokerage house in 2015.

I’ll very briefly go through the central thesis, because actually Lucy and I worked on this very hard last year. I was the Beijing Bureau Chief of the Financial Times until January 1, and I’m now the Asia Editor based in Hong Kong. But last year, Lucy and I and our colleagues sat down at the very beginning of the year and decided what our big topic for the year was, what we’re going to focus on for the year, and do a series of pieces on. And what we came up with was this idea of the end of the migrant miracle, the end of this flow of humans from the countryside into the cities to work in the factories, to work in the construction sites, to work in the restaurants. You will see later on that actually it’s the biggest migration of any type of mammal ever. It’s quite amazing. And it’s actually the biggest annual migration of mammals; because everyone who’s a migrant worker, 277 million of them, they usually around Chinese New Year go home for about a month, back to the villages. So that mass movement is much bigger than I think bats are the second biggest, and they’re a lot smaller, something like 90 million. It’s astonishing when you think about it, and that movement of people is really one of the main things that has led to this extraordinary growth in China over the last 30 years. Just the fact of moving people from very low productivity jobs in the countryside to much higher productivity jobs in factories, in construction sites. Just that shift has created enormous, enormous wealth. And our hypothesis, which we believe to be, most of us believe to be absolutely correct, is that this supposedly endless flow of migrants is now drying up. And it’s probably already peaked and is preparing to go into reverse. This is called in very technical economic terms the “Lewis turning point.” It’s happened in the U.S., it’s happened in advanced societies, advanced economies already in many parts of the world. We believe it’s happening now in China.

What it tends to mean is much higher wages, which we are seeing in China over the last few years. You’ve seen double-digit, 20-30 percent wage growth, wage inflation. It also means that economies slow down a lot and we’re seeing that. And if you don’t have innovation in particular, if you don’t have a kind of shift to a new innovation-led, creativity-led economy, then these economies tend to stall. And we’ve seen that through the so-called middle-income trap that you see in many countries. One little thing I’ll leave you with because it is part of the video, but so I can set the stage a little bit for when you watch it later. If you’d said to any of us 10 years ago that China, the source of all cheap labor in the world, the workshop of the world, was going to be importing workers, we would have all said you were completely crazy. But that’s what’s happening now. And we interview in the video a young migrant worker from Vietnam, illegal, who’s smuggled across the border into China and who was working in the factories in southern China. We don’t have good numbers because these are all illegal flows, but we estimate anything from 50,000, 100,000, possibly more workers have snuck into China through Myanmar, Vietnam, and other border states, mostly those ones, and are now working in the factories. You can go to some factories, and there are people speaking only Vietnamese in some of these little factory towns. That’s astonishing when you think about it. It’s China, 1.4 billion, but they’re importing workers.

So this is the sort of crux of what we were looking at, and we did a long series of pieces, I urge you again to go on the website and buy a subscription. I’m a salesman now basically, not a journalist. But you should go and have a look. We did do a series, and actually those are all free, the series of pieces we did. About a dozen pieces, looking at different aspects of migration, and different challenges that migrant workers have. What we tried to do is humanize the story, because so often we’re talking about big China or bad China or weird China and I think what we’ve tried to do is also point out that this is a phenomenon or these are phenomena that are affecting individuals, real people like us.

Orville Schell: So those of us who’ve been around this block a few times have encountered many occasions when people thought the end was near. And yet we have seen one of the most extraordinary periods of economic dynamism in world history over the last couple decades. And counterintuitively, it has somehow kept on going. Let me just read you something here. This is from the Telegraph, if I can find it. Basically what they’re suggesting is that we’ve seen in this last quarter a kind of uptick in the economy. The housing market looks better, growth rates and exports are better. Why should we believe that this is actually the last act of this drama?

Jamil Anderlini: You’re asking me, right?

Orville Schell: Well I’d like to ask all of you, but start. You’ve laid down the theorem.

Jamil Anderlini: Sure. I think there are a couple of things happening. First of all on real estate, I don’t want to get too technical and too in the weeds, because Lucy and I think about this every day and argue back and forth a little bit. But first of all on real estate, we have seen an uptick and a rebound, but it’s only in the top tier cities. It’s in Beijing, Shanghai, Shenzhen, Guangzhou. In the second and third tier cities, prices are still falling; volumes are not rebounding in the way that you’d like to see them. Plus, if you look back over the last two years, you’ve seen a drop. Last year, prices were about flat, and volumes of sales were going down. But investment was still up overall; investment in real estate was still up overall. But in the last two years, if you look at new starts in investment, they’re down like 20-30 percent. So actually what we’re seeing now, if you want to have a continued growth in investment in real estate, the main driver of the economy, you’re going to have to see a huge rebound in new starts. We’re seeing a small rebound, and I expect by the end of this year, for the first time, that investment in real estate will actually contract, leading to a much, much bigger slowdown in the Chinese economy. That’s first on real estate. The second thing is you have seen a slight rebound in things like fixed-asset investment, and several other key indicators, only in the last three months by the way. But that has been accompanied by the biggest growth in debt that we’ve seen yet. And China has already had the most incredible debt explosion over the last six or seven years. Depending on whose numbers you look at, it’s gone from 130-140 percent of GDP, the overall debt load, to 260-270 percent. We have an FT article, again out in the next week or so, which gives the latest in estimates which we’ve calculated ourselves. That is not necessarily a problem in itself; the absolute debt level is not a huge issue, although it’s approaching Japan levels, which is the highest level in the world. The key problem is the speed at which you’ve gone from 130 percent of GDP to 260 percent. No economy in history, as far as we’ve been able to find, has ever seen that quick a ramp up in debt without a financial crisis. I think you have to look beyond, I mean obviously we’re tied to the news cycle, the monthly data, we have to always report this, but you have to look beyond that and look at what’s happening over the broader economy. I think all the signs are pretty much negative.

Orville Schell: George, let’s turn to you. You’ve watched this for decades now, and every time there’s a problem, there’s stimulus, and the debt increases. Do you think that China can continue to bail itself out of these slowdowns by this strategy?

George Soros: I think there’s an eerie resemblance of what’s happening in China to what’s happened here leading up to the financial crisis in 2007-2008. It’s similarly fueled by a credit growth and eventually unsustainable expansion of credit. But it feeds on itself, and it has a lot to do with real estate as was mentioned. Since it feeds on itself, it can reach the turning point later than anybody expects. This happens in America, where 2005-06, a lot of people like Paul Walker saw it coming, but it went on to 2007-08 and most of the damage actually occurred in the last years, because it’s kind of a parabolic circle where more and more credit is needed to sustain growth. In the case of China, based on I think 2015 numbers, it takes seven units of credit to get one unit of growth. I think since it’s parabolic, it probably continues to expand. 

Jamil Anderlini: It’s double what it was just a few years earlier. Like 10 years ago, that’s double the amount of credit you need for GDP.

George Soros: Well it’s now up to what? The total social credit is 350 percent I think, around. If you look at the numbers, of course, it has been growing exponentially. What happened now is the slowdown that has been building up has reached a point where it would have caused a decline in employment. That, the government cannot afford. And correctly, it took measures to stimulate the economy. Effectively, the most successful way of doing it is to relight the furnaces and produce steel and cement. To do that, you need to have some place to use it, and that’s construction. Of course, house construction, a construction boom. And that is in fact what is now occurring. It can buy you additional time. But it makes the problem that much bigger. So that’s where we are.

Orville Schell: But they have quite successfully, it seems to me, in the last several decades, pushed this problem forward with more stimulus each time. And I wonder, George: 10-15 years ago, did you think we were at the end of the road?

George Soros: I didn’t.

Jamil Anderlini: Orville wants timing I think from you, George.

George Soros: In the end of capitalism or something, and then of course the authorities intervened, that’s correct. But now, again, correctly, they decided they can’t afford to have unemployment, and so they relit the furnaces. And they also induced a construction boom and the real estate boom.

Orville Schell: Or bubble. 

George Soros: Well it is a bubble, but it can grow, it can feed on itself. And markets are not infallible, they buy into it. And that of course is another factor that makes it grow. And that is in fact what has happened. So the markets are reassured. When I see in March that credit grew by an enormous amount, that is taken as a sign that recovery is on the way. To me, I think it’s a warning sign, because it shows how much more credit is needed to bring up or to stop a decline.

Orville Schell: So Lucy, from where you sit in Beijing following this, how do you view it in terms of the stages to some sort of denouement? Do you think we are at a stage where the old strategies of releasing more credit and stimulus to keep things going and reassuring people is coming to an end?

Lucy Hornby: Yes. I think we are, but I don’t necessarily think that means a super hard landing. I think you can visualize it in a way that if you assume there is a general level of organic growth that should have happened given China’s population growth, general increase in wealth, let’s say from 1949. It should have gone at a certain level. Instead it went way down, and there was sort of a boomerang effect like pulling an elastic band, where it shot way up, started to moderate and come back to the mean. And then as Mr. Soros just said, they juiced it. Now it’s coming back to the mean again, and they juiced it again. Sooner or later, I think it will always come back to the mean. I think the mean is still going to be growing though. There’s still a number of Chinese that don’t have our standard of living, and aspire to that, which is quite normal. The question is just whether inducing it, whether they’re willing to accept a time where it should go below that mean again before it reverts to a more organic or natural stage. I think as you say, they’re very afraid of that.

Orville Schell: You wrote a wonderful book about the Party, about how things work politically. Two thoughts occur to me. One: do you think politics are relevant to how China manages its economy? And do you think at this stage that Xi Jinping has both the power and the will to correct the fundamentals of the situation so that it doesn’t have to keep getting, as Lucy so elegantly put it, juiced?

Richard McGregor: I think if you look at Xi Jinping, you can divide his power into two areas. There’s one area that’s the Party area, if you think he has control of the three P’s: the P.L.A. [People’s Liberation Army], personnel, and propaganda. Whether or not you like what he’s doing in those areas, he can be very effective, very decisive, and very nimble in controlling those levers of power. When it comes to the economy, the sort of increasingly authoritarian style of leadership that we see in Xi Jinping doesn’t work. It may work a little bit; we have had a slight uptick in property prices and everything in the first three months of this year. I think that’s a temporary thing. But China is a vast, sprawling, continental, complicated economy. Xi Jinping is the chairman of everything, as we know. He’s the chairman of the Party internal group overseeing the economy, but I doubt he has that much time, as people tell me, to actually focus on it. He has a very tight inner circle, but within that inner circle on the economic side, he has very cosmopolitan, worldly, market-oriented advisors. I don’t see any sign that’s really listening to that. But in any case, he can’t click his fingers on the economy as he might be able to click his fingers and get the governor of this or that province removed. And that’s difficult.

Now, if we go one step beyond that, and ask the question of whether Xi Jinping is comfortable with an economy ever reliant on the markets, which go up and down, and in developing countries, with great alacrity and causing great damage on some occasions. Does he really want to take risks? We’re coming into the political season in China, we’re pushing forward with the so-called “decisive role for the market.” I’m not sure that’s his instinct actually, and his instinct might be to juice things. I might say very briefly, I don’t want to be a Pollyanna on the Chinese economy, but things are changing. There are other changes happening, I think we’ve had four years in a row where manufacturing and construction has contributed less than consumption and services. There is a transition happening. But when the financial crisis comes, and there inevitably will be one, I think the real question is just how bad it is. And what is hidden that we don’t already know about. So there’s a transition under way. Can that sort of sprint, or amble ahead of the big challenge down the track? I just don’t think we really know.

Orville Schell: Some of you raise the interesting question about whether Xi Jinping is willing to countenance doing exactly what he said he’d like to do, namely let market forces determine the allocation of capital to a greater extent. But as we saw in the stock market crash a year ago, when push comes to shove, the Party wants to move in and fix things. Do you think we will ever reach a time when it will be safe enough to begin the kinds of reforms which the Party itself declares are necessary? I throw this to all of you.

Richard McGregor: I’ll speak briefly. I think no, in some respects. I think the Communist Party, as long as it survives, will always want to have the state or at least enterprises over which they control at least the personnel at the top of, to have the commanding heights of the economy, I feel like. That’s the first thing. Look, for example, at the moment. When Zhu Rongji was in charge and they did the massive overhaul of the state sector, something between 40 and 50 million people were laid off. In the last few weeks, we’ve heard talk about 1.8 million people being laid off. Now obviously that’s difficult for anybody who does lose their job, but compared to what the economy went through before, that’s almost a rounding error. And in terms of Chinese employment that’s almost a rounding error, it’s almost like attrition. And if that’s a difficult decision now compared to what the Chinese leaders managed to push through before, then you do sense a sort of loss of nerve in really transforming the economy completely. And I don’t think they want to do that in any case.

Orville Schell: Jamil, they clearly have centralized power as you pointed out. In fact, the prime minister, the premier, is now really almost an accessory. Which means that the responsibility for what happens in the government is also centralized. How do you think Xi Jinping is going to manage to spread the blame, if in fact your scenario comes to be true?

Jamil Anderlini: Well, I think he can still blame the premier. I think the premier is still nominally in charge of the economy, and we’ve heard recently that the premier has not been traveling for the last five months because he has to stay back in China and deal with the economy. So he’s still the fall guy if things get really bad. Obviously, it’s not good for the Communist Party and the idea of unity at the top if you’re firing your number two. But last time I was in Beijing, the gossip was very much focused around whether or not Li Keqiang would stay the current premier, whether he would be allowed to stay on for another term, a second five-year term. I think that’s unclear, actually. I think we’ve seen with Xi Jinping that he’s willing to rip up the rule book. We used to talk a lot about unwritten rules, unwritten consensus rules, which are now being unwritten even more, as in they’re being discarded entirely. As you’d be very familiar with, the rule that if you’re 67 years old, you can stay on in the Standing Committee of the Politburo, if you’re 68 you have to retire. As you know, the reason for that is because Jiang Zemin, the former president, had a rival who happened to be 68 and a friend who happened to be 67, so he instituted this new rule, which became an unwritten rule they’ve followed ever since. But it’s not written down anywhere, obviously. And I think there’s a very good chance Wang Qishan for example will be allowed to stay on. He’s the key hatchet man, very important person in the anti-corruption campaign and many other things. So I would point out that Xi Jinping has really taken power on so many things that we hear about. Some of these are sort of secret, some of them are more open, but there are now something like 30-something small leading working groups, which are the real way that power is exercised. Including how to fix the Chinese soccer team, which I think is hilarious. There’s a small working group led by the president, with the premier, the vice chair, all these people, and they sit around and talk about how and why their soccer team sucks so much.

Lucy Hornby: The thing is that broke. 

Jamil Anderlini: It is really bad. Their soccer team really does suck. Their men’s team, by the way, their women’s team is fantastic.

Orville Schell: I mean, Deng Xiaoping was head of the All-China Bridge Association.

Jamil Anderlini: Well that’s actually a point I was going to make. People say look at Xi Jinping, he’s got all of these positions, and he’s got all of these formal roles as the head of all these small working groups. But I make the same point that you’ve just made: that the formal levers and institutions of power are far less important than your gravitas and your standing within the Party, and your informal networks. And as you point out, Deng Xiaoping ran the country; he was the paramount leader, and the only title he held was Chairman of the Chinese Bridge Association, for like a decade. So you don’t need all these titles, you need the support and the loyalty of the generals, number one, obviously, very first thing you need. And then all the cadres down through the system, you need the officials behind you. And I would say that the fact he has to hold these formal levers means he probably has less of these informal power structures.

Orville Schell: He just showed up on Central Chinese Television wearing camouflage army fatigues and touring, visiting the People’s Liberation Army.

Jamil Anderlini: We were just talking about that, yeah.

Orville Schell: So Lucy, let me ask you. You live in Beijing, and you cover the economy. How do you think ordinary people are experiencing this sort of evolution of economic things in China?

Lucy Hornby: I think it depends what type of ordinary person you are, right? So for a lot of the migrant workers, things are getting very tough because despite the rhetoric about increased urbanization, actually there are increased efforts to push people out of the cities, and that particularly hits children. They had relaxed a lot of rules about children attending schools. Parents had brought them with them to try to raise them themselves in the cities, now they’re pushing them back out to inferior schools in the countryside to be taken care of by elderly grandparents. At that level, the decreased stability to provide these services is felt not so much as dollars in your pocket, but in terms of the human separation, that you’re not allowed to have a normal life with your six-year-old, you have to send your six-year-old on a train 2,000 miles away. I’ve had people say to me, “I’ve got the money, I can pay for the school fees, they just won’t give me the paperwork to put her in.” 

Orville Schell: Otherwise, are you finding people optimistic, pessimistic, frightened?

Lucy Hornby: I think a lot of people are looking at real estate in California, yeah.

Orville Schell: This is something I wanted to ask you about, George. There’s much talk about capital flight. Of course, there is a policy to do mergers and acquisitions as well. Do you think that this is a hemorrhage to be worried about, or a normal phenomenon for a country that’s increased its wealth and power and wants to go abroad?

George Soros: It’s a growing phenomenon. I think the anti-corruption drive, which can hit people unexpectedly because it’s used as a way of purging your enemies, makes people very nervous. I think there is a definite urge to diversify, to get your wealth out. And you’ve also got people who are influential, who are losing the loopholes for improving the international expansion of their businesses to actually move money abroad. Of course, the outstanding example was this insurance company that wanted to buy Starwood. So I think this is an ongoing thing. But the authorities have imposed capital controls to a great extent. And it’s something that is approved now, by the IMF. So it’s an accepted way of dealing with the problem, and it has had an effect. I think probably households find it difficult to get access to the allowed quota of I think 50,000. They can’t withdraw it. The authorities are aware and trying to control it. But I’m not familiar with the details of the inside situation. I’m learning and listening. But there is a fundamental contradiction between Party control, which is centralized, and the market solution. For instance, markets insist on information. Now, information that was previously available has been interrupted. So it’s much more difficult to follow developments, and you need a free press, you need a media. And the media has been brought under the personal fealty to the leader. So that I think is a very troubling development.

Orville Schell: So how do you three view the prospect of this country that wants to be innovative, wants to be modern, in a somewhat information compromised environment?

Jamil Anderlini: That’s a nice way of putting it.

Orville Schell: Do you think the economy can move forward as robustly and energetically as it will need to, if information is, as George describes it, beginning to be more and more circumscribed?

Richard McGregor: Well, it’s political information that’s circumscribed, I think technical information isn’t.

Jamil Anderlini: I would disagree. In one case, I mean, you’re right, in general, technical information is not circumscribed. But if you look at the case last year of the Caijing journalist who was thrown in prison because he reported on a technical matter in the stock market.

Orville Schell: Well, it was the stock market crash.

Jamil Anderlini: Well, he was reporting that the government was going to remove ... it was a scoop, it was a great scoop, we’re very jealous. He was reporting that the Party was going to remove its support for stocks, stop buying the stocks on the same level it had in the last month. And that was enough to get him arrested and thrown in prison, and a confession on live television.

Richard McGregor: Fair enough, but that’s politics, I think. That was a political crunch time. Well, I guess technical, let me put it a different way: technological. Of course what George says broadly is true. You’re not going to build a great society unless you have an open society. But China I think has done better than anybody expected having it both ways.

Orville Schell: How do you explain that?

Richard McGregor: Well, there’s the effect that Lucy talks about. There’s the boomerang effect. Remember, this is a society bouncing back. It’s a highly educated society. Obviously mainly in urban areas compared to rural areas. Without getting into sort of cultural mumbo-jumbo, we all go to China, it’s very energetic, it’s very entrepreneurial, people want to improve their lives and they’ve been able to do that. And so there’s a great incentive, you can work hard and get on. And also if you go to the basic technology that we use getting around a city these days, the Ubers and the like, and the Chinese version, Didi Dache or whatever it’s called, all those sorts of things. The Chinese do very well with them. And the Alibabas, and this that and the other in terms of consumption, it’s a very switched-on place. Now, can it prosper and grow at the rates it has if all the horrible sort of kryptonite at the heart of the party system stays there? I doubt it. And I think it will be a drag, but I don’t think we should think it can’t be innovative.

Orville Schell: But there is a school of thought that believes precisely because there’s so many impediments and Chinese have such incredible dynamism and energy, that the sort of Darwinian imperative of finding your way around these impediments has created an enormous sort of innovative creativity.

Richard McGregor: That’s right, it’s a skill. 

Orville Schell: It’s a skill.

Lucy Hornby: I’ve heard a Chinese person say to me that if they didn’t spend so much brainpower on navigating the bureaucratic system, that they could have invented the iPhone.


Orville Schell: Well, that sort of refutes my idea.

Jamil Anderlini: I’ve got another slight rebuttal to your argument. So I have a friend, he studied at MIT, he was a student in 1989. 

Orville Schell: I think I know who you mean.

Jamil Anderlini: Careful. So he was a student in 1989, he left that year and went to MIT. He sold his first company several years later for a hundred million dollars. He went back to China, and he has lived there for a long time. His family has a big car dealership business, that’s what he does. But he’s still a nerdy programmer at heart, and he has four or five guys who are old sort of friends of his, colleagues of his, and he pays them to just innovate. And they are really innovative. They’ve come up with some amazing stuff. Including, it was several years ago now; they came up with this wonderful software that could live-broadcast from your iPhone straight to your WeChat or your Weibo account. They were the first in the world to come up with this. It was really innovative, like live streaming to your twitter account. Anybody can see what you’re doing or what you’re looking at. Now think about the implications of that for a police state, for an authoritarian system, where I could be sitting while Xi Jinping picks his nose and I’m live streaming that to everyone on the internet. Or there’s a protest down in this village or that village I’m live streaming. So he recognized immediately the huge potential for this, but also the huge danger he was in having come up with this technology. And so what he ended up doing was selling it to the state security system for a pittance.

Orville Schell: I rest my case. Innovation at work.

Jamil Anderlini: Very innovative, but killed at birth. And now obviously that technology is available, others have come up with it. But he was the first. I mean really, he swore to me that he was the first, and other people said he was. And that’s really sad. You do have an extremely innovative society, which can’t really properly bring it to market, can’t really monetize or popularize it.

Orville Schell: In a minute, we’re going to try again to watch Jamil’s film. But George, I want to ask you: why not just devalue?

George Soros: Well, it would have very severe effects internationally. In fact, one of the reasons why markets are reassured is because there is genuine cooperation, particularly between the United States and China. People talk about the G2.

Orville Schell: Not too loudly, though. Never got too much purchase.

George Soros: No, no. But I think it’s quite real. I think that the United States rightly wants to have China participate in the international financial system. They came very close to setting up a rival one. And then they were given the right to become a recognized currency, the SDRs. And Xi Jinping agreed to that, it’s his accomplishment, and he’s bought into it. Which is a very good thing. So that has voided a competitive devaluation, which wrought havoc in the 1930s. So we have learned quite a bit from that experience. We are avoiding it so far, exactly based on the efforts that we have learned from that. This is why the markets are actually calmer than they were at the beginning of the year.

Orville Schell: And you think that China will maintain that responsible stakeholder posture?

George Soros: Yes, it will actually make their position more difficult actually. Because it means that one route of currency adjustment is denied. They did decouple from being tied to the dollar, so they now are tied to a basket of currencies, of which the dollar is just one. And therefore they can rebalance, if the dollar goes through the roof then they can decouple from the dollar. So it’s actually a very positive development for the world, I think. It’s a very healthy thing that there is this cooperation. 

[Film Played: “The End of the Chinese Miracle,” Financial Times]

Orville Schell: Good work, interesting. Before we have questions from you all, let me ask our panelists just in literally 15 seconds: what one thing do you think China could do and should do...

Richard McGregor: Throw open the books financially and get transparency on everything that’s hidden inside the system.

Jamil Anderlini: Political reform, I think.

Lucy Hornby: That doesn’t leave much, does it? I would say socially, if they remove what’s called the hukou that binds people and still prevents...

[Audio interruption]

George Soros: …resistance. And I hope they will manage to prevail.

Orville Schell: So we’ve sort of returned to where we began. Whether perhaps Marx and Lenin belong together, but Lenin and Adam Smith, finally, are not such congenial partners. Anyway, let’s have some questions from you all. There are some microphones, because this is being webcast, and so we can have your question be webcast as well. And please make your question short and tell us who you are.

Audience Member: I have a question for Mr. George Soros. If you were the Chinese leader, what would you do to help Chinese people fight against the economic hardship and mitigate the financial loss? Thank you.

Orville Schell: So did you get that George? What would you do to fight against, what was it? Economic hardship.

George Soros: Well, I think that the authorities realize that they can’t afford to have lasting unemployment. They are right to do so. That’s why they actually re-ignited the furnaces and are producing steel and so on. And that will delay the financial problem. But it will make it that much bigger, so they are in a way digging a deeper hole. But at the same time, there are also positive developments. You mentioned that there is an increase in the tertiary industry, the service industry is growing, is gaining momentum. But of course, there productivity increase is more difficult to come by than in manufacturing.

Orville Schell: Okay, another question, I see one right here.

Audience Member: Thank you.

Orville Schell: And you are?

Audience Member: Nicholas Davidoff. I just wanted to ask about some news in the FT this morning, about the Chinese operating their own gold fix. And just the general interest of the PBOC [People’s Bank of China] in gold generally, given the politics of the Shanghai court and the Fed. Is that a parallel strategy or a hedge for the PBOC?

Lucy Hornby: I’ll leave the technicals of monetary policy to Mr. Soros. But I think that there’s a broad ideological concept here, that the Chinese leadership for years has looked overseas. Ideologically, they haven’t been brought up in a culture that a market can be set by itself. So there’s a lot of discourse in China about having pricing power. And the perception is that if we have the exchange, if we have the fix, then we can set prices, and not you. And so we won’t be at the mercy of your price. And of course the dollar as the world “lingua franca” currency is the ultimate goal there, but you’ve seen that rhetoric attached to every commodity, large or small, so without daring to answer how it would affect the PBOC’s technical movements, I think that you should also look at this as a response to an ideological perception of how markets work, and who holds the power in those markets, and trying to take that power and move the center of that power to China.

Jamil Anderlini: China thinks that George Soros has all the power, and that he can set prices in the world. And so, they want to take their power back from him and have it in Shanghai.

George Soros: Fortunately, I can’t comment because I couldn’t hear the question.

Jamil Anderlini: Very convenient.

Orville Schell: Question right here.

Audience Member: Yes. My name is Kevin Doherty. The question is about the currency that Mr. Soros brought up. Certainly recently in the last weeks and months it does seem that there’s more stability and perhaps some agreements by different central banks to try and keep things more stable. But over the last, whatever period you want to go, two, three, five, eight, ten years there’s been extreme currency volatility globally in whatever currency you look at. How long do you think they can really maintain some sort of tacit agreement to try and keep things stable when market forces are pushing things so strongly towards instability?

George Soros: Could you just briefly repeat? Because I should answer this.

Orville Schell: With market forces pushing currencies toward instability, how long can we expect this balance to be maintained in Chinese currency?

George Soros: Well, I will say there is a definite cooperation between particularly the United States and China. That makes the task of the Chinese government more difficult, but it does protect the rest of the world, and that is why the markets are having a sigh of relief. Because the danger of competitive devaluation has greatly diminished.

Orville Schell: So here, George, you view the Chinese...

George Soros: Although actually what just now happened today, where the dollar strengthened considerably, because oil has made a new high, will strengthen the dollar and will make the commodity-producing countries’ position more difficult.

Orville Schell: So you think in a certain sense, China should be commended for the role it’s playing in keeping world currency stable.

George Soros: Yes.

Orville Schell: Okay, next question.

Audience Member: Hi, my name is Erica Chang, I’m a graduate student at Columbia University. I would like to address my question to our Financial Times representatives. How would you interpret the messages that China is sending by militarizing the South China Seas? Could we say that it’s the Chinese government’s effort to assert or reinforce its global power during this economic downturn?

Orville Schell: So, how do our Financial Times representatives interpret China’s militarization of the South China Sea?

Jamil Anderlini: We’re just working on a book on sort of this topic.

Richard McGregor: Well, not actually on that...

Jamil Anderlini: Sort of, sort of.

Richard McGregor: Well, I’m more East China Sea but I think that what we were talking about earlier is, “Is China innovative.” China could be very strategically innovative. We mightn’t know, of course, whether what it’s doing in the South China Sea now will work. We might need 10 or 20 years. Perhaps we have to wait until we have the first Shangri-La Hotel open on the Paracel Islands or something to see if the strategy is really working. But I think basically, there’s a lot of cult in talking about China these days, there’s a lot of the cult of Xi Jinping, it’s all about Xi Jinping. But I think really, what he’s doing, he’s certainly more decisive and he acts more quickly, drives consensus. But China’s claims to the South China Sea, all the sorts of envelopes that China is pushing at the moment, none of that is new. The main thing that’s new I guess is that we have a more decisive leader. But China has much greater capability to enforce those claims. The tactics they’ve been using, the so-called “salami slicing” tactics, I think are on one level very clever. The U.S. is not going to war over a newly built sandy atoll. It probably isn’t going to go to war either after these islands have been militarized, which obviously is taking it to another level altogether. At the current stage, China couldn’t defend those islands. In 10 years, they might be able to.

Flip that around, though, and the strategy doesn’t look so clever. China might think as a certain other country has at different times that “might is right.” But you look at what’s happening in Asia these days, we hear about the U.S. pivot. The real pivot in Asia, or the real impact of the pivot in Asia is the multiple areas of cooperation opening up against China. It’s Japan and the Philippines, it’s Japan and Vietnam, and it’s even Vietnam and the Philippines of all places. Not that they’re very powerful, but everybody is making all these links. Malaysia and Indonesia, we’ve had the issue with the Chinese fishing boats all the way down in the Natuna Islands in the last few weeks. So can China just do what it wants, which is what it’s doing? Is China as the state councilor and then foreign minister famously said in 2010 in Hanoi, “China is a big country and you’re all just small countries and that’s just a fact.” Is that sustainable? I really wonder about that. And I really wonder, every time China overreaches like this, everybody says they’re going to reassess and pull back, but frankly the opposite has happened. I think we’re not at an inflection point right now, but I think it’s going to be very dangerous in the next five to 10 years. It’s a bit of a ramble, but.

Orville Schell: Do you have any comment, Jamil, on this?

Jamil Anderlini: I mean, I agree with everything Richard said, but ... I got to be careful; Richard hired me to the FT. In Chinese, we say “wo lao da.” So he’s my rabbi, so I got to be a little careful. Bishop, sorry, bishop. Getting confused.

I toy with this slightly unorthodox idea that China ... sometimes I think China could be being more belligerent. China could be being even more assertive. As you pointed out, all the claims that they’re making are claims they’ve made for decades. So we’re not seeing the claims expand, we’re just seeing their ability to enforce those claims is much greater than it was before. I almost wrote an article and didn’t end up doing it, but I was going to call it “China the Reluctant Superpower.” It’s kind of educated its populace in nationalism, educated its people to believe that all these border areas belong to China, they’ve always belonged to China, and now it sort of has to kind of act on it, but it’s kind of reluctant. It doesn’t want ... I mean, I see elements in the system that don’t want to expand too much. It doesn’t want to get into a fight with America obviously, and it doesn’t really want to get in a fight with Japan. So if I flip it around a little bit, I say China could be a lot worse than it is being, could be a lot more belligerent. But then I go back and think they’re really mean and nasty and bullying their neighbors. So I sort of toy with this idea of what would be the worst-case scenario, they could be making bigger claims. They could be saying that Mongolia was always part of China, they could be saying that Hungary was part of China at one point. Genghis Khan made it all the way to the gates of Vienna, why not say that that all belongs to the Yuan empire.

Orville Schell: The hundred-dash line.

Jamil Anderlini: The hundred-dash line, all around the world. Maybe we’ll see that one day. But actually, Korea belonged to China. Japan, maybe. Vietnam, definitely. They could make a lot bigger claims, maybe they will, but if all they want is a few piddly islands ... sorry, got to be real careful here. Piddly islands like Taiwan, and you know, Japan.

George Soros: I think the U.S. is following the right policy in cooperating where China cooperates and pushing back where China is pushing forward. That will, I think, hopefully that attitude will keep China from pushing too far forward. There are some signs of greater cooperation with Japan. You see it in the South China Sea, but actually there’s been no travel recently with the islands. Because I think China hopes that Japan will invest in China. I hope it will work, because I think peace depends on that.

Richard McGregor: I’ll just make one very quick point related back to the topic at hand, the economy. I mean, these days you can’t mobilize the Chinese economy like you used to be able to. You can’t just have inputs and get growth that way. But you can mobilize people emotionally, I think, in China. It’s a different form of mobilization. If the economy slows, do we automatically move to that nationalist prop for the Party? It’s a bit of a sort of conventional, binary, maybe too simplistic view. But I think there’s definitely an element of that. This is not a data point, this political scientist would say, but I’ve never met anybody in China who doesn’t think the South China Sea belongs to China. It’s not even open for discussion. And if you go outside of China, of course, you get a very different view. That seems a very tough issue to solve. Of course it used to be the 11-dash line, and then the Chinese took two dashes away for North Vietnam in a comradely action, although that hasn’t helped them long term in their relations with Vietnam.

Orville Schell: Yeah, I mean, I think the danger is the South China Sea becomes like Taiwan and Hong Kong. You know, a core interest where there’s no discussion. Because no diplomacy can do anything, it’s just theirs. Okay now, I think we have time for maybe one more question.

Audience Member: Thank you. I’m John Lakshmee. It seems to me that the thesis presented here is invalidated by some of the things presented in the movie itself. Adam Smith seems to be prevailing over Lenin and Marx. If India and Vietnam and Nigeria and other manufacturing countries become more manufacturing oriented, isn’t there a global marketplace working here to even out wage pressures in China? And also, the urban population going back to the villages, as this gentleman pointed out, they start businesses and other parts of the economy start growing in China. Isn’t the marketplace actually working even though it may not work in the way the leadership wants?

Orville Schell: I think this is for you, Jamil.

Jamil Anderlini: Okay. Yeah, I think that’s exactly what’s happening. The Communist Party recognizes the power of market forces and has tried to harness them, and is also at the same time fighting against them. But the big things that are going to change the Chinese economy, the Chinese society, the world, are unstoppable. They’re things like demographics, which we touched on in that movie, but I think are far more important than any sort of investment model. You can’t stop demographics, actually. And China for the last 30 years has had huge numbers of people entering the workforce, entering the working age population, and for the last two or three years we’ve seen it shrinking, the working-age population. So that’s all tied to what we were talking about, the one-child policy, it’s all tied to all of this. So yes, I think despite the Party’s wish and desire to control market forces, to have this sort of final say in how markets operate and the outcomes that come out of them, these forces are unstoppable and are very powerful. So, yeah, what’s happening is definitely market forces that they can’t control. Hope that answers.

Lucy Hornby: If I could add a word, I think your question is actually what’s obsessing Chinese leadership right now. Earlier this week, there was a two-day conference in Beijing called “Avoiding the middle-income trap” or something about the middle-income trap. Every influential Chinese economist pretty much was there. The concern was exactly as you stated. The markets working globally, you mentioned Nigeria and India maybe. Other countries are taking up that low-skill manufacturing. So that provides a natural cap to China’s ability to employ those people, and that’s why we saw the gentleman from Hunan going home. The problem that they’re worried about is that that is the middle-income trap. You could have a scenario where those low wage jobs even themselves out worldwide, the price of a t-shirt doesn’t change, but then China’s kind of stuck as well unless they can make the leap as, say, Korea has done, Japan has done, as the British empire did, as the Americans did. Unless they can make that leap to a more complex economy that is not reliant on textile and low-income factory jobs. So that is, you’ve just encapsulated the very worry that they have. And they’re not entirely confident of their ability to make that transition.

Audience Member: [Unintelligible]

Jamil Anderlini: I would argue that all the examples you give, Japan, Taiwan, South Korea, just in the region, that transition, that evasion of the middle income trap, is generally accompanied by democratization and political reform. So call me a zealot, but I think those two things go together. I think that’s also part of the inexorable market forces that are driving. Either China is going to get stuck in this middle-income trap, or it’s going to be accompanied by natural political reform. It’s my sense.

Orville Schell: Although I have to say, Jamil, having thought this almost every single year over the last 30 years, I have to take my hat off to how far they’ve gotten without having that political reform that you suggest is so essential. We have one person right in the front here; do you have a quick question?

Audience Member: The question is for Mr. Soros. As China’s debt boom and GDP growth observed your theory of reflexivity worked beautifully on the way up. Now, with the very high debt to GDP ratio, the boom obviously will be followed by a bust. In that process, the role of regulators, in this case it’s the government’s will to interfere with that natural cycle. How do you see this play out?

Orville Schell: So the question is…

George Soros: I think I understood it. I think the key is the banking system. Because the bad debts, now most of the money that the banks supply is needed to keep the bad debts and the loss making enterprises alive. You can close branches, but you can’t actually close entire companies. You can close a factory, but you can’t close an entire company without having to write off the debt. The banking system now has more loans than it has deposits, so it’s troubled on the asset side but it also increasingly has trouble on the liability side, because it now depends on the system to provide the credit. Other banks have to lend to each other, and that is an additional source of uncertainty and instability. So the problem has been deferred and it can be deferred for maybe another year or two. But it’s growing and it’s growing at an exponential rate. So that’s the problem that they are facing.

Orville Schell: Please join me in thanking our four great panelists, and thanks to all of you for coming.