George Magnus is an associate at Oxford University’s China Centre, a research associate at the School of Oriental and African Studies, and a former chief economist at UBS. He has written extensively about China in print media, including for the Financial Times and Bloomberg, and he regularly serves as a commentator on China for television and radio.
Magnus opens his book with a brief exposé of Chinese history, including a discussion of the eras of Mao Zedong and Deng Xiaoping, which culminated with the circumstances that led to Xi Jinping’s ascent to power as China’s undisputed leader. Historically speaking, I find it particularly striking how much more advanced China was compared to the rest of the world (particularly Europe), right up until the Renaissance, but that it lost this advantage seemingly due to excessive bureaucracy, infighting, and an inability to experiment and innovate. China’s inward orientation seems to be an issue even today (though all large nations could be said to have this tendency).
Magnus then dives into four major areas in which China is likely to encounter serious growth challenges, including those that may be capable of derailing the country’s progress. The first two of these challenges are the nation’s excessive debt and the related issue of the so-called renminbi trap. Regarding the former, Magnus points out that China will have to reduce its debt at some point, which will, in turn, inevitably slow its growth (other countries, including the US, face this dilemma as well). Regarding the latter, Magnus points out that the central government’s focus has been on managing its currency’s value relative to that of other currencies; the renminbi’s value is artificially low now, which inevitably leads to increased stress and reduced trust in trade discussions, as we have already seen manifested in the Sino-US trade tensions. However, adjusting the renminbi to a more natural level would also likely to lead to headwinds that could derail China’s export drive.
The third factor that might derail China’s economic growth has to do with the country’s demographics—specifically, its aging population. Magnus points out that the shift of people from the relatively low-productivity agricultural sector (in the countryside) to relatively high-productivity industrial jobs (in cities) may come to an end soon. There is simply no way for more people to make this shift without impacting the nation’s food supply. Furthermore, due to a relatively low fertility rate, China’s population is rapidly aging, which is increasing the costs of providing welfare to older adults. Combined, these effects are likely to slow China’s economic growth, and they could even lead to a recession. Social unrest is another possible consequence.
The fourth derailing factor is what Magnus calls the middle-income trap, which works as follows: China has strong ambitions to become a leader in various high-tech segments, including artificial intelligence. However, it is unclear whether China’s workforce possesses the depth of human-capital competencies needed for this development. It is also uncertain whether the nation’s governing institutions are up to the task. There could be resistance, for instance, from inside the communist party itself. China’s economy could be described as split between low-wage (poor) and high-wage (rich) competition, and it is uncertain whether China can negotiate out of this difficult position. First, there are many areas in which the county’s productivity is not on par with that of the rest of the world. Second, there are questions regarding China’s authoritarian governance, its ideology-driven institutions, and Xi’s ideological rigidity. In fact, the author argues that China’s biggest challenge could be itself. Indeed, not all experts agree that China can catch up technologically and benefit from its current development. China’s famous plan to become superior in ten defined areas by the year 2025 may thus never come to fruition.
In the last part of the book, Magnus pulls his arguments together to examine China’s development from a broader, global context. The author discusses two areas of tension between China and other countries (particularly the US): trade and foreign direct investment. The Chinese trade surplus has created a corresponding deficit in other nations’ ability to trust China.
The author also discusses two recent Chinese initiatives: the Belt and Road Initiative and the controversial expansion into the South China Sea, which has involved the creation of military bases on small, previously uninhabited islands. Furthermore, China has made significant foreign direct investments—not only in Asia but also in several European countries and in Africa. Although such investments are usually positive for all parties, observers have pointed out that China’s influence has been increasing along with its investments.
In this way, Magnus discusses the general political factors related to Xi’s presidency. As a starting point, he stresses that politics is now a main consideration in China and that—as is clear from the discussion of the four main threats to the country’s growth—China’s various economic contradictions may be hard to sort out, given the country’s political relationships. When handling key disagreements—including those with the US—China’s foremost concern is the security of its Communist Party. In the end, the country’s continued stability and growth may come down to two key factors: whether China’s increasingly important private sector continues to thrive as political dogmatism increases and whether the nation’s social fabric will continue to tolerate—or even support—the heightened level of political control. Only time will tell.
Overall, I find this book to be highly relevant to us as investors, particularly because it points out plausible ways in which a slowdown could occur in China. The book provides a more balanced view of China by contrasting the two extremes that so commonly appear in today’s debate on the country: on the one hand, unqualified admiration of China’s economic growth, and on the other hand, a blind focus on flaws such as its prevailing authoritarian system, seemingly out-of-control pollution, and the legitimization of growth practices that those in the West consider to be unacceptable (e.g., a disregard for both intellectual-property rights and human rights). George Magnus provides a more nuanced view.
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