UBS Asset Management Panorama Podcast 1 - transcript 0:00 Hi, my name is Barry Gill and I am the head of investments at UBS Asset Management. 0:06 So many myths and misunderstandings surround China. 0:10 It's complex and diverse and never fails to confuse and confound the West. 0:14 But it's geopolitical and economic importance is without question, it demands our attention and we can't really afford to ignore it. 0:23 To some degree, at least, we must put ideologies and stereotypes aside and find ways to remove our biases. 0:31 Only then will the real China emerge in our minds. 0:35 The one that lies behind the headlines, the one that leads the way in renewable technology, the one that values security over freedom, the one that is socially and environmentally conscious in ways that we in the West don't quite yet understand. 0:48 Like everyone this year, I've been forced to sharpen my thinking on the investment case for China. We came into the year with high hopes for the economy and the financial markets there. Based on a post COVID reopening. 0:59 As we all now know all too well, this really hasn't materialized. 01:05 In my attempt to make sense of events, I came across a book called the New China Playbook by Dr. Keyu Jin, who I'm delighted to introduce here, and to have the opportunity to interview. I found the book remarkably balanced and thought provoking. 01:20 This perspective is perhaps unsurprising given Doctor Gino's background. Having spent her early childhood in China and moved to the US as a teenager to attend high school and further education. 01:31 Her book in my mind, is a refreshing take on China that spans a wide range of topics, from technological innovation to trade, from consumer and savings habits to the demographic and psychological hangovers of the one child policy, from finance and corporate competition to the unique and delicate dynamic between central and local government. 01:51 Also known as the rise of the mayor economy. More than anything, though, it forces us to think of China as a dynamic country and economy that is changing in front of our eyes. 02:01 Set on a transformational path by Deng Xiaoping, China has reformed and opened up some of the lines between capitalism and socialism are blurring, yet only some of our mental models have updated as rapidly to reflect the new realities. :02:15 As Doctor Jin says, sees things. The old playbook was one of industrial subsidies and technology transfers, but a radically different younger generation is set to reshape China's future. 02:27 The new China that is emerging is dynamic and exciting, but by no means perfect and not without risks. So with all that in mind, Doctor Jin can you explain why you wrote this book and what you hoped to achieve with it? 02:40 Well, my book starts with a sentence reading China in the original, not lost in translation or in perspective. I think China, this large, complex country is often misunderstood. I want to provide a perspective from the inside. I would like to give even if we're talking about. 02:59 Economics and politics, a cultural and historical lens and to reduce the misgivings that often divide the east and West. And as time goes on, especially recently as tensions rise. 03:11 The need for understanding this country and the differences and Chinese aspirations, the developmental model and where it is going in the future, I think is critically important. 03:24 So what do you think is the single biggest thing that we in the West get wrong about China? 03:31 There are many, but if I were to name one or two it would be first of all China’s model. Now people think about China's being extremely centralized state of top down decisions, but a more accurate characterization of the Chinese development model is political centralization. 03:51 But an extreme form of economic decentralization, and if we look at the localities, the local government officials all around China, they're highly entrepreneurial. They're doing their own thing. They're implementing economic programs, protecting the environment. 04:06 Now pursuing high tech and hard tech technology and innovation, and it's very decentralized. So that makes it very different from anything 04:18 really what 04:18 we have seen around the world and in history, but I also like to add that the misunderstanding of the Chinese people. 04:27 Is also so important and so. So how should I say? 04:34 It's it's in. 04:35 It's it's important not only for understanding China as a whole, but also the political economy. 04:41 The Chinese people, they're the the fact that they've always had to balance the deference to authority and their independent exertion of free will. It's part of the cultural traits. You know, we've all we've had to deal with that since we were young, whether it's between us and parents. 05:01 Us and the teachers or the Chinese people and the Chinese emperor or now the Chinese people and the Chinese state, it's never been black and white. What are considered to be often irreconcilable paradoxes to the western eye, often not so in China, they can coexist. 05:20 So a lot of people tend to think of China as a command and control economy. You touched on that just there. But can you explain how the mayor economy works and the sort of intricate relationship between central and local government, how that comes together in China, China, the whole seems, you know, everything seems much less black and white than we tend to. 05:40 Passed it. 05:41 Well, interestingly in Chinese, it's a lot funnier than Chinese mayor, economy and market economy sounds very similar. So that might have just been identical to that. You're unfamiliar to Chinese, but one is mayor, economy one's market economy. I think it's it's. 06:01 Kind of a name and anecdote to capture the fact that local provincial governors or party secretaries or mayors, the local fish. 06:10 Are highly motivated to to develop to their local economy, whether it's innovation or whether it's pushing through these hard reforms or social stability, maintaining social stability or protecting the environment. They are in charge and they take great responsibility and they're held accountable. 06:31 So the great leader Deng Xiaoping said in 1978 that reforms start from breaking rules. 06:40 It was incredibly difficult to think about how rules could be broken after the culture revolution in a country that was highly dogmatic and steep. In these these identity struggles, how to think about breaking the rules. But it was in fact the local officials, mayors, I call them. But really these these local. 07:01 That broke rules. 07:02 And then made these ultra successful economic zones with opening up to investment and to trade. And that once one was successful, not only did that mayor gain recognition and was able to be promoted to the higher rung of the political hierarchy. 07:20 That model was rolled out throughout the country, and that's how China reformed, remarkably so in the last 40 years. That rapid growth really started from these high incentives and local officials. 07:33 And Fast forward today today that political economy model is still very important because when we talk, I think about technology and China's great ambitions for innovation and the new era of technological prowess. The local officials have a lot to do with it as well. If we look at the. 07:54 Unicorns technology companies, in particular in China, they're distributed all. 08:00 Over the country. 08:03 Not just in Shanghai, Beijing and Shenzhen, but even in, you know, Wuhan, Suzhou, Wuxi, Nanjing, Chengdu, and of the likes of second tier cities. I don't know if any of you have heard of this city. 5 million people of Buffet, but they're home to the global quantum 08:21 avenue. Where they are, where we can find Chinese companies that have excelled globally or the headquarters or where it is. The headquarters of the Top EV company, NEO and the whole government was very entrepreneurial. They invited these great entrepreneur. 08:36 They invested in them, or even if they didn't invest in them, they helped them coordinate the global, the coordinate, the supply chain or financing from banks attract talent. Effectively, these local officials were building mini silicon valleys all around the country, and it was not directed from the central government, the central direction. 08:57 Was pursue technology, protect the environment? Save the economy, but it was really up to the local officials how to interpret that and how to implement it. And so that that, that synergy between these local officials and the private entrepreneurs is very nuanced. 09:13 The West has somehow bought into the idea that the state suppresses the private or the private entrepreneurs, but it's in fact the opposite, because if you think. 09:21 About it, the local officials. 09:23 Need the private entrepreneurs, even one another way around. In this day and age, whether it's for tax collection, revenue collection or employment. 09:32 Or undertaking technology innovation. 09:35 And with the success of many of these private companies, the service industry flourishes, retail and even the real estate that the officials own are worth more. So their incentive is very, very much in line with promoting the best and the most productive entrepreneurs, because otherwise these entrepreneurs would just flock to the. 09:55 Neighboring region or city and then earn credit for that official and that mayor, instead of this one, so that internal competition between the mayors and the party officials in that tournament actually acts as a very important. 10:08 Checks and balance. 10:09 Means that very few people are aware, even in a politically central country like China, and even today, when it comes to protecting the environment. Recently I visited Dali in Yunnan. I mean the the Lake Erie high is so well preserved and you know well protected now. So, so different from many. 10:29 Years ago, and that comes from that state impulse that local local project and mobilization. And so I think it's really important to understand the mayor economy in combination to the market economy to understand the Chinese economic dynamics. 10:47 So I like that word tournament that you use to sort of to find the competition that the cities or the mayors have as they fight for entrepreneurial growth in their in their designated area. Clearly that that component of the Chinese economy has grown dramatically over leaps and bounds over the last decades, but. 11:08 There are still a lot of state owned enterprises driving a large chunk of the Chinese economy. Can you just maybe tell us how the SOE's have evolved over the last few years and how you see their role in the future and and one of the things that came through earlier on this year was, I don't know who came out in a paper or a statement, but the. 11:29 State owned enterprise regulator added improving return on equity to the list of key performance indicators for the state owned for the SOE's and. 11:40 You know, I'm. I'm just wondering. I think there's some degree of skepticism as to whether anything can really be achieved on that metric, which is a very pure capitalist metric. Whether that can actually be anything can be achieved if there's no real economic feedback loop to management of these investments, so, do you have a perspective on this? 12:00 Well, first of all, you talked. 12:01 About evolution, and I think it's very important. 12:05 Because SOE's have evolved over time, along with private enterprises, and in fact the rise of private enterprise in the private sector has pushed the SOE's through reform, because they're suddenly in competition. Now, it's true that there are certain number of sectors, strategically important sectors in which the SOE. 12:24 still have monopoly power. 12:26 But gradually overtime, their share of the economy is substantially smaller than what they were before, despite the fact that we think that the state exerts more control over the economy only in certain strategic sectors. But if you look at manufacturing or service industries or gradually technology industries, it's really dominated. 12:46 By very productive private enterprises. But again, they push each other and a really interesting phenomenon that has occurred and again tells you that the line between the state and the private or the collaboration is very. 13:01 Nuanced is that the state enterprises now often take an equity stake, directly or indirectly in the private enterprises. And so even if the numbers of SOS are are smaller over time, they they do have that network, that network that spans this entire corporate network and capital where they. 13:22 They have a stakes, equity stakes of many, many productive. 13:25 Private enterprises and that relationship is also interesting because sometimes it's actually highly desirable for private enterprises to have a big SOE as your major stakeholder or a significant stakeholder, because then it helps you get over some of the barriers to entry, or helps you with local with financing. 13:45 And that relationship could also play an important role, and there has been a feedback between the two, private and SOE. 13:53 So if we looked at the data over time, SOS have actually gotten more productive despite what we think. 14:00 And a large part of the reason is that there have been reforms that private enterprises have been making competition more difficult, so they're ousting the less productive. And there's a positive market selection mechanism that's pushing the SOE's. 14:15 Still, the soles are still less productive than the private enterprises on the whole, but they are evolving over time. 14:25 So just taking it in a slightly different direction. 14:30 The investment theme behind China has been about infrastructure spend for so long, right 20 or 30 years at this point. 14:38 And that has meant the Chinese economy has become relative to other global economies, somewhat imbalanced. 14:46 What needs to happen for consumer confidence to grow in such a way that the savings rate declines? And are there any developments that you'd like to see in the financial sector that that could really support this type of transition? 15:02 Well, first of all, there is a severe lack of confidence in the Chinese economy currently and I think it has a lot to do with the fact that during the pandemic and post pandemic China. 15:12 Did not see. 15:13 A major stimulus package demand stimulus package in the way that Europe and the US had was able to enjoy. 15:22 And so I think that also explains a significant part of the very tepid recovery after the pandemic for the savings rate to significantly fall. I think it will take time. 15:38 And this is not a confidence issue, but it's also a habit issue, a cultural issue, an issue that has to do with housing prices. And as you pointed out, a lack of financial sector development. If we look at the younger generation, which I hope to talk about a little bit later. 15:58 Their spending habits. 15:59 Are very different from the previous generations. 16:02 85% of aggregate consumer credit is taken up by people under 35 and they spend and they don't really save for a rainy day in the way that older generations do. And so I think, you know, that's part of the reason the financial system. 16:16 Right. 16:21 It really is the last dinosaur standing in the economy. In fact, it's performed very little. If you look at aggregate credit, 80% of accredit is intermediate by banks. 16:32 As a typical feature of an immature financial market as those as the developing countries, and only 15% of aggregate credit comes from capital markets and so. 16:44 The problem with. 16:45 That is that you have layers and layers of financial intermediaries in the financial system, so that when you're in the bottom of the food chain. 16:52 Like a private company, small or medium size. 16:54 Is you're getting really, really high cost of real cost of capital because it is simply cost of capital adds up as we go through the layers in the financial system and they enjoy, sorry they, they, they they have the. 17:08 Burden of double. 17:08 Digit real cost of capital compared to an SOE 3 to 5%. 17:13 And that also. 17:14 Brings to the point of why stimulus monetary stimulus is often not as effective in China is that the reason is that that credit gets stuck in the financial system and that again has been very slow to reform. 17:29 OK. It's very interesting now. 17:33 China's GDP? 17:35 And the stock markets are famous for how uncorrelated they are. You have some interesting theories as to why that could be the case. Could you elaborate? And I think people kind of have to look under the hood a little bit more to understand what's going on. So maybe you can take us through. 17:55 Yeah. One really. 17:56 Puzzling phenomenon in China is that whilst has been the most remarkable economy in terms of growth in. 18:05 The last few decades, it's. 18:06 Had almost the worst performing stock market and if you put in a dollar in 1990 in a dollar equivalent portfolio weighted. 18:15 Then you would pretty much have gotten that taller back, you know, 15 years. 18:21 Later and so, and also as you pointed out, there's correlation between economic fundamentals and the stock market is almost zero, which makes China in the bucket with Iran, countries like that, you know, the correlation for US or UK is above 50%. 18:41 Sometimes 80% and that correlation is 0 in China. So that's that's quite puzzling. But I guess anecdotally it fits with a view that's been very difficult to make money as a you know normal investor or retail investor especially. 18:56 In the Chinese market and so part of the reason is that there is a strong selection mechanism. Well, first of all, you know in, in the Chinese, when you when you get listed, you have to go through this approval system. So it's not registration basis as is the case in the US but China is moving towards that currently. 19:15 And the the conditions are very stringent, very difficult to list yourself on IPO with your consecutive viewers of certain kind of profitability and so forth. And so a lot of these companies actually string their resources or do things that are not good for them for the long term, for the short goal of being listed. 19:34 And so you see them get listed and then you know, a year later their stock price drops by on average 50%. And so the average stock decline post IPO is significantly larger than those in other countries. What's also interesting is that Chinese companies equivalent Chinese companies that are listed. 19:53 In overseas, in the Hong Kong market or in new. 19:57 Work performed much better and that relates to the fact there's corporate governance issue in China. So now, now, now we know the story of Evergrande. There's so many Evergrande around. Companies get listed and your pharma company and you start buying golf clubs or start to produce an EV or buy soccer teams. And so that kind of. 20:18 Spending right investment horizontal expansion without focusing on core business, some of them also even invest in real estate. 20:30 Really, that that level of corporate governance issue is also really very important in explaining why the return on investing these stocks is low. But hopefully you know the there's a lot of focus on reforms for the stock listing process and the starboard which is the. 20:49 Chinese version of NASDAQ etc. Would help and welcome these great Chinese companies. 20:56 That don't necessarily see a prop. 20:57 Yet to be able to list in domestic markets rather than choose to list overseas as well. 21:04 So it's a really interesting topic because what you've been able to in in that type of environment where to persist being an active manager is where you want to be and the same level of indexation that we haven't that we've seen in other global markets is unlikely to persist until the capital markets normalize and the stock markets. 21:25 Normalize in the direction of those Western markets, so it'll be very interesting to see how that develops over time. 21:34 Uhm, you talk about moving in a slightly different direction. You talk about many seismic but unintended consequences of the one child policy in the book. Can you elaborate on that please? 21:48 Yes, the 1 child policy, something that's close to my heart with because I've done research on it, but also because I'm I was born in the first batch of the one child policy generation in the early 1980s. It's extremely interesting. 22:04 I think on the negative side, I think these population policies might not have been perfectly designed to the point that now we have a demographic issue because having been used to having a small family with no siblings, then the current generations have changed habits in terms of not wanting. 22:25 Necessarily a bigger family and is also broken some of the. 22:29 Social fabric of the family fabric traditions, some, some some in some ways very good because there used to be such a hierarchy between the parents and the kids. The authoritarian kind of family. And now there's great equality. In fact, the children are sometimes enjoying higher status than the parents because there's only one child. 22:52 There's also been other economic consequences that have been totally unexpected. My research focus is on the fact that explains a huge part of the high saving rate, basically because you just spend less if you have one child and you also have to save more for your old age retirement because in the past previous generations. 23:11 We had five kids, they're going to. 23:13 Help support you in your old age, whether it's cohabitation or income support, and to see that very much. 23:18 In the data. 23:19 That people who have more children and more post retirement support and aggregate. And now you have only one child. You say the bit more for yourself. 23:30 But the other economic consequences and social consequences are very, very fascinating, because there's only one child, I call it trading quantity for quality. So you raise the quality of the children by giving them huge education investment. But that's also led to the greatest anxiety. 23:50 The Chinese Society today, which is education competition 23:52 anecdotally or something that's very telling is that the most popular national TV series is about how to get your. 24:01 kids in. 24:01 School. So you can. 24:02 Feel the angst of the parents all around the country and the economic and financial burdens of just educating one kid, spending up to 1/3 of your household income. 24:13 You can imagine that pressure also, yes. 24:17 A huge part of your income and that pressure also extends to much poor families. And so parents feel very anxious for the fact that if they don't have 8 tutorial classes for their kids, then they are falling behind from the starting line as they they as they say. 24:37 And hence the crackdown on the education sector, which is partly alleviated some of the issues but not totally resolved, that again that tournament style mentality, because you have only one child. 24:48 Now on the flipped side, there has also been really great positives. In particular, it's led to a golden era for Chinese women. In the past, as a daughter, you were educated after the sons were, which meant that most of them were not educated, but now you have a daughter. You were educated daughter like you educate a son. 25:10 So after the one tell policy with the right kind of timing the convergence. 25:14 Of higher education between men and women have totally closed, and actually the returns on education of girls have been actually higher than of boys. Also, as you can see in the data now, whether we look at publicly listed companies or even even in the political system, the number of female. 25:35 Leaders the share of female leaders have just really shot up. If you look at the later generations post 80s Post 90s compared to the previous generation of post 50s or post 60s. And so I think that's been an unexpected plus of having fewer children to raise the status of women. 25:53 But going forward, I think that that change in habit is very important. Reducing the education costs so that people have the desire to have more children for the benefit of the country is very important. Having enough space, so affordable housing, so that you can rear your children in a proper environment is also very important to be able to encourage people. 26:14 And the newer generation have more kids. 26:17 So as the as the parent of a single child, I can echo a lot of the the comments that you've made there, and I'm certain that I'm going to have to save a lot for environment. So look, you know if 26:34 Talk about some of the the the negatives and the positives, but obviously this this is this is a whole generation of new Chinese people, right that are effectively different because they've grown up in a completely different environment to their to their forefathers and not. 26:52 Only from a demographic standpoint, but obviously also in a very different economic environment as well, so. 27:00 These differences. 27:02 And and and you know, we're seeing this in the US, right, the the, the as the millennials become much more significant part of the demographic and their spending power changes, their biases also get reflected in that spending. So what's this going to do? 27:17 How's this going to affect consumption patterns, if at all, given as we talked about before, the consumer economy is is so such a small part of the overall uh Chinese economy and then one of the big investable trends that might emerge from following this cohorts activities? 27:37 I have high. 27:38 Hopes for the new generation for a number of reasons. First of all, if you look at the surveys and data, it definitely shows that they're much more open minded. They care about diversity. They're much more socially conscious. They care about worker inequity, inequality, the environment. 27:56 All the way to animal rights in Africa, and I think this is part of the reason of a maturing, it's because partly the country is maturing. It's a young economy, it's an old country, but it's a young economy. 28:08 And as it matures, as it prospers, there is more scope to care about things other than just putting bread on your on your, you know, for your family on on the dinner table. And that's what this new generation is about, greater empathy and humanity, which I think will also give. 28:28 China, a greater soft power that connects better with the rest of. 28:31 The world, but also in terms of other habits. They've also changed consumption. As I mentioned, they are huge borrowers. They like to spend and with the benefit of technology, one click on Taobao on Alibaba, your university student, you can borrow without an income to buy a lipstick. 28:51 That might pose other problems, like consumer borrowing, which might become a problem sometime in the future. But you know, maybe they get their parents to repay because everything is intergenerational transfers and. 29:04 altruism, but it goes to show that they have a very different mentality and a different psyche. Now the new generation loves to have not only consumption, but lifestyle consumption, traveling spending on things like apparel and food. I forgot the numbers, but they spend at least twice as much. 29:26 On things like food and and clothing, despite having much less income than than the previous generation. 29:35 So twice as much in dollar terms or twice as much as a share of income. 29:38 Twice as much in aggregate terms, but even in terms of shares, it's probably even more even higher, much higher because. 29:45 They earn less. 29:47 I forgot the precise numbers, but it was very surprising and it fits with you know what we observed that the new generation Chinese, St. Fashion, high fashion. 29:58 The fact that in second tier, third tier cities you have many, many much more exciting, you know retail and coffee shops and you know juice bars and restaurants than you have in Beijing and Shanghai because the new generation has taken over and they want to transform their economic landscape into something that fits with their lifestyle. 30:18 And they travel. And so I think that's going to push China to become even greater consumer economy plus the traveling. So that benefits the rest of the world. They're also a more relaxed bunch. You hear about lying flat. You know, this kind of notion. 30:37 Of not just giving up, but not necessarily to the extent of giving up. 30:42 But just being more. 30:43 Relaxed, less ambitious, less hungry. They are a generation that's very different from the Foxconn workers that wanted to that opted for three shifts a night just to earn an extra little bit of income. They're highly educated. 30:57 They want to enjoy life along with working hard and of course they're entrepreneurial stars. That would be, you know, the most hard working and disciplined in the in the whole world. 31:07 But I think by and large, that generational shift has made the new generation somewhat more, you know convergent in values with the. 31:17 Rest of the world. 31:19 And in terms of what kind of sectors are very appealing. Well, first of all, there is a lot of competition in the consumer 31:27 sector. But even if you look at the snacks. 31:30 and the Maltais and you know the specialty coffees and all of that and the apparel you know luxury conglomerates enjoy premium especially the hard luxuries and the very well-known foreign brands. But if we go a few layers below that. 31:50 There are a lot of national brands that are, you know, that very much appeal to the younger generation. 31:57 And you know, they're going to spend more things on beauty. So cosmetics is a great area. Healthcare in the sense they're going to go to the gym now. They want to have healthier choices. So again, typical of that cycle of going from, you know, when I was growing up, McDonald's was a luxury. Oh my goodness. I had to get in such great scores. 32:19 I had to. 32:19 Go out. 32:21 I had to get really good exam scores to be able to have a few bonuses. McDonald Happy Meal bonuses, but now they're going to opt for, you know, higher quality things and they're highly innovative. They're transforming physical their physical. 32:37 World into the online. 32:39 World in really important ways. They think about innovation as solving practical issues, so they observe the busy urban lifestyle and they think about really innovative ways to make people's lives. 32:50 Just a little. 32:51 Bit better. So it's a very, very different mentality. 32:55 So my favorite chapter in the book really focused on technology, and it was my favorite chapter because some of the things you hit on are things that I tried to think about a lot. 33:08 You talk about. 33:10 Zero to one and one to N innovations, so maybe. 33:16 And there is this it's it's right that you've divided it that way, right? Because there are there are these assumptions out there. Uh. With respect to where China can and will compete. So can you explain what you mean by zero to one and one to N and why this is useful for understanding Chinas and ultimately the world's technological. 33:36 future. Are there clear inhibitors to China winning in the zero to 1 space and is there anything different in the current administration that would impair the rate of innovation we've seen in China over the last few decades? 33:52 Well, if we look. 33:52 At innovation with the definition of innovation, is it actually? 33:56 It is quite broad. 33:57 It's, you know, whatever that makes something better, less costly, higher quality, should all count as innovation, not necessarily a first of a time thing. And so any processes or products that make us leaner. 34:11 And cleaner, greener, more productive. All count as innovation. 34:17 And that's what. 34:17 Actually matters in the end, from an economic standpoint, 34:21 And so zero to one are what I believe are fundamental breakthroughs, breakthrough technologies going to Mars or curing cancer or, you know, the first computer or steam engine one to N is, you know, applications or improvements based on existing technologies. 34:42 Equally important, potentially even more important, I think it took 100 years between the invention, you know, the full realization of steam engine to be, you know, to be reaped and many, many innovations along that fundamental breakthrough. And so China has been very successful. 35:02 From 1 to N. 35:04 Whether it's processes or efficiencies or business models, if you think about it today, I still believe, I believe that still even today four out of the five top most downloaded US apps are Chinese apart from TikTok, there is a fashion. 35:24 App called Sheehan and then Timu which is pindo doors outpost in the US. 35:31 And it just goes. 35:33 To show that Chinese business models are world class and they're being copied, you know they used to be copiers and they are being copied now and they're highly innovative. 35:44 So as successful. 35:45 As these applications have been, I think still very important again, if we think about, you know, the majority of the people. 35:52 Living on Earth today are still living in developing countries. What they need are not some just most advanced technologies, but they actually need technologies they can use at affordable prices. And this is what China can offer even ahead of advanced economies. 36:09 But breakthrough technologies and I want to, I want to say that there's also a difference between mastery of high tech, high tech and breakthrough technologies. And I think for the latter, China can do hard tech China can master high tech because of cumulative knowledge, the talent pool. 36:28 All the engineers, the scale, the financing. 36:32 So an earlier, earlier this year, an Australian f have put fintech out the research report that shows that China leads on research in 35 out of 44. The cutting edge technologies. 36:45 Well, it was fascinating that report. 36:47 Absolutely. And even though there's a difference between research and commercial output. But even if you look at the actual things that China has been able to make and do, I mean, even just simple things like MRI machines, you know, China used to import all of them, and now China makes its own 90% lower cost. 37:06 Than an American one 37:08 Or the fact that the Huawei has come out with a new phone, defying U.S. sanctions and, you know, Chinese, Chinese grasp of critical technologies in so many areas just goes to show that mastery of high tech is very much feasible and has been. 37:29 You know, in many ways attained by China, even though it's behind the US on breakthrough technologies. 37:36 and I think breakthrough technologies goes to something much deeper, much more profound and money marketing talent. It goes to goes down to the whole society as a whole, the civil society to do breakthrough technologies. You need basic research. You need a patience country with patience people and patience capital. 37:56 Goes back to the financial system. You want people to be intrinsically motivated by curiosity and passion rather than just being extrinsically motivated by short term profits and returns and 38:07 That's the things 38:08 That we admire about the US, the scientists and the collaboration between universities and industries. 38:14 But really, fundamentally, coming from a desire to make impact and change rather 38:19 than short term goals 38:21 So I said. 38:22 In the book short flat fast as having captured a certain kind of national psyche. It was, it used to be originally came from a winning volleyball strategy, but it also. 38:34 It was also used to describe investment strategies. 38:38 And then marriages 38:39 but that to you know, to capture that it's an impatient country because you've seen so much growth in such a short period of time that if you don't have a Unicorn after three years, you are a failure. That kind of mentality also prevents you from doing great even if it lets you do something good. So I think it will take some time. 38:59 For breakthrough technologies to really be a focal point actually to have no focal point or no goals at all is as a starting point for a country that wants to do these kind of zero to one technologies. 39:15 Yeah, it's very interesting and the Huawei phone obviously caught a lot of off guard and I had to look into it myself and it'll be very interesting. This seems to be. 39:25 The limit of DUV deep ultraviolet lithography, which the Chinese companies have been able to acquire but to go to shrink the node even further, you're going to need EUV or extreme ultraviolet, and that is the stuff that is now embargoed, so we it may, be a false signal that we're getting. 39:46 In terms of the pinch that the embargo is having. 39:51 But if China figures out a way to make that leap from DUV to EUV on its own, that will be. 39:59 Very, very interesting development. 40:02 I think this is just a beginning. Always just a beginning of a whole national mobilization, and we can't underestimate how many other companies are working on. 40:11 This potentially even through alternative routes, alternative methodologies that will circumvent these restrictions. Potentially you can domestically manufacture. 40:22 A fourteen nanometer chip that has the same or even better capabilities as the seven nanometer that would. 40:28 Be very useful. 40:29 For Eve and you know, other kinds of applications. So I think it just goes to show that within such a short period of time, these, you know, there have been already quite a bit of achievement and I think it 40:43 Is just a beginning. 40:45 And just belaboring this, you talked about this intrinsic curiosity. Does that exist on the ground? Is it? 40:55 Is are all of the necessary ingredients to feed that there in China? 41:01 Well it existed in history if you think about it? 41:03 Of course, absolutely. 41:04 yeah, but I think. 41:06 It's it's deeply wedded. 41:07 In the Chinese ecosystem, the traditions, right, if you think about the curiosity, intellectual curiosities of Confucius, but also. 41:16 The fact that meritocracy was the bedrock of 1000 years of feudal society in China just goes to show that there is such an emphasis 41:24 On long term intellectual pursuits and interestingly ironically, in the past many of these people kind of shunned commercial applications because they thought it was just too, you know, too banal. And even though China invented, you know, the gunpowder and the compass. 41:44 They weren't really you 41:45 know the applications weren't really of great interest to the Chinese. 41:50 And so that I think that will come back, I think it will come back when people are just seeing a bit more normalized growth rates rather than these, you know, extreme bursts of growth where everybody felt compelled to have to do something and be part of that wave and to grab something, grab the pie somehow. 42:10 I think it's not necessarily a bad thing that China normalizes to more normal growth rate and with greater emphasis on quality and sophistication on niche, on specialization. And I think that will return, but I'm not sure when, but I think. 42:27 It will come back. 42:29 So Doctor Jin. 42:31 Property! it's almost impossible to do an interview on China without touching on this topic. Much is made of the overall leverage in the Chinese economic system and how much of that relates to property from your perspective. Is it really that bad? Is it? Was it Gray Dalio referenced the 42:51 The concept of deleveraging gracefully is it possible to do that and if property deflates even slowly, what you kind of touched on this a little earlier on? What impact will it have on consumer conflict? 43:05 In short, and in the short run, it's going to be fine. It's going to be difficult to find something to replace property as an engine of growth because it was just that massive and it was just that straightforward to implement, especially with China's political economy model and the economic decentralization that we talked about. 43:22 And the fact. 43:22 That real estate. 43:24 Was the the half of the revenues of the coffers local government coffers? So there was 43:28 A lot of incentive to 43:29 develop it and so you know, in the past, people wanted local officials wanted. 43:33 To do industrialization and then when the real estate boom happened, they want to do urbanization. And so all these incentives were kind of aligned to roll out real estate at a rapid pace. 43:45 But I think that 43:46 In the long run, there is a gradual or let me put it this way, the new equilibrium. 43:53 Will take time and the market will find new equilibrium. I don't necessarily agree that there's no pent-up demand and that supply weight exceeds demand because if we look at urbanization, it's still got a long way to go. We still have hundreds of millions in the rural areas who want. 44:08 To have a. 44:09 House or apartment in the in the urban area 44:12 Areas and housing ownership is very important for the Chinese individual and the Chinese households. Everybody wants to own a property. It's still growing economy and I don't really think demographics is really the most critical point here because again. 44:32 Reaching a higher income or reaching the middle income by international standards is way more significant and applies to almost a billion people here. 44:41 But I think it's gonna be a painful adjustment, a slow process, a very controlled on the way down. So we don't really know what the actual, you know, kind of extent of real estate price decline would be. There would certainly be quite a bust and that would. 45:00 Affect consumers and confidence even further. The thinking is that the government will try to avoid a hard landing and then, depending on the circumstances, adjust the amount of support that they're willing to give the real estate. And in terms of the debt, a lot of the debt will be absorbed by commercial. 45:17 Banks, as I mentioned in my chapter, give very explicit reasons why I think a financial implosion or major financial crisis is less likely to happen in a very controlled state. Coordinated bank dominated AA financial system like China, but along the process there will be debt weighing on growth. 45:38 Weighing down on growth, there will be a lack of confidence that we've seen in, you know, investment in property being substantially negative and dragging down overall investment. 45:49 And overtime, but overtime supply will have to adjust and meeting :45:54 the slow 45:55 Growth in demand there is, you know there is some cause of concern because there was only 76,000,000 registered. Sorry 7.6 million registered new marriages last year out of hundreds of millions of millennials. 46:11 And so people are not only having not having kids, but not getting married either. That's going to put some pressure on housing prices as well. But I don't think it's doing loom situation. I just think it's a painful long adjustment down downward. 46:27 So the final question I have for you is on the context of sort of soft power, the belt and road initiative has been in place for over a decade now. What's has it achieved? 46:41 What are its weaknesses and how do you see China's sort of soft diplomacy evolving? 46:47 And what do you make of the evolving expansion? 46:50 Of the bricks 46:54 And and maybe contrast that with the legacy role of the G20. 47:01 The Belt and Road. was initially a very ambitious project. It was China's answer to a new paradigm of globalization, not only in trade and investment, but building a global network based on physical or digital infrastructure and greater connectivity. 47:20 And I think that made a lot of sense because when we look at, you know pretty much everything today, it's part of a network productivity, is part of a network infrastructure is obviously a network. And so you want to connect the nodes and then you want to be the most central component of that network is a very. 47:40 Smart thing to do, right? But I think overtime. 47:46 That, that, that idea was good. 47:48 But it's the Chinese ambitions have run ahead of the global reality, which is that yes, China can have the financing can construct infrastructure, but not all the economies were ready for that scale of infrastructure before the economy. 48:04 Were really. 48:07 You know, producing these, these, these jobs and the. 48:12 Cities you build the roads. But then and that that I think that does help a great deal in terms of trade and that should help with growth. But a lot of people are asking, you know, yes, that we have great roads, but what about food? How do we how do 48:25 We earn food. 48:27 So I don't think that's up to the domestic economy to solve, not up to. 48:32 China, but still. 48:34 I think there's been a little bit of a mismatch of timing and hence some of the debt issues have arisen. 48:40 But I also think that there's been a great deal of a misunderstanding about the debt issues involved with Belt and Road. And here I want to spend a few minutes to clarify and there's been. 48:52 A lot of 48:52 Research and a lot of data collection by international organizations around this 48:57 issue so a few. 48:58 Things, first of all 49:02 The quality of Chinese investments in belt and road projects have dramatically improved, as well as the countries and regimes they've worked with. 49:12 They've also shifted from just state to state collaborations to collaborating with private enterprises and you know, building, you know, efficient projects. And so the quality has risen over time between 2013 and even 2019. 49:31 And 2nd 49:33 The debt issue 49:35 You know, the majority of emerging market debt is held by Western financial institutions, not 49:41 China. And so I think there's been a little bit too much blame on China for domestic debt issues. And as we know all emerging countries way before their arrival of China had 49:54 Debt, debt problems, sovereign debt issues and indebtedness. That's got really nothing to do with China. So China is a major creditor to emerging markets. 50:09 But where it relates to Belt and Road. It is still very small proportion considering the entire debt picture. And then the third misunderstandings about asset seizures, there's been no asset seizures in Africa. There was one case in Sri Lanka, maybe one or two, but really. 50:29 A far and few 50:30 Between and even there, there's been a lot of misunderstanding and some local Sri Lankans will come out and say that you know the blame that has been put on China on that particular issue is actually quite adjust. So I think to summarize, I think that the idea is good, the implementation has not been so 50:48 Great. you can also argue that there has not been a great evolve you know involvement of many different parties other than the Chinese participants but at the same time it is an evolving thing. I think China now being financially constrained fiscally constrained because of internal economic issues. 51:08 has less appetite and less room to undertake these large programs externally. So we're going to see that change. 51:15 As well 51:16 But it's also been a learning process for the Chinese 51:20 But infrastructure is so important, you know, infrastructure is one of the three or four critical conditions of helping countries get to a higher income level. Escaped the middle income traffic, and China has enjoyed that privilege of being more productive because of infrastructure. And it didn't want to offer that to the developing world and South. 51:39 But I don't think all the stars 51:40 were aligned to do that. 51:43 And just on the bricks versus G20 topic, how do you how do you view that? 51:48 It is, it is. It's really 51:49 very important, I think you know emerging markets 51:51 Have a strong desire. 51:53 To both have a 51:54 Greater voice and say in the global International Monetary and financial system and global system trading system and is pushing to create a 52:07 You know, a coalition of powers that counters or it balances out the Western powers. So we see that move very clearly in all fronts, including when it comes to an alternative system to the dollar. 52:20 Or whether it's a parallel system to swift or internationalization of the RMB current currencies that can be freely traded among emerging markets and alternative paths to circumvent US, you know, inspection on scrutiny. 52:41 On these financial issues. 52:43 So you do see that person. You're gonna see that stronger and stronger over time. So I don't think bricks itself is just a concept that it's an empty thing there. There is, there is a real push to do things differently. 52:57 And I think South to 52:58 South trade. You know, more trade among the global South and more regionalization. 53:03 Is something we're going to see as well in part as a response to the geopolitical tensions globally and the global, the unreliability of the global supply chain and so much uncertainty. 53:15 um, and you know, so I think I think it's just a response to the fact that the rules have been written down by a handful of countries that not necessarily answer to the real conditions and real needs of the emerging markets. I mean, take the 2009 financial crisis, the US. 53:35 Had a system of a liquidity support for six advanced economies. The swaps with the six advanced economies and there was a big gaping hole left open for the emerging 53:47 Markets or when global institutions like the World Bank and the IMF come into these developing countries, they have strict conditions and conditionalities imposed that are sometimes, in their view, not in the interest of emerging markets. And so China sees this very differently, being an emerging country itself and a great creditor. So it's more sensitive to some of their needs. 54:08 I don't think this is at all an empty thing. I think it's a very important trend to watch. 54:14 So, Doctor Jen, thank you very much for your time and for sharing your perspectives on such frankly A fascinating and largely misunderstood country. I hope that the our viewers will have gleaned as much insight as I have from the exchange and I look forward to staying in touch. Thanks so much. 54:29 Thank you. 54:30 So much, thank you very much.