Unlike many others, Economist George Magnus is not optimistic about China’s outlook.
George Magnus has the distinction – unlike many economic commentators – of being right, at least once.
Like Nouriel Roubini of “Dr Doom” fame, the 62-year-old senior economic adviser at Swiss bank UBS predicted the financial crisis.
The worrying thing for China is that he is now very bearish about the country’s immediate economic outlook.
In his latest book, Uprising: Will Emerging Markets Shape or Shake the World Economy?, which is about to be translated into Chinese, he argues China’s supposed property bubble may burst and its economy could experience the same sort of slowdown that has afflicted Japan for the past two decades.
“It is the most obvious place where there is obviously asset-price inflation,” he says.
He believes the Chinese government’s 4 trillion yuan (4.5 billion euros) stimulus package since the economic crisis could end in some form of bust.
“Whether the tools of monetary policy are being applied adequately to put this genie (asset-price inflation) back in the bottle is where my concern is in a nutshell,” he says.
Magnus has a certain slightly old-fashioned genteel academic manner that is slightly at odds with the modern steel and concrete offices of UBS’ London headquarters right next to Liverpool Street Station.
He was in the news the morning of our interview with an article in the Financial Times warning that China might be reaching its credit-fueled “Minsky moment”, named after the US economist Hyman Minski who warned of the dangers of economies becoming over-leveraged.
Magnus says China’s political leaders are currently grappling with the same sort of economic issues that faced American politicians in the 1920s before the Wall Street crash and, indeed, the Japanese in the 1980s.
The comparison with the United States nearly 90 years ago relates to the actions of the then fledgling Federal Reserve Bank. It, too, was worried about the external value of its currency, like China is today.
” The (central bank) managers couldn’t figure out whether they were supposed to be managing America’s credit policies in the interests of containing domestic inflation or whether they were prioritizing their commitment to the gold standard. There was this domestic versus international credit policy tension,” he says.
“They went this way and that but the bias was to sustain the commitment to the gold standard. There was therefore excess credit creation and inflation at home and by the time they came to address it in 1928, it was too late.”
The Japan case in the 1980s, according to Magnus, has even more direct parallels with China today.
The government wanted to keep the value of the yen low so it would benefit the country’s technology exports and pursued a policy of low interest rates, which created an asset bubble that burst.
Magnus says it is alarming that China is talked of today in similar language to Japan three decades ago.
“The balance of financial power then seemed to be changing, Japan was the world’s largest creditor, the emperor’s gardens in Tokyo were supposed to be worth more than the whole real estate of California and Japan was going to take over the world,” he says.
Magnus, who studied economics at Westminster University and then at the School of Oriental and African Studies in London, began his career as an economics writer in the Central Office of Information, part of the UK civil service.
He went on to have high-profile jobs as an economist with Lloyds Bank, Bank of America, SG Warburg and for the past 14 years with UBS, the last six as a “thought leader” for the bank doing research for some of the bank’s most high-profile clients.
In this role, he wrote an article in February 2007 saying there were substantive risks of a financial meltdown.
He eventually had discussions with the bank’s senior management but they didn’t heed his warnings and were one of the European banks worst hit by the financial crisis, having to write off billions of euros of liabilities and make 5,500 employees redundant.
“I do remember having discussions with the management at the time – who are all gone now – more than a year after I had started saying something rotten is brewing. They don’t act upon it but by then it was too late,” he recalls.
“To be brutally honest, I don’t think I had even heard of subprime mortgages in 2006. I had no idea what they were,” he says.
Magnus rejects some of the analysis of other writers such as the British Marxist intellectual Martin Jacques, author of When China Rules The World, who predicts a gradual Chinese ascendancy throughout the 21st century.
“There are those that say the West is finished. China will rule the world and we will all become Chinese. I don’t think it will be quite like that,” he says.
He thinks the United States will continue to be the dominant power for quite some time to come.
“I think it is the only country in the world that can propose global agendas and to try and build a consensus. I don’t think the Chinese are in a position to do so and that is partly because they don’t want to,” he says.
One of the arguments in Uprising is that emerging market economies such as China find it difficult to make the transition to Western standards of living.
“Very few countries have actually done it. The Western countries and regions – and by this I also include the rich Asia Pacific countries and regions of Japan, South Korea, Australia, New Zealand, Hong Kong and Singapore – are the only countries and regions that have actually done it,” he says.
He says he is not a Sino skeptic but insists the challenges facing China are often underestimated.
“I don’t think it is a big deal that China’s GDP will surpass America’s in 2025. You only need a modicum of common sense and organizational efficiency to be able to do this with 1.3 billion people compared to 350 million,” he says.
“The real issue is per capita income. That is a measure of how prosperous and wealthy an economy really is. I think the gap between China and the United States is going to remain very big for an awfully long time.”
– Andrew Moody