Get started now. Folks are still arriving which is fine. But we want to get started because weve got a fantastic program for you and not a lot of time. This hour is going to flyby. Toms book is really a fantastic read. But i do think that folks especially in the United States are going to find the book controversial. Thats a great thing about a book. If the book doesnt generate a conversation then it may not be worth reading. This is a glass halffull story about chinas economy in the management of the Financial System. Its offered at a time when u. S. China relations are declining. And attacks from all different corners in the United States of china system are growing. And theres this argument that chinas economy, how it manages that economy, is incompatible with the international system. And as a result the u. S. And others need to reduce their exposure to chinas unique risk. The book tries to answer the question, how did china japan should do it . How did they manage to continue to grow without a major financial crisis . And, can they keep it up . Im going to turn the floor over to tom in just a minute. He will introduce his book and then we will hear from several commentators, all leading experts on chinas Financial System in their own right. And then well open up things to discussion with our online audience. You have ways to submit questions through the chat function or through email to our staff who will forward me the questions. And then ill help moderate that conversation for the remainder of the program. We were expecting a small audience for a specialty topic like this, hence exuma room that can accommodate about 500 folks. We are overflowing. We had almost a thousand people register for the event. So no matter what, folks will be able to watch this now or online and just a bit. So im going to turn things over to tom. He is a bluebirds chief economist, prior to joining bloomberg, orkut chinas economics correspondent for the wall street journal. Hes an advisor the uk executive director the imf and policy analyst for the British Treasury and commission. He is also an author of understanding chinas economic indicators, which delved deeply into chinese statistics. Tom, thank you so much for writing this book. Im really looking forward to your presentation in the conversation this morning. Over to you. Thank you very much. Just give me a minute while i share my presentation. Now is that working . That looks fantastic. And if i move it, does it move . It does. Fabulous. Well look, its really never been more important than to understand not just chinas economy but the intersection between chinas economy, chinas Financial System, chinas business, china leadership, china security, and i cant think of anyone in the world who pulls these pieces together more smartly and more comprehensively than the team at sea sif. So im delighted that they have this book talk and thank you for helping pull this together. So, as i prepared to launch my book for the internet. I was thrilled to be doing it with sea sif. You do a book launch in person, the audience is physically there and they see a moral obligation to buy a copy of the book. When you do a book launch over the internet, perhaps that sense of moral obligation isnt there are quite as strong. So devise an extremely clever mechanism which im going to ensure i engineer maxim sales miss event. So before i start my presentation i like everyone to raise the right hand and repeat after me, i tom orlik. And here you insert you the right name. Im easily pledged after the preparation ill order a copy of china, the bubble that never pops. And thats a compulsory part of the presentation, the pledge, and im not an unreasonable manse of the second part is voluntary. But feel free to follow along if you want to. Also purchase one for friends or relatives in also leave a positive review on amazon. Okay so with that done, let me jump into my presentation. So i lived in china for 11 years, from 2007 through 2018. And for that entire time there was a consistent thread of pessimism, even a thread of doom running through the western view on what was happening in china. Ask, the story went 10 rate looks impressive. But poke a little bit beneath the surface and there are problems. That is too high china will have a financial crisis. Leadership cant execute on reform, they are too conservative, two trapped by vested interest. The state sector is too big into inefficient. And chinas medium group grassy prospects just arent that strong as a middle income track. And yet here we are in 2020 in the china bubble has not popped. So my motivation and putting pen to paper for my book was to try and understand why. What are the hidden sources of resilience and chinas economy . How does china continue to defy that pessimistic prediction of collapse . And how should that shape the way we in the u. S. And europe think about engagement with china Going Forward . So the presentation today, i want to touch on four areas where i think we dont have the story wrong on china, but we have the emphasis in the wrong place. So want to talk in particular about debt, reform, the state sector, and the future. So first, lets talk about debt. This chart tells you, i think, the way in which most foreign economists, and many chinese economists think about the biggest risk for chinas econom economy. It shows you the ratio of debt to gdp in china. In 2008, chinas it debt to gdp was 140 . Fast forwarded 2015 and that is it to hunter 50 . If we look around the world and we scan the history books, we cant find any other countries that have taken on as much debt as china, as quickly as china has. But we can find a number of countries that took on significant debt, that left debt in china and still had a financial crisis. Career in 1997. Took on a lot of debt. Not as much debt as china. They had a financial crisis. The u. S. In 2006 2007 took on a lot of debt, not as much debt as china, they still had the lehman shock and the great financial crisis. If you look a bit deeper into chinas Financial System, well, if we think about the borrowers, we have zombie enterprises, we have Real Estate Developers building ghost towns in the desert, we have local governments building roads to nowhere. And if we look at the lender side we have the explosive growth of a shadow Banking Sector skirting the rules, skirting the regulations and growing faster than they should. If you put all of that together looks like an extremely risky picture. But what that picture misses is something really important about financial crises something really important about chinas Financial System. And thats whats happening on the liability side. Remember the financial crises do not start on the asset side of the Balance Sheet. Lehman brothers did not fall over because it had too many investments in mortgagebacked securities. Koreas bags did not fall over because they had too much exposure to clone the capitalist organizations. Financial crises start when the banks round of funding. Lehman fell over because the money markets decided they didnt want to fund it anymore. Koreas banks in the Asian Financial crisis, fell over because Foreign Investors pulled their money out of the country. What does that mean for china . Well, china has an extremely high savings rate and it has controls on moving money out of the country. And what that means is there is continued pileup of funds in the Banking System. Chinas deposit base for the banks continues to grow. And that means the funding for the bank is very secure. And even so as problems on the asset side of the Balance Sheet increase and i ensure there are a vast quantity of hidden bad loans on chinas bank Balance Sheets, trigger for the crisis isnt there. The second area want to talk about is chinas leadership and their propensity to execute meaningful reform on the economy and the Financial System. So here you can see chinas previous leader, chinas current leader. You can see both of them applauding politely. One of my observations on watching what chinas leadership that i care to mention is that the ability to applaud politely for a sustained period of time is actually a key requirement to make it to the top of chinas leadership. If you cant applaud politely for sustained period of time, youre not going to make it onto the standing committee. Thats a subject that maybe our western china watcher should pay bit more attention. Most seriously, through the air at theres been a consistent narrative about reform in china and has been a narrative about reform failure. We were told was to consensus oriented, too much of a committeeman to push through difficult reforms. She paying we were told is too conservative to push through the needed. We think that narrative and lights just some significant process that chinas leadership has been able to make. Lets think about the two most important instruments that control the economy. The Exchange Rate and the Interest Rate. The Exchange Rate chinese goods relative to foreign goods, the Interest Rates with funding. Theres really nothing more important than driving the economy is in and the economy it right for these two instruments if we go back to 2003 when his coming into office with the Exchange Rate in the Interest Rate were managed by the government and not officially low rate. And if you swing forward to today in 2020 the Exchange Rate is close to the value and move substantially by iraqi forces. And on the Interest Rate quite similar to progress has been made but Interest Rates today substantially more market set than they were ten or 15 years ago. Because we view chinas leadership theory kind of red mist and that also means we dont have sufficient attention to move the dial in managing the Financial Risks. Here he went to talk about chinas leveraging agenda. He was a chief advisory to xi jinping. Theres a nationwide campaign to reduce risk and chinas financial sector. And with that the peoples bank of china traveled around the country they knocked on the door of every single commercial bank. And they said scioscia Balance Sheet. And if they didnt like what they saw either on the asset side or the liability side, of the Balance Sheet if they thought the bank was taking too many risks in their lending are too many risks in the funding they imposed meaningful punishment on those banks. I remember traveling in the summer of 2017 and speaking to a group of local banks and all of them with the campaign was the leveraging campaign to have it meaningful impact. We see that in the data. This chart shows you the lending, the riskiest part of chinas Financial System. 2006 he was growing at a rapid pace. When the d leveraging campaign kicked off lending first decelerated rapidly and then actually contracted for the best part of two years. We underestimate chinas leaders abilities to execute on meaningful reforms and we underestimate chinas leaders ability to meaningfully take steps to manage risks in the Financial System. The third area i want to talk about is the state sector. Now, theres really no area where the contrast between the u. S. Market system and chinas state centered economy is more obvious and more sharply drawn than on state ownership. In the u. S. , the private sector as a key driver of dynamism in the economy. In china, the state sector plays an outsized role. A vivid illustration of that consider the revenue of chinas state owned industrial firms. As you can see in this chart, if chinas state owned industrial firms were an economy, theyd be the Third Largest economy in the world. Chinas state sector, on its own is bigger than the entire german economy. Now, in the west, we view that entirely through a negative len lens. We view it through lens of inefficiency and corruption. And that is not an incorrect way to view it. Chinas state sector is very inefficient. Return on asset for china state sector is much lower than return on asset of chinas private sector. That is not the only way to think about chinas state sector and that is not the way in which chinas leadership think about the state sector. Lets take a step back and try and see the role of the state sector in china through the eyes of chinas leaders. To do that, lets hear what xi jinping thought of me shall go which great reformer of the soviet union. In what his son said about his father. He says my father thanks goper chop is an idiot. So why did duncan think that goper chart was an idiot . One important reason is that goper chart attempted to reform economy by taking his hands off the leaders that was on the economy and by doing so he ultimately lost control and failed to execute the objective objectives. Chinas leaders have taken a different approach. Chinas leaders have kept their hands on the levers that control the economy. The commanding of the bank, the oil firms, many industrial firms remain state owned. A powerful leader to execute on Development Objectives and on management. On Development Objectives chinas leaders can direct state banks and state firms to acquire technologies and put these technologies to work at enormous scale in the chinese economy. Bringing china closer towards the productivity frontier. On management of the economic cycle, chinas leaders can correct the hold onto their workers and to invest when private firms become more cautious and that is a powerful tool for cushioning recessions. The state sector is big, state sector is inefficient but by focusing only on the negatives we missed a crucial role in the china state sector plays as a driver of development in a private tool that the economic cycle. The last area where our focus in terms of thinking about china is only on the negatives in the midst of some of the positives is on chinas media term prospects. So when we think about chinas prospects we tend to focus on you stumbling blocks that china faces. The working age population is shrinking. There is a middle income track may be china will not be able to innovate the middle level of development. Trade wars may block access to global markets. In these things are true and they are real problems. But china also has some very significant positives working in its favors. These positives are so obvious that they were obvious even to adam smith, the grandfather of modern economics when he wrote his book the wealth of nations all the way back in 1776. So im going to quite briefly went out of smith wrote about china more than 200 years ago. Two important points. Lets see. The great extent of the empire of china, the vast multitude of bids and habitant tenants, render the whole market done throughs of so great extent it be alone sufficient to support a very great manufacturing admit very considerable subdivision of labor. So thats the first Crucial Point. Because china is so big they can achieve maximum economies of scale and massive efficiency gains through subdivisions of tasks. The second Crucial Point of smith, the more extensive navigation, the chinese would naturally learn the art of using and constructing themselves all the different machines made useful in other countries as well as the other improvements of art and industry which are practiced at all the different parts of the world. Now, smith was right on that as well. And also early. He was 200 years too early. But when xi jinping opened the door between china and the world in 1998 and when join the wto 2001, these two powerful drivers of growth came together. In china had enormous scale and the capacity to learn from foreign technologies. And when you put these two things together you have an extraordinarily powerful engine of growth. The question then becomes has this engine run out of steam . And i think the answer to that is no. And the reason i think that is because the comparison between china and japan. Lets think about when japans economy fell over in 1989. Japans gdp. Capita in 1989 hit arctic, up to the level in the United States. Japan was already on the front tier of what was possible in terms of using technology and becoming more productive. Chinas gdp. Capita todays very significantly below the level in the United States. And for me, that means there is still significant catch ups. I think in the middle of this decade its entirely possible china will still be growing 5 a year. I think at the end of this decade its entirely possible that china will still be growing at three or 4 a year. So, im going to wrap up in a Second Period but before i do let me try to pull these pieces together and applied them to thinking about what has happened to china in the last six months. Now, covid19 is of course a human tragedy. It is also an economic and Financial Stress test for the world and for china. In the last few months, income for the biggest borrowers in chinas economy, state enterprises, Real Estate Developers, local governments, have all contracted. If there was a moment where the chinese bubble was going to pop, it would be now. As income for the biggest borrowers fold, their ability to Service Loans disappears and that is the moment we would expect to see some kind of day of reckoning for chinas economy. And of course that is not what happened. In this chart, you can see daily activity indicators that we built for china and other major economies. What you can see is yes china fell, but they didnt follows far as other major economies. And they pic