Webinar Transcript: Roger Garside on China – Economic and Political Fragility, US Policy, Impacts of COVID, and a China Coup?

This is an edited transcript of our webinar episode with Roger Garside, recorded on 9 December 2021.

Bilal Hafeez (00:00)

Hello and welcome everyone to our expert speaker series. And I’m very happy today to have Roger Garside, who will be speaking on China. Just a few housekeeping points. First of all, everything that we just sort discuss on this webinar, it’s not meant to be financial advice in any way and nothing is based on any private or non-public information. And on top of that, this webinar is only for the members of Macro Hive. And so, hopefully it will allow us to be a bit more interactive. So if you do have questions, just click on the Q&A box at the bottom of your zoom window and you can type in the question or you can just put it in the chat as well. And then, while I’m asking questions, if I see a question that I think is interesting to ask at that point, I’ll just ask that question as well.

So, this should be a fun and engaging conversation. And just in terms of backgrounds, hopefully most people know me. So I’m Bilal Hafeez, I’m the founder and CEO of Macro Hive. I think I’ve hopefully interacted with most people who are attending this webinar. But the more important person is our guest, Roger Garside. Roger Garside has had quite a distinguished career. Notably, he was a diplomat for the British government and twice served at the British embassy in China. And he’s written a number of books on China. The latest is called, China Coup, which is a great title and very provocative a book on a potential regime change in China.

And one of the reasons I wanted to give this opportunity for Roger to speak is he gives a perspective that I haven’t really heard anywhere else on China. When most people talk about China, they talk about the stuff we all know, about reforms in China, or they talk about bubbles in China or those sorts of things. But Roger really does have a different view. So I really did want our members to hear something about that. So welcome, Roger. It’s great to have you on.

Roger Garside (02:25)

Thank you Bilal for inviting me on.

Bilal Hafeez (02:29)

Great. Excellent. Okay, so maybe we’ll just jump straight into it. Maybe I just wanted to start with a question which is that this year there’s been a bit of a polarised debate on China where you have some real heavyweights like BlackRock over the summer, recommended to investors that they should boost their exposure to China by as much as three times. So there’s these big financial organisations that are talking about increasing your exposure to China. Then at the same time and coincidentally around the same time, you have someone like George Soros who warned that if you pour billions of dollars into China, it’s a mistake. And he talked about some of the geopolitics and national security interests that would go against the US. So you have these two different views on China. So why do you think there’s such a disagreement from very kind of credible into institutions and people?

Roger Garside (03:28)

I think there are four reasons, major reasons for this disagreement. First, the strategy of the Chinese regime is undergoing the most radical change since Deng Xiaoping launched the reform era in 1978 under the leadership of Xi Jinping reform and opening is being replaced by regression and closure. And it’s not yet clear just how far this will go.

Secondly, I see a whole array of deep-seated problems in China produced by the totalitarian regime. A totalitarian character is this regime. It’s not authoritarian as most people say, it is totalitarian. And the most obvious of the problems is the debt mountain.

As in the case of the property development sector, we’re seeing just now before our eyes unfolding. Others are genocide in Tibet, in Xinjiang, in Mongolia overlooked by the free nations for a long time, but no longer public opinions. Israeli waking up to the magnitude and horror of what is going on in Xinjiang. Suppression of freedom and rule of law in Hong Kong. And financial institutions, too many of them have chosen either to disregard these in the hope of making huge short term games, or are simply ignorant of them. I think there’s more willful blindness, perhaps due to the fact that some of the largest have poured resources into building up privileged positions, access to the China market and they want to get pay off for that.

Thirdly, there is I believe by no means everybody agrees. Very few people agree with me on this, but I detect signs of deep disagreement within the Chinese elite, both on domestic and international strategies that are being pursued by the Communist Party under Xi Jinping. And this manifests itself in policies and actions that are sometimes unclear, contradictory, and even self-destructive like Wolf Warrior diplomacy.

And fourthly, US strategy for its part has undergone a fundamental reorientation from benign partnership with China to deep hostility. It has accepted that there is a long-term threat from the Chinese communist regime to the national security interests of the US and other democracies. But I think that Wall Street still hopes to be able to ignore this.

Bilal Hafeez (06:52)

I just want to pick up on a word you used, totalitarian. That seems like quite old fashioned word from the ’40s or the ’50s. And you made a distinction with authoritarian. And I assume there’s intent behind using that word totalitarian. And so, can you talk a bit more about what you mean by totalitarian? The importance of that and the consequences of that.

Roger Garside (07:18)

Well, you are quite right. I wouldn’t say it was old fashioned, but I would say it’s been around quite a long time and for very good reason. Sadly, totalitarianism, which we saw manifested in Nazi Germany and Soviet Union is manifesting itself again now in China. What do I mean by the distinction? To me, not just to me, but to the scholars in the field, like the great Anglo-American historian Robert Congress said that a totalitarian regime asserts its authority. It demands acceptance of its authority in every sphere of life, but it of course makes calculations about where it is feasible to impose that authority. And as China grows stronger, it is imposing its authority more and more. But the problem is with this, that totalitarianism cannot coexist with freedom and the rule of law and democracy. There can be short-term accommodation, but there cannot be long-term coexistence.

Bilal Hafeez (08:57)

Okay. Understood. And in terms of where people talk about how China could, as its economy grows, it will naturally become more democratic. There’s this kind of Western notion at least that economic growth or some form of capitalism naturally leads to democracy. Is that something you’ve seen in China, or not?

Roger Garside (09:29)

Yes it is. And the Communist Party have seen it too and they don’t like it. They launched a transition towards a free-market economy back in the late ’70s, and that liberated the energy and enterprise of the Chinese people to a huge extent and we saw spectacular growth. But as the property owning class grew and grew and travelled abroad, became more aware of other systems of government, send their children to study in liberal democracies then, and began to seek protection under law for their own property. Then the Communist Party saw a threat to their monopoly grip on power as the property owning class not only asserted itself, but wanted to expand the area of its activities to take over the commanding heights such as banking, insurance, transport, utilities, which the Communist Party had reserved to itself and upon which it depends for patronage and share economic power.

Bilal Hafeez (11:23)

And in terms of timing, because obviously, our audience are investors. In many of these charges you put about China being totalitarian, controls its population and such things. You could have said that 10 years ago, 20 years ago, 30 years ago. What makes you think now is something a bit different from before?

Roger Garside (11:51)

I think that the Communist Party leadership, those who were in power around the year 2008 collectively came to the view that an expanding private sector was dangerous to them, was undermining their authority. I think they were very careful not to alert the outside world to that assessment that they had reached. They still wanted access to our capital, to our technology. And so, they were very careful to keep us quite confused about what was really going on in China and their reassessment of things. And that bred a certain complacency in America, as well as in Europe and Japan. There came an awakening during the Trump administration. The kind of intellectual awakening came. And we heard about his pivot to Asia. But not much was done till the Trump administration came to power and put China Hawks into crucial positions in the administration. And they shook up policy towards the Chinese Communist Party. And Europe is now awakening too.

Bilal Hafeez (13:50)

Okay, understood. Yeah. So basically we have a move away from the private sector. Since the global financial crisis since 2009, you had a great awareness from Western powers about trying to contain China. And then within China, there’s more centralisation, the kind of cultic personality that’s occurring on the president Xi. Now, in your book, you lay out a possible path for a coup de tat to occur. And that for me an interesting angle you have, which I think is different from what outsiders have is that this won’t be a bottom up popular revolution to take out president Xi, but a way of regime change would occur in China would be that other elites, other people at the highest levels would engage in a coup to remove president Xi. So how would that work? What makes you think that’s the path that this could happen and what are some of the mechanics of that?

Roger Garside (14:45)

Well, first of all, as you accurately say, I don’t foresee a grassroots bottom up rebellion against the regime. This is a regime which is extremely good at control. It’s good at brainwashing. And for the most part, the population is not rebellious. That could change. Well, we could go that into that later. That could change, but at the moment, that is the case. But there’s evidence that within the upper reaches of the Communist Party of the elite that rules China, there is dissatisfaction with the system as it stands. And particularly with the direction in which Xi Jinping is leading them. I’ve mentioned that he has replaced Deng Xiaoping’s strategy of reform and opening with regression and closure. And he has, and present policies have alienated the most powerful country in the world. And there are a substantial percentage of the upper and middle officials of the Communist Party of China who see this as overreaching and creating risks for China and for their own power and wealth. They haven’t undergone some kind of damaging conversion to the beauties of liberal democracy. But they can see that they are prisoners of a totalitarian system, which is no longer delivering the goods. In fact, it’s producing some risks to the stability and economic health of China. And I’ve enumerated some of them. So we have witnesses to this.

The highest level defector from China to the United States in the history of communist China since 1949, a professor Cai Xia, who taught political ideology at the central party school to the senior and middle ranking officials for 15 years. She is on the record as saying that 60 to 70% of the upper-level carters of the Communist Party regard constitutional democracy as a better system for social stability and the defence of human rights. And that’s why they’re sending their sons and daughters to universities in the liberal democracy. That’s why they’re using every possible means to get as much of their wealth out and invested elsewhere as they can, because they do not have confidence in the future of the regime they serve.

Bilal Hafeez (18:30)

Okay. And in terms of some of the characters that could be involved in the coup, who are the players you’re looking at? Who to hire up?

Roger Garside (18:40)

Well, I carefully researched the top leadership of the Communist Party, and I selected three to lead the coup. The prime minister himself, Li Keqiang. And I’ll come back to why in particular I chose it. Then a vice premier Han Zheng, who has a lot of economic policy experience and was the boss of south China Guangdong province for years. And he demonstrated a willingness to look at not only economic, but political reform during that time. And thirdly, the vice president of China, Wang Qishan, Xi Jinping’s oldest friend in the top leadership, but a man of independent mind, very sharp, very capable, very good understanding of Western financial systems and the people who run them.

So those three, I identified. And curiously enough, the same three people have been identified by bloggers on the Chinese social media. I was astonished when I saw that, but very pleased and reassured in my choice. So I see them waiting an opportunity to strike. It won’t happen unless the US and its allies exert external pressure, not military force, but economic pressure on China. We have economic superiority over China. We have some great assets like the control of the international banking system, like the major reserve currencies, etc. You know this. And we have to deploy those in ways that will embolden and enable them. These kinds of people that I’ve mentioned create the conditions where they feel emboldened and enabled to move. And already the US has without declaring this as their objective moved in that direction, both in the measures taken to limit the export of dual technologies and the transfer of dual technologies or military technologies also from the US to China, Huawei the prime example. But also are moving to enforce the disclosure of financial information that Chinese companies listed and traded in the US have long been required to disclose by law, but been prevented by the Chinese government from doing so. Well, as I’m sure, many of your audience will be aware legislation was passed by the US Congress and signed into law in the last days of Trump, which will lead to the suspension and from listing and trading in the US of Chinese companies continue to fail to disclose financial information in full measure.

Bilal Hafeez (22:38)

Okay. No, that’s great. So my sense from what you’re saying is there’s certain players within the upper echelons of the political system within China, the prime minister and the two Wangs are kind of orchestrate a coup, but you also need the external conditions. And essentially, Trump kind of set up a framework almost to economically contain China. We’re kind of seeing the effects of some of that with China voluntarily de-listing some companies to sidestep these rules. But if Biden was to step it up and impose further restrictions on China’s access to capital and that could increase the chances of this regime change.

Roger Garside (23:20)

Well, I think if the legislation which is already in place entitled holding for foreign companies to account is implemented with its full force, that will create a crisis, a confrontation between the US and China. And that financial capital market confrontation would rapidly become a political confrontation. And I believe it would lead to a political crisis in China, which would play into the hands of those who have long believed that Xi Jinping’s being overreaching.

Bilal Hafeez (24:14)

Okay. Understood. And I’m not sure if you’ve read the book, Red Roulette by Desmond Shum. So he was kind of an insider whose wife was connected to Wen Jiabao. And she disappeared, and now, Desmond Shum’s written a book about his experience in being so close to the elites. I just wanted to get your thoughts on that book if you’ve read it.

Roger Garside (24:44)

Well, I’ve read the book and I’ve given lunch to Desmond Shum, and his partner at the reform club, and we had a very good hour and a half or couple of hours together. And I think it’s a very interesting book because here we have rarely for the first time somebody who has been at the heart of, at the very nexus of politics and economics in China economic activity in China. And Desmond is by no means a political operator. He left the political relationship building to his former wife, now, apparently, being held in some kind of house arrest or arrest. And so, this is the first time we’ve had a kind of insiders account of this. And I think it’s a very well written book and a quick and good read, and I recommend it to your audience.

Bilal Hafeez (26:05)

Yeah. What I find interesting about that book was just the level of kickbacks and corruption, that’s prevalent in China amongst the upper political elite. Everybody’s got a finger in the pie. And so if the economic engine slows down, or if that’s compromised, I could imagine these people thinking, look hang-on my gravy train’s over. So I’m not happy with the current presidential regime. So there it is kind of an interesting insight to how China operates at that level.

Roger Garside (26:38)

There’s been an operation since really, since the beginning of the reform era, a firstian pact between the Communist Party and the economic entrepreneurs of China, the people of China. The people say, we let you rule and you let us make money. And with that actually goes for members of the Communist Party, as well as those outside it. And I think that the pact has been under strain increasingly since 2008. And since the great financial crash, when at first China impressed us all and helped us all by pumping credit into the economy and maintaining a higher level of economic activity and a growing level of economic activity. But that of course has been continued past the point when it really ought to from economic health point of view have been stopped and hence the huge debt mounted so great that no country has ever succeeded in reducing a debt amount of this size without either recession or inflation.

Bilal Hafeez (28:16)

No, thanks for that. Now I’ll take some questions from the audience as well. There’s one question here, which we kind of touched on. It’d be good if you could elaborate. Does president Xi, does he need foreign capital? And if so, how much shop is doctrine that is centralised economic control disrespect for the rule of law? Is he prepared to compromise on to kind of keep the capital coming in?

Roger Garside (28:40)

Very good question. China has needed foreign capital, has made good use of foreign capital and Hash and companies, Chinese companies have shown until very recently no sign of letting up on applying for licence things for IPOs in the US and elsewhere, but particularly the US. They wanted that capital. I think quite a lot of them, one big motive of it was the entrepreneurs wanted to acquire capital beyond the reach of the Communist Party. And so, they were raising billions of US dollars, which they were in free to spend as they saw fit, including buying politicians in China, but also using it outside China. And I think that Xi Jinping moved against that. Not for economic reasons, not because there was no longer need for foreign capital in China, but in order to assert the authority of the regime, and this is the totalitarian regime clamping down on activities beyond its control. Now, is he prepared to backtrack from that, no sign of it. It looks as though he is going ahead with that, and it must have created a lot of dissatisfaction amongst the entrepreneurial class in China and amongst many people in the regime who through their friends in business have built up multimillion, multibillion fortunes in this way.

Bilal Hafeez (31:10)

Okay, that’s good. There’s another question which is just wants to kind of just press a bit more on terms of the risks of Xi losing control. So we’ve talked about one, which you just alluded to now, which is that economic actors within China or private sector entrepreneurs feeling heavily under pressure losing their wealth. They could be one source of attack against regime. Another would be external, if the US further tightened screws and forces Chinese companies to disclose more and so, forced them to reform. But what about other factors like demographics or environmental issues, those sorts of things. Is that a potential source of risk for Xi as well?

Roger Garside (31:53)

Well, the demographic one is absolutely major break on future China is growth, but questionable how much of an impact that’ll have over say the next five years? But I think much more worrying for everybody inside China and outside China is the environmental problem. Again, this traces back to the totalitarian system. In order to control China and win and retain the tolerance of the people, which even totalitarian regimes have to do. They have given priority to economic growth over environmental control and pollution control. And they’re rhetoric not withstanding. That is still the case. The whole incentive system for promotion, for Communist Party officials at every level. And it has long prioritised economic growth over environmental control. And one aspect of this, which is particularly dangerous, is the great and growing dependence on coal to generate power. And although they have actively sought and vigorously sought and efficiently sought to develop green sources of energy, the scholarly studies that I’ve read persuaded me that neither wind nor solar in China is going to do away with the need for reducing the reliance on coal. And on present policies, they’re headed for disaster. And that means disaster for all of us, because they are the biggest emitter of greenhouse gases on this planet.

Bilal Hafeez (34:30)

Okay. And there’s another question. This question relates to de-listing issues. So at the moment Chinese companies use structures like VIEs and ADRs to essentially list in US exchanges and capture foreign capital. Well, do you think the Chinese government will essentially try to ban those instruments completely and force everyone to de-list and come on shore into China, or do you think they’ll kind have this steady state where VIEs will still be allowed, but the government will periodically come in and de-list one company say.

Roger Garside (35:13)

Well, this is a topic that I’m sure many of us are following on a day-to-day basis. The latest public signs that we see out of China are of the briefing of well placed journalists in China, Caixin, financial magazine. What seems to be in the wind is prohibiting future use of VIEs, but not damaging, not acting against those Chinese companies listed and traded abroad, thanks to having put VIEs in place. But of course the US for its side might move against VIEs. After all, shareholders have been show sold instruments, which do not allow them to control the companies they bought the instruments to which they’re related and Wall Street kept very quiet about all that all these years, but people are waking up to the facts now. And I think quite a lot, I think public opinion is moving on this.

Bilal Hafeez (36:47)

Okay. So that’s interesting. So essentially, your sense is and your reading off the noise we’re getting out China is that new companies won’t be able use VIEs. That’s kind of a no-go for, for the future, but existing ones will still exist. And the risk for those probably comes more from the US side of the US clamping down and actually applying the same level of regulation as any other company that’s listed other than this. Okay. No, that’s good.

We have another question. This is actually changing a bit for the topic, and this is on Taiwan. So, will President Xi use some kind of assault on Taiwan in some way as a way to consolidate his own power? So how does Taiwan fit into your view of China at the moment?

Roger Garside (37:39)

Well, I can see why the question has been raised because the Chinese regime has been extremely public and extremely assertive and extremely threatening towards Taiwan. And it’s opted, it’s rhetoric, and it’s in increased the number of flights over the air defence zone around Taiwan. And of course, they are very concerned about the shift in opinion, both within Taiwan and in the rest of the world regarding Taiwan, not least in Japan and South Korea. And there are those who think that Xi Jinping will want to move against Taiwan sooner rather than later. But I’m sceptical of that. The risks are huge. And frankly, I think unquantifiable. And the power of the US and its allies to retaliate militarily, but also economically is devastating. And I’ve always taken the view that what the Communist regime in China has done in the south China sea and in its pressure on Taiwan is largely for domestic political purposes to mobilise nationalism behind the regime rather than a sign of an early assault on the island.

Bilal Hafeez (39:47)

And if other people have questions, feel free to ask. I have one or two questions. One is, If there was a raging change of some kind and if some of the existing elites took over. Do you think that would be positive economically for China? I’m just trying to get a sense of if suddenly tomorrow you wake up and you see Xi’s out. Initially there’ll be probably a sell off, but then people will try to work out. Is this positive economically for China? How would you view that?

Roger Garside (40:23)

Of course, it all depends on how the coup is conducted and how the transition to democracy, which I predict is launched. But I am cautiously confident that it would be smoothly and peacefully handled. I think we are looking at very adroit, very skilled, very experienced political operators who would be very well prepared. Now, what would the economic effects or will that be? I think positive. I think that there’d be the economic effects, the social effects, any kind of affects you name in terms of human rights, whatever I think would be positive across the board. But yes, including the economic effects because democracy would bring the rule of law and economies flourish with the rule of law. And the economy would be on how much sunder China, as we can see now with the property sector problems, 29% of GDP in property sector development. And here we have the second largest company in, limited default as defined by rating agencies.

This is going to create very severe problems for local governments, raising finance they used to be able to raise it too by land sales, that’s going to be a much less fruitful path to maintenance of local government. So before regime change takes place, or as it takes place, there could be severe disruption. But in the longer term, a democratically elected government would be able to mobilise resources. They could make the shift from dependence on investment in infrastructure and exports to a more consumption led economic growth model because they could use the mobilisation of public opinions through democratic elections to redistribute capital and income from the present elites, particularly, not least at the regional level and thereby give consumption a greater role and in a healthier economy. Just one example.

Bilal Hafeez (43:33)

Okay, great. Now, I’m going to sort of round this off by putting you on the spot a bit and asking you, if you had to assign a probability to a coup occurring, say in the next, say two, three years, what probability would you assign?

Roger Garside (43:50)

I would, so much depends on the US and allies as well as on what goes on domestically in China. I would say within the next three years, I would assign a probability of 20%. If you take us out to five years, I would assign a probability much nearer to 50%. Yeah, let’s say 50%.

Bilal Hafeez (44:49)

Okay. No, that’s very useful. Okay. So that’s great. Okay, so it’s 20 to possibly 50% next three to five years. And from our conversation, what I’ve learned is a big swing variable here is how the US plays this. So, if the US really does turn the screws especially through capital markets and the economy, and that probability goes up. Internally within China, there are players at the highest levels who are ready to act if needed, but what’s important is how the business class, how it kind of how they feel like their wealth’s being taken away and they could act as an internal agent of change. And so that’s the internal factor to look at. Okay. No, that’s great. And I would just add that you can, hopefully the audience can see Roger’s book China Coup behind him.

So, I would urge people to get hold of his book. It’s a great read. It’s written really, really well as kind of like a gripping thriller almost of like real time how a coup occurred, the players and so on. And as hopefully everyone has seen from our conversation, this is quite a different type of conversation we’re having on China than what you normally hear, which is other conversations tend to be much more conventional. But we’re able to accommodate such divergent views because we’re not attached to any big financial institutions. So, we can have these sorts of discussions. Although they at this stage it might be low probability, but I think it’s worthwhile thinking out how these scenarios would involve. So, with that Roger, thanks a lot. You’ve been great. I’ve learned a lot speaking to you. Again, hopefully it’s been very good for our audience as well. So just over to you for any final words if you have any.

Roger Garside (46:20)

Well, thank you very much, indeed Bilal. As before you are a superb interviewer. It’s a delight to talk with you. I would just add that I think the value of the book is not only in the entertainment value or the excitement of reading the coup scenario, but also the other three quarters of the book, which is sober fact-based analysis. So is nonfiction. And it distils into either think rather few pages, a lot that people may not read. I would certainly they don’t read in the daily or weekly newspapers.

Bilal Hafeez (47:07)

That’s excellent. Thanks a lot, Roger. And thanks a lot everyone in the audience. Hope everyone’s enjoyed this. And if people do have follow up questions for Roger, just ping me and I’ll try to get in touch with Roger to answer those questions.

Roger Garside (47:19)

Absolutely.

Bilal Hafeez (47:19)

So, thanks everybody. And yeah, have a good rest of the day. Excellent. Thanks.

Roger Garside (47:25)

Thank you and goodbye.

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)