Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Tracy Allaway and I'm Joe Wisenthal. So, Joe, did
Speaker 1: I tell you that I got a tear gassed recently? Oh?
Speaker 1: My god, No. I think I saw a tweet from
Speaker 1: you that kind of hinted at that, but I couldn't
Speaker 1: totally tell whether you actually did, or whether you were
Speaker 1: just at risk of it, or whether it was just
Speaker 1: in theory or you or your colleagues were so I
Speaker 1: wasn't sure. So I you actually got tear gassed. Yeah, So,
Speaker 1: just to clarify, this is not the norm in financial journalism,
Speaker 1: but for those who haven't been following international news recently,
Speaker 1: there have been a series of very big and historic
Speaker 1: events in Hong Kong. We've had these massive protests now,
Speaker 1: two of which were very very peaceful and very big,
Speaker 1: and then on one occasion, we had a protest that
Speaker 1: descended into I don't want to say violence, but a
Speaker 1: little bit of chaos. There was a lot of police
Speaker 1: pushed back, which I personally witnessed, and the police also
Speaker 1: fired rubber bullets and they also fired tear gas canisters
Speaker 1: and it was sort of a surreal experience. Because all
Speaker 1: of this was taking place in an area of Hong
Speaker 1: Kong called Admiralty, which is sort of like a midtown
Speaker 1: Manhattan or maybe a Wall Street equivalent to New York.
Speaker 1: And so among all these big office buildings, including the
Speaker 1: Bank of America Mary Lynch office building, which was very
Speaker 1: very close to where all this was happening. You had
Speaker 1: these tear gas canisters being fired in the air as
Speaker 1: commuters were trying to get home. It was pretty crazy. Yeah,
Speaker 1: I was pretty struck by the images, and obviously exactly
Speaker 1: that fact, because of course I would just visiting you
Speaker 1: in Hong Kong last November, I think it was and
Speaker 1: realizing that, you know, this is just a normal business
Speaker 1: district that was utterly transformed, and being looking at those
Speaker 1: roads and saying, hey, I was walking down those roads,
Speaker 1: probably looking for Rose Duck at one point, and then
Speaker 1: seeing the scenes that they had become was pretty extraordinary.
Speaker 1: I think you did actually wander down that area looking
Speaker 1: I'm pretty sure it was chicken wings and you told
Speaker 1: me about it. I literally did. Yeah, I'm not exacted,
Speaker 1: that's literally what Yeah, that's literally what I was there for.
Speaker 1: All right. Well, the reason all of this was happening
Speaker 1: was because of a proposed piece of legislature that was
Speaker 1: working its way through the legal system in Hong Kong.
Speaker 1: People referred to it as the Extradition Bill, and it
Speaker 1: was a new law that would basically allow Hong Kong
Speaker 1: residents or citizens to be extradited to China, and that
Speaker 1: was something that wasn't allowed for. And Joe, I don't
Speaker 1: know how much you know about the history of Hong Kong,
Speaker 1: but you're familiar with them one country, two systems principle. Yes, right.
Speaker 1: So after the British handoff of Hong Kong back to China,
Speaker 1: the stipulation was that for several years, I think maybe
Speaker 1: it was fifty Hong Kong would get to operate as
Speaker 1: it generally does, is something more or less like a
Speaker 1: liberal democracy with free speech and protest and free trade
Speaker 1: and all that, and so that even on some level
Speaker 1: it's politically now China, it is completely separate from a
Speaker 1: lealistic standpoint than the mainland. Yeah, that's a good summation,
Speaker 1: and I guess the thing to be aware of is
Speaker 1: there's a sort of deadline hovering over this idea of
Speaker 1: one country, two systems, and that is the year and
Speaker 1: that's basically the date when that agreement sort of lapses,
Speaker 1: and no one really knows what comes after that, but
Speaker 1: most people assumed that they have a few more decades
Speaker 1: at least of sort of having their own legal identity
Speaker 1: separate to China. And when the legislature in Hong Kong
Speaker 1: proposed this extradition change, people were suddenly very worried, very
Speaker 1: up in arms, saying that this would bring that era
Speaker 1: to a close even sooner than they had expected. There's
Speaker 1: one more thing to note about this whole drama, and
Speaker 1: that is the the chief executive of Hong Kong is
Speaker 1: a woman called Carrie Lamb. She's not elected in a
Speaker 1: democratic process, uh, and she's become something of a controversial figure.
Speaker 1: She was pushing the extradition bill, and on the day
Speaker 1: that we're recording this, she's actually just apologized for pushing
Speaker 1: it through. She's also paused the bill, so it's no
Speaker 1: longer winding its way through the Hong Kong legislature. But
Speaker 1: it's still very unclear or exactly what is going to
Speaker 1: happen to it. Is it actually dead and gone for good?
Speaker 1: And needless to say, a lot of people are still
Speaker 1: very very upset about the events of recent weeks, and
Speaker 1: in particular the violence and the pushback that we've seen
Speaker 1: from the police. No, I appreciate this because, like I
Speaker 1: didn't even know, for example, that she wasn't elected. So
Speaker 1: I appreciate all of this set up because otherwise I'd
Speaker 1: be completely ignorant. Well, I, I know you know this part.
Speaker 1: But Hong Kong is a very very large financial center,
Speaker 1: and it's really the only international financial center within China
Speaker 1: or close to China, and that makes it very special.
Speaker 1: And it's market, as I can attest to having been
Speaker 1: here for seven or eight months now, is very very
Speaker 1: unusual in many ways. So I thought, given recent events,
Speaker 1: we could have someone who not only is an expert
Speaker 1: on that market but also has been pushing to change
Speaker 1: it in various ways, and someone who also has some
Speaker 1: very very strong opinions on the future direction of Hong
Speaker 1: Kong and what the recent spate of protests might mean
Speaker 1: for that future. Like I said, there's so much I
Speaker 1: have to learn about this, so I'm very excited about
Speaker 1: this episode. I might get in a few questions, but
Speaker 1: I think a big part of me we would just
Speaker 1: be sort of sitting back and hearing our guests speak.
Speaker 1: Because of how little I know, I'm very looking forward to. Oh,
Speaker 1: I'm sure you'll come up with questions, Joe, You'll like
Speaker 1: this one, I promised. So. Our guest for this particular
Speaker 1: episode is David Webb. He's a former banker. He's now
Speaker 1: an independent I suppose you describe him as an activist investor.
Speaker 1: He runs a website where he sort of researches various
Speaker 1: companies in Hong Kong and also writes down his thoughts
Speaker 1: on politics as well. So, David Webb, thanks so much
Speaker 1: for coming on. Thanks for having me, David. When I
Speaker 1: was prepping for this episode, there are a lot of
Speaker 1: people in the Bloomberg Hong Kong office who already know you,
Speaker 1: um and our familiar with your work. And I was
Speaker 1: sort of going around and asking people to tell me
Speaker 1: things about you, and I heard so many varied things.
Speaker 1: I heard that you used to be the chairman of
Speaker 1: Hong Kong Mensa. Yes. I heard that you used to
Speaker 1: design video games in the nineteen eighties. I was a programmer, yes,
Speaker 1: So okay, walk us through your sort of like early development.
Speaker 1: You were a video game programmer at one point, and
Speaker 1: eventually you ended up in Hong Kong. Had that happen well.
Speaker 1: I was writing books and games for the first generation
Speaker 1: of home computers in the early nine eighties while I
Speaker 1: was still at school and university, and I did mathematics
Speaker 1: at Oxford for three years, and then after graduation I
Speaker 1: stopped coding and went into the city of London in
Speaker 1: six to start corporate finance, working in a small merchant bank.
Speaker 1: That was the year before something that was the year
Speaker 1: of Big Bang, which was when stockbrokers and jobbers or
Speaker 1: you would call market makers, perhaps in New York they'd
Speaker 1: be called specialists. UM and merchant banks were all brought
Speaker 1: together under a regulatory reform. So that was a big year.
Speaker 1: And then in nine of course we had the crash,
Speaker 1: the Wall Street crash, Global crash. I carried on to
Speaker 1: incorporate finance in London for two more banks, and then
Speaker 1: the third one, Barclay, sent me out to Hong Kong
Speaker 1: in to do I p O s and merchers and
Speaker 1: acquisitions in Asia, which I did for them for three years,
Speaker 1: doing an awful lot of travel on the company time, Indonesia, Thailand, Philippine,
Speaker 1: South Korea and so on, and one of the first
Speaker 1: b shares in mainland China, which was a B share
Speaker 1: then was a share for foreign investors that was listed
Speaker 1: in Shanghai. And I left that firm in ninety four
Speaker 1: and went to work for a local conglomerate for four
Speaker 1: years for a called family controlling shareholder, basically to advise
Speaker 1: them on their corporate structuring and transactions and investments. And
Speaker 1: then in as the Asian financial crisis rolled through to
Speaker 1: Hong Kong, having started a year earlier in n I retired.
Speaker 1: I haven't worked for anyone since then, and I set
Speaker 1: up website dot com, which made use of some forward
Speaker 1: planning with my surname, and that was a way of
Speaker 1: giving something back to Hong Kong in terms of the
Speaker 1: expertise I had built up in in the regulatory system
Speaker 1: for companies here, particularly listed companies, and since I was
Speaker 1: free of any conflicts I no longer had any employer,
Speaker 1: I was able to write quite critically about the appalling
Speaker 1: corporate governance that we have in many parts of Hong Kong.
Speaker 1: And at the same time I was pursuing my hobby
Speaker 1: investing in small caps on Hong Kong Stock Exchange because
Speaker 1: they were then and and and still are largely overlooked,
Speaker 1: and it's very hard to filter them for the value
Speaker 1: um and for good governance. If you just filter for
Speaker 1: one and not the other, you won't get decent returns.
Speaker 1: So the website is not for profit. I've never made
Speaker 1: any revenue, and I subsidize it quite heavily to keep
Speaker 1: it going. And it has a big database of who's
Speaker 1: who in Hong Kong and increasingly elsewhere, and I've been
Speaker 1: writing content for it, looking at sort of corporate horror stories,
Speaker 1: because as I filter through the stock market here, I
Speaker 1: can find occasionally good companies, but an awful lot of
Speaker 1: rubbish as well, and some of those are bad enough
Speaker 1: to use for case studies on the need for regulatory reform.
Speaker 1: Would you talk about the appalling state of governance in
Speaker 1: listed Hong Kong companies. What are the common themes that
Speaker 1: you see, What are the what are the characteristics that people,
Speaker 1: perhaps in other markets would be horrified to see, or
Speaker 1: the things that people get away with until you uncover them. Well,
Speaker 1: the one of one of the underlying themes is that
Speaker 1: because most companies do have a controlling shareholder, and it
Speaker 1: used to be families mainly, but since since we started
Speaker 1: listing mainland Chinese companies, it's also government control. But because
Speaker 1: of that, the so called independent directors aren't really independent
Speaker 1: because they're only they're all elected by the controlling shareholders,
Speaker 1: so they're only as independent as the king wants them
Speaker 1: to be, and that causes problems because a lot of
Speaker 1: them are just rubber stamps and they're looking the wrong way,
Speaker 1: or that they're hired for their ability to look the
Speaker 1: wrong way, So there aren't really the checks and balances
Speaker 1: that you might expect. There's also fairly low levels of
Speaker 1: financial disclosure. We only get full financial statements once a year,
Speaker 1: and we get a condensed set of half yearly statements
Speaker 1: um and for the main Board of Hong Kong, we
Speaker 1: don't get any quarterly financial statements except for a few
Speaker 1: companies not a voluntary basis, and for ironically, for mainland
Speaker 1: companies that have if they're listed in Shanghai or Shen's end,
Speaker 1: and they must also report quarterly and and that gets
Speaker 1: reflected into Hong Kong. There's lots of insider related party
Speaker 1: transactions and sometimes they are not disclosed as such. So
Speaker 1: if an acquisition looks ridiculously overpriced or a disposal looks
Speaker 1: ridiculously underpriced, and it's and it's with a b v
Speaker 1: I company, the owners of which are not disclosed British
Speaker 1: Virgin Islands. That means then you have no way of
Speaker 1: knowing who's really behind it, because offshore jurisdictions don't have
Speaker 1: to disclose in the b v I, particularly shareholders, So
Speaker 1: there's there's quite a bit of that. Also, you find
Speaker 1: that when companies go public here they may have skimped
Speaker 1: and saved on the controlling shareholders salaries as directors, but
Speaker 1: once they go public, they suddenly deserve a tenfold pay increase,
Speaker 1: and so they can extract money that way. So there's
Speaker 1: there's a there's probably if there are a hundred ways
Speaker 1: to leave your lover, there's at least that many ways
Speaker 1: to rip off your shareholders, and I've written about most
Speaker 1: of them over the years. So I'm curious, given that
Speaker 1: lack of information and disclosure, how do you actually go
Speaker 1: about researching Hong Kong companies, Because judging by everything that
Speaker 1: I've read, you've been quite successful in doing this. So
Speaker 1: Bloomberg had a profile of you a few months ago,
Speaker 1: and I think we valued your portfolio at something like
Speaker 1: a hundred seventy million dollars and also described how it
Speaker 1: had been out performing the general market for some time.
Speaker 1: So clearly something is working in your research process. How
Speaker 1: how are you going about that? Well, you can you
Speaker 1: can thank Janet Yellen's husband, George Jakoloffs for the theory
Speaker 1: behind this, but it's fairly obvious that he wrote a
Speaker 1: paper on the lemon problem and one a Nobil prize
Speaker 1: for it. And and basically, if you are an expert
Speaker 1: mechanic walking around a secondhand car lot, then you generally
Speaker 1: you don't get warranties. You have to look carefully and
Speaker 1: if you and if you do, and you're an expert,
Speaker 1: you can find carefully maintained cars that are underpriced because
Speaker 1: they're all discounted for the risk of being lemons, and
Speaker 1: most most of the good cars would never be there
Speaker 1: in the first place. So in in company terms, I
Speaker 1: look closely at the corporate governance of all the small
Speaker 1: companies and find a few of them that are actually
Speaker 1: well governed, and I get in the back seat, usually
Speaker 1: because the driver in the front is a controlling shareholder,
Speaker 1: so I have to be confident that they will be
Speaker 1: able to deliver honest returns and give me my fair
Speaker 1: share of the returns, and but they're they're all discounted
Speaker 1: for the risk of being lemons. Occasionally one of them
Speaker 1: does actually crash badly, but more often than not, I've
Speaker 1: been able to avoid the most of the crooks most
Speaker 1: of the time, as it were, and that means that
Speaker 1: I can help perform the general market by doing that.
Speaker 1: It's weird because when I think of Hong Kong, you know,
Speaker 1: I think of it as one of the main obviously
Speaker 1: financials owners of the auto world. So I would think
Speaker 1: New York, London, Singapore, Hong Kong, and that's kind of
Speaker 1: about it. Typically, why are the standards so bad? So,
Speaker 1: why is there this sort of corporate governance discount and
Speaker 1: an inability to essentially bring the listing requirements or the
Speaker 1: listing oversight in line with other markets where people don't
Speaker 1: have this overriding negative perception. Well, there's a number of issues.
Speaker 1: In the first of all, Hong Kong is a very
Speaker 1: small geographic place with population of seven million, or about
Speaker 1: zero point five percent of China. So for all of
Speaker 1: the Chinese listed managed companies that are listing in Hong Kong,
Speaker 1: they are in a different jurisdiction, which means cross border
Speaker 1: enforcement is fairly difficult, whereas in America, it's such a
Speaker 1: vast economy and place that most of the companies that
Speaker 1: list in America are managed in America as well, and
Speaker 1: so it's probably a bit easier to hold people to account,
Speaker 1: although not, I would add in the case of Chinese
Speaker 1: companies are sitting listed in America, that's another problem as well.
Speaker 1: And it never held out America as a bastion of
Speaker 1: corporate governance. It's got its own set of problems that
Speaker 1: derived from the race to the bottom that has basically
Speaker 1: ended in Delaware with very management friendly company laws that
Speaker 1: tend to allow entrenchment of managers to start behaving like
Speaker 1: owners and excessive pay as a consequence. And and also
Speaker 1: America tends to have fewer opportunities for shareholders to vote
Speaker 1: on things like related party transactions. Quite often they're just
Speaker 1: approved by a board after hiring an adviser to say
Speaker 1: that they're okay. The UK overall has in my view,
Speaker 1: better corporate governance than America and Hong Kong by some
Speaker 1: margin on its main board, at least, not so much
Speaker 1: on the newly created things like the alternative investment market
Speaker 1: aim which is a lawless kind of regime, and so
Speaker 1: and and also the control structure has to be mentioned
Speaker 1: because you know, continental Europe has the same issues, lots
Speaker 1: of families controlling most of the companies or governments. And
Speaker 1: then it's very hard for independent shareholders to have any
Speaker 1: say even to elect the independent directors unless there is
Speaker 1: some sort of proportional representation system in the boards. So
Speaker 1: if you looked at the hang Thing Index at any
Speaker 1: point in time in the last thirty years, there's only
Speaker 1: been a handful or less of companies that don't have
Speaker 1: a controlling shareholder, including companies like HSBC, which tend tend
Speaker 1: to have better governance just because will they're regulated as
Speaker 1: banks in that case, but be without a controlling shareholder,
Speaker 1: and with good corporate laws that prevent things like poison
Speaker 1: pills and that you have in America, you tend to
Speaker 1: get better behavior overall. And the companies constantly, unless they're very,
Speaker 1: very big, they're constantly looking over their shoulder and making
Speaker 1: sure that they're delivering shareholder value because otherwise some will
Speaker 1: take them over and do it for them. So, David,
Speaker 1: you sort of operate in a particular niche in the
Speaker 1: Hong Kong market, which is small cap stocks. I'd like
Speaker 1: to get to the big topic in recent weeks, which
Speaker 1: is of course, the extradition bill and the ensuing protests
Speaker 1: in Hong Kong. I'm wondering do the events of recent
Speaker 1: weeks change your perspective on either the future of the
Speaker 1: Hong Kong market or the future of Hong Kong as
Speaker 1: a financial center. Well, it's been in fascinating time. What
Speaker 1: we're seeing is all wrapped up in the overall situation
Speaker 1: with mainland China Visavi America as well and the trade war.
Speaker 1: China has become increasingly confident in the last decade as
Speaker 1: its economy has grown and it started to look out
Speaker 1: woods and has made built built islands in the South
Speaker 1: China Sea, launched an aircraft carrier, has been increasingly assertive
Speaker 1: over Hong Kong. For the first ten years after such
Speaker 1: change of sovereignty here, they largely stayed out of sight
Speaker 1: the Liaison Office on Hong Kong Island, which represents the
Speaker 1: mainland government. They hardly ever appeared in public at events here.
Speaker 1: That's all changed and now they are increasingly interfering in
Speaker 1: Hong Kong affairs. This Extradition Bill. Although it was we
Speaker 1: were told conceived in Hong Kong, the amendment to the
Speaker 1: Extradition Bill, it was backed with gusto by the mainland
Speaker 1: when they realized this would give them the opportunity to
Speaker 1: basically close what they see as a loophole but what
Speaker 1: to others see as a firewall, and allow them to
Speaker 1: grant people from Hong Kong and extradite them to face
Speaker 1: charges in the Mainland. That basically it drives a tank
Speaker 1: through the firewall between the two systems and two jurisdictions.
Speaker 1: Because Hong Kong has its own courts all the way
Speaker 1: up to the Court of Final Appeal, which are widely
Speaker 1: regarded as trustworthy. They include at least one foreign judge
Speaker 1: on on the courter final Appeal on any given hearing.
Speaker 1: And China, on the other hand, has secret, closed door trials,
Speaker 1: no often no access to lawyers, forced confessions, televised confessions,
Speaker 1: and a system which is very poorly regarded globally and
Speaker 1: including in Hong Kong. And the public knows that. And
Speaker 1: the opinion poll that was done at the end of
Speaker 1: made by the University of Hong Kong found that by
Speaker 1: a ratio of four point two to one. Hong Kong
Speaker 1: people don't trust the mainland courts, and what we're seeing
Speaker 1: is is basically given that the Legislative Council here that
Speaker 1: makes the laws is now essentially a rubber stamp. The
Speaker 1: majority of its members are pro government people elected in
Speaker 1: often small so called functional constituencies. I call them dysfunctional
Speaker 1: constituencies because the things like licensed to banks and licensed
Speaker 1: insurers and so on. Often they don't bother having contested
Speaker 1: elections because it's only a small hundred and fifty ydd
Speaker 1: electorate of companies and they decide amongst themselves. But because
Speaker 1: of that rubber stamp thing, the only thing that stands
Speaker 1: between bad laws and unpopular laws and those being passed
Speaker 1: is the general public, where if the issue is big enough,
Speaker 1: they will come out and protest against it in massive numbers.
Speaker 1: So that was heartwarming in a way that that Hong
Speaker 1: Kong people still are able to do that and to
Speaker 1: come between the Chief Executive and her rubber stamp legislature
Speaker 1: and stop that proposal. At least for now. The bill
Speaker 1: is still in is in the Legislative Counsel. And one
Speaker 1: of the most appalling things about today's purported apology by
Speaker 1: the Chief Executive, which is what she basically said, I
Speaker 1: apologize for the fact that you didn't understand this bill,
Speaker 1: and I'm not withdrawing it. She wasn't really apologizing for
Speaker 1: the bill itself, and it's it's it's not really sincere
Speaker 1: if you're going to keep it hanging over people and
Speaker 1: just wait for it to expire when the Legislative Council
Speaker 1: term expires in July. So you know, in practice she
Speaker 1: won't if she hasn't already entered the terminal stages of
Speaker 1: her position. She won't commit political suicide by trying to
Speaker 1: bring it back in July before July twenty. But the
Speaker 1: right thing to have done to respond to public opinion
Speaker 1: would have been to withdraw it. Why can't she It's
Speaker 1: because she's also appointed by Beijing, and when you are
Speaker 1: an authoritarian iron fist regime, you must never admit that
Speaker 1: you've made a mistake. You have to be be seen
Speaker 1: as infallible. And and so Beijing won't let her withdraw
Speaker 1: the bill even she could, and I've been advocating that
Speaker 1: she withdraws it and refers the whole question of extradition
Speaker 1: and mutual legal assistance, which also could freeze people's money
Speaker 1: while they're being investigated. To refer all that to the
Speaker 1: Hong Kong Law Reform Commission, which would be able to
Speaker 1: apply their minds, including the Chief Justice of Hong Kong,
Speaker 1: the our highest judge and others, to actually focus on
Speaker 1: the issues and decide whether there's a need to reform
Speaker 1: these laws and if so, how can I ask a
Speaker 1: sort of a very big picture question when I when
Speaker 1: you see these images and these extraordinary protests essentially trying
Speaker 1: to push back the tide of greater integration and tracy
Speaker 1: noted in the intro, the sort of one country, two
Speaker 1: systems framework that's only scheduled to last until fifty years
Speaker 1: after the handoff, is the goal to maximize? Is the
Speaker 1: freedom of Hong Kong up until seven or is there
Speaker 1: a longer vision of hopefully maintaining some pressure and somehow
Speaker 1: after that year, still maintaining some sort of notion of separateness. Right, So,
Speaker 1: so the Joint Declaration and the Basic Law only says
Speaker 1: that there will be no change for the first fifty years.
Speaker 1: It doesn't say that there must be change after that,
Speaker 1: And this, of course will become an increasingly important question
Speaker 1: in many areas of the economy and society. As we
Speaker 1: get closer to two or four seven, we've got twenty
Speaker 1: eight years left, but I can imagine in about ten
Speaker 1: years time, with eighteen years to go, people will get
Speaker 1: quite nervous about things like mortgages and also simply about
Speaker 1: whether they want to after they graduate stay in Hong
Speaker 1: Kong to build their careers, will move overseas. And after all, if,
Speaker 1: for example, you want to be a lawyer, you'd like
Speaker 1: to know whether you're going to be practicing under the
Speaker 1: common law legal system that we've inherited from the British,
Speaker 1: or whether we'll be practicing in the Guangzho People's Intermediate
Speaker 1: Court under under mainly and law. And so if China
Speaker 1: has not substantially reformed on its own in the next
Speaker 1: ten years and started to open up into a pluralistic
Speaker 1: and democratic society, which I don't think is on the
Speaker 1: near term agenda, then people are going to get quite
Speaker 1: nervous here. I have to say, I'm an optimist. In
Speaker 1: the long run, I'll be eighty two in two o
Speaker 1: four seven. I hope I'm still here, and I think
Speaker 1: that there's there's no way that China can continue to
Speaker 1: deliver prosperity to its people, which they will demand without
Speaker 1: significant liberalization in terms of removing the various restrictions on
Speaker 1: on the movement of capital, on them, on the movement
Speaker 1: of people, on what they can read on the internet,
Speaker 1: and giving them some accountability at the ballot box as well.
Speaker 1: I just think that if you look at history at
Speaker 1: all experiments at central planning of large scale economies, they
Speaker 1: simply don't work. Whether it's outright communism as they tried
Speaker 1: from seventy nine or the current form of Marxism with
Speaker 1: Chinese characteristics as they call it, it simply doesn't deliver
Speaker 1: the prosperity because it assumes that someone at the top
Speaker 1: knows best for everything and allocates resources by feat Whether
Speaker 1: that reform process happened smoothly, which I hope it obviously
Speaker 1: hope it does, I hope there's some sort of Gorbachov
Speaker 1: type figure that emerges, or group of them that take
Speaker 1: China towards the sunlit up plans of capitalism, or whether
Speaker 1: we have to have an economic crisis big enough for
Speaker 1: the people in heart and and sudden enough for the
Speaker 1: people to wake up to this and take their own initiative.
Speaker 1: I don't know, because when you look at the surveillance
Speaker 1: tools available in the Internet era to to the government there,
Speaker 1: they have tools that no previous authoritarian regime has has had,
Speaker 1: at least until about ten years ago. They their facial recognition,
Speaker 1: the constant surveillance of everything you buy and wherever you
Speaker 1: are with the mobile phone and so on, so they
Speaker 1: can they can spot patterns of potential disturbance very quickly
Speaker 1: and try to stamp them out. So I don't know
Speaker 1: quite how that's going to pan out, but I hope
Speaker 1: I'm right that eventually, on way or the other, we'll
Speaker 1: get that reform, which case we won't be worrying any
Speaker 1: more about our freedoms in Hong Kong because they'll be
Speaker 1: the same freedoms that China will be enjoyed too. You
Speaker 1: mentioned that technological capability that China has at its disposal now,
Speaker 1: and we actually saw that on display when it came
Speaker 1: to how the Hong Kong protests were shown or I
Speaker 1: should say not shown on the mainland. So of course
Speaker 1: we had the usual censorship, you know, scenes of the
Speaker 1: protests on CNN and other international news networks were of
Speaker 1: course blacked out and censored. We also had particular words
Speaker 1: blocked on way boat. We had do you hear the
Speaker 1: people sing? The song from lay Miss h blocked on
Speaker 1: ten cents music streaming service when Winning the Poo was
Speaker 1: banned some time ago as well, of course, because it
Speaker 1: because cartoonists likened him to Zegon Ping. So I guess
Speaker 1: I'm curious how long can China really hold the visuals
Speaker 1: of an event as big as the Hong Kong protests
Speaker 1: at Bay Because, of course, as part of the liberalization
Speaker 1: that has been going on so far on the mainland,
Speaker 1: you do have more Chinese citizens who are traveling abroad,
Speaker 1: and you do have people who are able to get
Speaker 1: around the Great Firewall in one way or another. So
Speaker 1: are they fighting a losing battle on that front. I've
Speaker 1: been impressed at how how successful they've been at censoring
Speaker 1: the Internet in China. I didn't think twenty years ago
Speaker 1: they'd be able to do it, but they have. But
Speaker 1: you're right that since they are allowing their people to
Speaker 1: travel overseas in the tens of millions every year and
Speaker 1: thereby get exposure to foreign media and read about things,
Speaker 1: then the truth eventually starts to filter in. But you
Speaker 1: have to remember, though, that there's an awful lot of
Speaker 1: effective brainwashing going on within the Chinese system. You're you're
Speaker 1: you're brought up not to question the parties infallible judgment.
Speaker 1: So you start off with a well, just look at
Speaker 1: the Westwater message in they had this global financial crisis
Speaker 1: and then they elected this weird president who's a sort
Speaker 1: of reality TV guy, and you know, and then look
Speaker 1: at Brexit and look at all the euro crisis and
Speaker 1: surely the mainland you know, leaders are the Communist Party
Speaker 1: of China is better at this. They protected us from
Speaker 1: all of these things. Aren't we lucky to have them?
Speaker 1: So that's the kind of messaging that gets prominence when
Speaker 1: there isn't any effective alternative messaging coming from the outside
Speaker 1: into the Chinese Internet. But at the end of the day,
Speaker 1: I think that money talks louder, and people in people's lives,
Speaker 1: in their personal wallets, and so you know what in
Speaker 1: the end brings down authoritarian governments is not great ideals,
Speaker 1: but the price of bread effectively, and that's what started
Speaker 1: the Tunisian Spring. It was inflation and high unemployment. And
Speaker 1: I think that you'll you'll potentially see some sort of
Speaker 1: financial crisis that would that would trigger reform in China if,
Speaker 1: as I say, if the leaders don't start reforming on
Speaker 1: their own pretty quickly, pretty soon, because for a long
Speaker 1: time now, the quality of the GDP growth that you
Speaker 1: read about has been very poor. It's it's been building
Speaker 1: extra roads and airports and exhibition centers that aren't actually
Speaker 1: economic but keep people busy and generate GDP while you're
Speaker 1: doing it. The moment you stop with that, so called
Speaker 1: the Austrians economists been called broken windows, then suddenly you
Speaker 1: find you've got rather low quality of GDP because you
Speaker 1: haven't been given giving people the freedoms that they need
Speaker 1: to to make their own choices. And there's also been
Speaker 1: a huge credit bubble building up in the shadow banking
Speaker 1: system in China, which includes a lot of so called
Speaker 1: wealth management products which had basically repackaged poor quality loans
Speaker 1: solders investments through banks, and the government has got a
Speaker 1: sort of growing potential liability that even though they're not
Speaker 1: guaranteed by the banks, because they've been sold that way,
Speaker 1: and because the banks are ruined by the government, you
Speaker 1: may end up with a massive need to for people
Speaker 1: to swallow those losses or to bail out the banks
Speaker 1: and let them take those products onto their balance sheets.
Speaker 1: So there's a number of different ways that China could
Speaker 1: get into a financial mess of its own making. Not
Speaker 1: even beginning to think about what the US could do
Speaker 1: in the ongoing trade war, which I think could develop
Speaker 1: into a broader financial war. Then, so far it's all
Speaker 1: been about tariffs on imports from China. But what about
Speaker 1: the fact that at the same time as that America
Speaker 1: is quite rightly complaining that the Chinese government subsidizes a
Speaker 1: lot of its economy and distorts the allocation of capital. Well,
Speaker 1: guess what, a lot of American investors are financing the
Speaker 1: same government control companies by investing in things like Petro
Speaker 1: China and China Telecom and so on in Air China.
Speaker 1: And that all the big old economy stocks are listed
Speaker 1: in Hong Kong or even in New York and are
Speaker 1: invested by Americans. And it's possible that that could become
Speaker 1: the next The powers of the President, through the Office
Speaker 1: of Foreign Assets Control, could be weaponized against that by
Speaker 1: requiring US persons to divest themselves of those stocks. It
Speaker 1: has been tried against a Russian aluminium company called Russel,
Speaker 1: and it was very successful in terms of the devastation
Speaker 1: it calls their share price because the Treasury basically said
Speaker 1: that the controlling shareholder was too close to Vladimir Putin
Speaker 1: and that Americans must stop dealing with the company and
Speaker 1: sell their stock and bonds within three months. I think
Speaker 1: it was three months. In the end, the order was
Speaker 1: reversed after there was a change in the shareholding structure
Speaker 1: of of russ Sale and it was taken off the list.
Speaker 1: But it was quite devastating for that company, and it
Speaker 1: could be applied in a in a more broader way
Speaker 1: under the guise of protecting the US national security and
Speaker 1: the economy. Just to bring it back to the recent protests,
Speaker 1: you told me earlier this week that that you yourself
Speaker 1: had attended the protests. I'm just curious what did you
Speaker 1: think about them? What do you think about the atmosphere?
Speaker 1: Two million people on the street according to the organizer's
Speaker 1: estimate on on the most recent Sunday's March. What was
Speaker 1: remarkable to you about it? Would you observe? Well? It
Speaker 1: was it was damn hot humidity and thirty thirty two
Speaker 1: what would be about ninety something fahrenheit in American terms,
Speaker 1: And it took a long long time to make that walk.
Speaker 1: But you have to applaud the peaceful nature of Hong
Speaker 1: Kong protests generally speaking, and particularly on Sunday when the
Speaker 1: police were given orders to stay away, and you know,
Speaker 1: not a single shop window was broken. Some of the
Speaker 1: protesters at the end were cleaning up their own rubbish.
Speaker 1: It was very um, peaceful and and also heartwarming to
Speaker 1: see people of all ages and all professions, many of
Speaker 1: whom have never come out before and had their heads counted,
Speaker 1: all voices heard coming out saying enough is enough. And
Speaker 1: as long as they keep doing that has said many
Speaker 1: times the price of freedom is eternal vigilance. They will
Speaker 1: stand in the way of draconian laws um and hopefully
Speaker 1: hold Hong Kong together until China itself starts to become
Speaker 1: a more open and freer place. David Web it's been
Speaker 1: a pleasure talking to you. Thank you so much for
Speaker 1: coming on the show. Thanks for having me. Thanks David,
Speaker 1: that was great, So Joe, I hope that wasn't too
Speaker 1: Hong Kong centric for you, But I do think it
Speaker 1: gets to some very big developments for the global economy,
Speaker 1: one of which, of course, is what is China going
Speaker 1: to look like as it sort of develops its own
Speaker 1: economy and its own power, and it feels like there's
Speaker 1: this huge debate about how it could go either way
Speaker 1: at this point. You know, it could sort of double
Speaker 1: down on the authoritarianism, or it could, as David pointed out,
Speaker 1: maybe actually liberalized. Yeah. Well, first of all, there's no
Speaker 1: such thing as to Hong Kong for me, because you
Speaker 1: know how much I love Hong Kong and I wish
Speaker 1: I lived there, and I'm jealous that you live there,
Speaker 1: So that's never an issue. I thought it was interesting
Speaker 1: that David was an optimist, because I feel like the
Speaker 1: conventional wisdom on the direction that China is going and
Speaker 1: then ultimately the direction towards which Hong Kong will be dragged,
Speaker 1: most people would say, are far more pessimistic and only
Speaker 1: see the pace of authoritarianism accelerating and the surveillance state
Speaker 1: only getting deeper into people's lives. So I did think
Speaker 1: it was interesting that he actually had a moral optimistic
Speaker 1: view on it, although it didn't sound like as optimism
Speaker 1: was based on any trends other than the fact that
Speaker 1: the current trajectory would be ultimately unsustainable and collapse in
Speaker 1: some way, right and speaking of unsustainability, there was one
Speaker 1: other thing he mentioned, and you know, he didn't really
Speaker 1: frame it as a pessimistic thing, but I think it
Speaker 1: could be interpreted this way, and that's the notion of
Speaker 1: in order for Hong Kong to avoid having unfavorable laws
Speaker 1: passed through its local legislature, basically the people have to
Speaker 1: mount these massive protests every time because the legislative system
Speaker 1: itself isn't really up to the task anymore. You have
Speaker 1: a basically a biased set of lawmakers and potentially well,
Speaker 1: I think they ended the ability to filibuster a while ago,
Speaker 1: so it's it's really up to the general population to
Speaker 1: um stop what they see as as bad or unfavorable legislature.
Speaker 1: And I wonder how realistic is it that people are
Speaker 1: going to be marching every Sunday. Yeah, it does seem unrealistic.
Speaker 1: It's interesting because, like some of the Hong Kong experts
Speaker 1: that I follow on Twitter, we're sort of skeptical that
Speaker 1: the people of of Hong Kong still had the appetite
Speaker 1: to come out and protest like this. And I guess
Speaker 1: there had been a view And again I'm speaking as
Speaker 1: like a real outsider tourist here who has no real information,
Speaker 1: But I guess there had been some question of like, well,
Speaker 1: do Hong Kong citizens really want to do what it
Speaker 1: takes to preserve their existing freedoms and fight for them
Speaker 1: or are they resigned to look eventually it's all gonna
Speaker 1: be one country, one system anyway. And so you know,
Speaker 1: it's still as you said, it's re mains to be clear. Well, well,
Speaker 1: people continual go out on the streets every time something
Speaker 1: that impinions on their freedoms pops up in the just lature.
Speaker 1: At least it's a possibility. I mean, it's hard to replicate,
Speaker 1: but that will be the uh, that will be an
Speaker 1: interesting thing to watch. Yeah, And in the meantime, there
Speaker 1: is this oddity that Hong Kong sort of continues to
Speaker 1: operate as normal, even though, as David mentioned, there's twenty
Speaker 1: eight years to go until now the deadline for the
Speaker 1: one country, two systems idea. But you can still go
Speaker 1: into a bank and get a thirty year mortgage, And
Speaker 1: of course people are still signing on to long term
Speaker 1: business contracts, so I guess there are explicit assumptions embedded
Speaker 1: into those types of contracts. So it's interesting, Yeah, it'll
Speaker 1: be really interesting, and uh, let's definitely record another episode
Speaker 1: in ten years from now when when there's only eighteen least.
Speaker 1: I thought you're gonna say in well, let's do that
Speaker 1: too obviously, Yeah, okay, but you know, we could do
Speaker 1: one every five or ten years as it gets closer
Speaker 1: to see if some of these financial instruments, if the
Speaker 1: risk that emerge around the well, wonder are there any
Speaker 1: like volatility curves that go out that far where we
Speaker 1: can start to see, Uh, that'll be interesting, right, a
Speaker 1: volatility event. Yeah, really long dated options on the hang
Speaker 1: saying stock index to see if they start reflecting risks
Speaker 1: around anyway, I'll take a look. I'll see if those
Speaker 1: are available for you. Okay. This has been another episode
Speaker 1: of the Odd Lodge podcast. I'm Joe Wisenthal. You can
Speaker 1: follow me on Twitter at the Stalwart and I'm Tracy Alloway.
Speaker 1: You can follow me on Twitter at Tracy Alloway. You
Speaker 1: can also follow David web He's at web with two
Speaker 1: Bees h K. His website is web dash site again
Speaker 1: Web with two Bees. You can find all his research there.
Speaker 1: And a big thanks to my Bloomberg colleague Benjamin Robertson
Speaker 1: for helping us organize this particular interview. You can follow
Speaker 1: Benjamin over at b M M Robertson, and be sure
Speaker 1: to follow our producer on Twitter, Laura Carlson. She's at
Speaker 1: Laura M. Carlson. And the Bloomberg Head of podcast, Francesco
Speaker 1: Levy at Francesca Today And check out the new home
Speaker 1: of Bloomberg Podcast on Twitter at the handle at podcasts.
Speaker 1: Thanks for listening