Of China, Brexit, and Consumption Downgrade

Britain China

“Consumption downgrade” has been a term bandied around the China-watching community for over a year now. The idea is that slowing income growth has begun to restrict middle class spending, whether it be on luxuries or the day-to-day. Analysts point to disappointing results from JD.com and NIO, the growth of lower-class commerce platforms such as Pinduoduo and VIP.com, and even the rise of social media such as Toutiao in support of this assertion. The anecdotal reporting, accurate as ever, interprets this as households actively downgrading: yesterday buying a Mercedes, tomorrow buying a Geely.

Yet I would posit a different theory. Whilst around the edges, some downgrade of consumption within individual households may hold true, by and large the evidence points the other way: luxury car sales are forecast to grow at a healthy clip of 9%, for instance, which whilst a slower than the previous decade (the market is clearly maturing) is hardly indicative of like-for-like belt-tightening. Rather, what we are seeing is a stratification of Chinese development, where the likes of Pinduoduo actually serve not the middle classes of today, but the newly emerging consumers of lower-tier cities – “the other 50%” as it were. And here, there is genuinely noteworthy, namely that it now appears many of these newer middle classes may never reach the same level of affluence as the pioneers in Shanghai and Beijing (sketched out theoretically below):

Consumption downgrade

Consequently it is the weighted average of the total incremental growth – in other words, of all the new consumption coming online – which is getting lower. Individuals however are still spending in-line with the past, and even still upgrading. The fact that lower-tier cities may not emulate the top cities is of course some cause for concern – but it is hardly unusual by OECD standards. It merely means that whilst luxury still has a market, mass premium and even mass common have more exciting times ahead. This is important, since is supports signs that Chinese growth remains surprisingly robust in the face of recent headwinds, and in particular that nominal GDP (at this stage in the cycle a far more relevant indicator than real GDP) is stubbornly consistent at 8%+.

On the other hand, “consumption downgrade” has been alive and well in OECD economies for some time now. One need simply look at the emergence of the sharing economy to see it in action: Uber, Airbnb and WeWork are all examples of capacity-sharing which reflect the fact that today’s younger people will never have what their parents had. However trendily dressed up as a “lifestyle” choice, it is not; if given the option, the majority of Uber users would rather have their own car; Airbnb customers would rather be able to afford a hotel; and WeWork tenants rather the funding needed to have their own office. Nobody has chosen to be reduced to this kind of life, although they are putting a brave face on it. It gave rise, in part, to Trump; it gave rise to Brexit; and it is a major driving force for the economy and innovation in the West today:

Social mobility

Source: The Fading American Dream: Trends in Absolute Income Mobility Since 1940 (Opportunity Insights, December 2016)

Which brings us to Brexit. Having long been a Remainer, I see Brexit being a self-inflected economy wound which is less than ideal. However, I have also always maintained that Brexit is a political debate, not an economic one; and it would and should be won and lost on the political questions and not on economic. On political grounds too, I am a Remainer. Nonetheless, it would be remiss not to see the opportunities that Brexit actually does present, not in terms of the fantasistic national resurgence posited by some on the fringes of the Conservative Party – let us call them the Liam Fox wing – but rather in acting as a test bed for innovation in consumption downgrade.

Because ultimately Brexit is a localized process which is only bringing forward long-term secular trends of declining middle-class income which are happening anyway, and which will be increasingly and universally visible across the OECD in the coming years. Britain will merely be ahead of its time. Therefore, any innovations that the British economy produces through this would be well-positioned for the broader decline across adjacent markets, ready to be rolled-out into the rest of Europe and America just as others too begin to experience their own downturns.

McKinsey consumption downgrade

Source: Poorer than their parents? A new perspective on income inequality (McKinsey, July 2016)

What will these innovations be? If I could tell you, I would have a substantially larger bank account; but my own sense is that it lies somewhere in areas such as consumer financing and potentially further changes in shared services. The irony is that the consumption curve for Gen Z will resemble something akin to a Giffen curve. For all the debate between ‘boomers on the one hand, claiming that the kids are “wasting their money on iPhones”, and young people on the other, lamenting that they will never be able to afford a home, the truth lies somewhere in between. The more that large capital investments such as housing feel unreachable, the more people will spend their remaining income on frivolous goods. The current younger generation can indeed be both poorer and more prone to disposable consumption at the same time – something I will for now label the Paradox of Chic Poverty (again, helpfully sketched out below):

Poor get poorer

In short, consumption downgrade is not what it seems (China), and at the same time has been with us for some time (Uber / WeWork / Airbnb) whilst potentially presenting a great opportunity (Brexit). Three cheers, then, for the rich getting richer!

Daily News – Hong Kong protests to emulate the success of King Cnut

Joshua Cnut

In the latest bid for foreign recognition, protestors in the troubled city of Hong Kong have turned to 11th century monarch King Cnut. Organisers hope that Cnut’s influence may bring the movement credibility, and have rebuffed suggestions that the Norwegian’s policy of holding back the tide met with mixed success.

“Like King Cnut, these protests have supernatural powers that show we can in fact hold back history”, said a visibly emotional Joshua Wong, who has been courageously leading the protests from The Front Line, the name of a yacht currently anchored off Bermuda.

“Besides, if this all goes nowhere, just like Cnut some of us will also be able to sail to sea and avoid the consequences.” Speaking via Skype, Wong noted that he could “practically smell the grapeshot.”

“I have been assured that police brutality on the ground closely resembles what I can see online”, although he went on to note that he may have been confusing news reports with back episodes of Peaky Blinders which he has been catching up on.

Asked about Wong’s likeness to the long-dead Norwegian, one local store owner in Causeway Bay suggested that Wong may have chosen ‘Cnut’ only due to a misspelling. “They’ve burned down my only way home now so I guess I’m going to have to swim across to the New Territories. But that’s what real freedom is, right?” another said.

Unconfirmed reports suggest that the protest movement is also taking advice from Ned Ludd.

On the big picture, the Hong Kong protestors have got it wrong

Even an effective government could not achieve what many assume would be the paradigm of a future in offshoring

HK protests

The protests in Hong Kong have had quite a few different narratives – the extradition treaty, democracy, police violence. Amongst one resolute strand of this riotous assembly, however, lies the optimistic idea that with a few tweaks here and redistribution there, the fundamental economic model of the city is a sustainable one. In that context, many protestors feel that it should be left well alone to prosper with its trade and rule of law. The only problem is, this is not true for at least two reasons, neither of them immediately do to with China.

The first is, as I have previously expounded upon, the changing shape of regional trade and the underlying end of entrepôts as they have historically existed. The vast majority of such centres’ lifeblood comes from a structure of trade which only exists in broadly imperial contexts. Nonetheless, even given that change, the world still sustains Bermuda, and Luxembourg, and Switzerland. The second point, therefore, is that Hong Kong could not emulate any of those examples, because ultimately it has too many people, and they are too poor.

To demonstrate the structural limitations of Hong Kong’s economic development, I have contrasted several key metrics against a selection of jurisdictions who represent, to a greater or lesser extent, paradigms of what an independent trade-based Hong Kong is supposed to look like. For this exercise, I look at Singapore, its long-standing regional counterpart which faces its own problems; three European examples of various sizes (Switzerland, Luxembourg and Malta); and finally the true offshore example of Bermuda although this has limited statistics.

One basic point is the city-state’s size: unlike other “offshore centres”, the population is of the same scale as Singapore and Switzerland. We will look at per capita numbers below but it should be remembered that absolute population size brings its own difficulties, not least in terms of proportionality between the offshore centre in question vs the large economies they seek to serve. Bluntly put, OECD economies can ignore Luxembourg, Malta and Bermuda as competitive threats; Switzerland, Singapore and Hong Kong they will keep a suspicious eye on – and have been closing in on for decades.

Total population (m)

HK chart 1

Population density (‘000 people per sq km)

HK chart 5

Source: CIA Factbook

So then onto the per capita numbers. We know that Hong Kong and Singapore are by far more densely populated than other “offshoring centres”. This has an inevitable knock-on effect of downward pressure on wealth (not least property) – median asset ownership per capita is significantly lower in Hong Kong and Singapore than Switzerland and Luxembourg, and only on a par with somewhere like Malta.

Median assets per capita (US$’000)

HK chart 2

Source: Credit Suisse Global Wealth Report 2018

Why does this matter? Well, there are two further calculations that arise from these figures. The first is the population size to asset base, which tells us whether a given country might be considered relatively over-populated. By this score, Hong Kong fares poorly, at more than double that of Switzerland and almost double Bermuda and Luxembourg. The wealth base of a country represents all the things it has accumulated over time and gives an indication of the future – ranging from capital assets such as production capability to softer things such as IP and skills. The higher this ratio, the more people there are dependent on a flimsy asset base and the more susceptible it is to the vagaries of neighbouring economies.

Ratio of population to asset base

HK chart 3

The second calculation is that of inequality. For this, I use my proprietary “Pang Coefficient” instead of the rather dated Gini numbers, where as a rough rule of thumb I look at the ratio of mean to median wealth per capita – the greater that ratio, the greater the inequality. (The antiquated use of Gini, which is based on incomes and therefore ever less relevant, is the subject of another discussion). In this, Hong Kong again stands out, being notably higher even than Singapore which is partly to do with Singaporean policy of public housing. And whereas Malta is even more over-populated than Hong Kong, this is mitigated somewhat by its equal spread of wealth.

Inequality as measured by ratio of mean to median asset distribution (the higher, the greater the inequality)

HK chart 4

When we put this together, we begin to see a picture of where Hong Kong lies in this landscape of offshore centres. It is the only one of these jurisdictions which suffers the double-whammy of being both over-populated and highly unequal – and the unrest it is encountering today is the result:

HK chart - full

Notes: inequality axis based on Pang Coefficient score +/- the average for the group; over-population score is based on population-to-asset ratios +/- the average for the group; size of bubble indicates total asset base.

Hong Kong did not exist two hundred years ago; and it will not exist in two hundred years from now – at least, not in the way it has thus far. The Asian entrepots are a curiosity of time and place, as a rent-seeking tolling gateway to an imperial trade flow which had fat margins during that structure. Those fat times led to an abnormally swollen population which, accepting inequality, were able to be live off the crumbs of the China through-trade. As those imperial structures receded, the margins have become thinner also, meaning that the number of people which can be sustained from that base will have to decrease.

It has been well-noted that house pricing is the most prominent driver of the current discontent – I have previously written on the “aspiration deficit” for young people in Hong Kong and Taiwan due to their comparative uselessness within the modern economy. But the reality is that even solving this through redistribution will only alleviate the problems for a while, not long term. Furthermore, the reliance on property rather than capital assets for wealth within the Hong Kong economy (it just does not and cannot “make” anything) severely limits the efficacy of this. Unlike redistributing the “means of production”, redistributing land is only going to reduce the value of the land leading to a division of misery all round. Any gains made in equality would be more than offset by a reduced asset base.

In other words, even a good, effective, popular, well-meaning government of an independent Hong Kong would not actually resolve the underlying issues from which the SAR is suffering. Bermuda does exist – because it is tiny and serves a niche that Hong Kong is far too big for now. Switzerland makes stuff – Hong Kong does not. There is nothing Carrie Lam or her successors can do about the diminishing role of entrepot states within the multi-polar post-colonial regional and world context. And here we face the other problem of Hong Kong: parochialism.

Those fat-margined imperial times also created a whole rent-seeking mentality amongst a (largely immigrant) population who are ill-equipped for the post-imperial age. The youth of Hong Kong are notably unadventurous and unenterprising; if they were offered steady civil service jobs which could lead to buying a small apartment, most would take it. Despite having the world’s third largest financial centre and the world’s second largest market on their doorstep, there are few startups of any scale and the lack of innovation is astonishing. Whereas 2m of Taiwan’s 13.5m working population is abroad, mostly in China, only a fraction of the same can be said of HK. Furthermore, overseas Taiwanese inhabit many Mainland startups and businesses in Beijing and Shanghai; I have yet to meet a single Honkie in the same position. Hong Kong was adventurous in its birth but is not as it approaches its death.

The travails of Cathay Pacific demonstrate in microcosm that Hong Kong’s destiny simply is not in its own hands; being a better airline does not save Cathay from the fact that people do not need to fly through Hong Kong to reach their destination. Furthermore, many wealthier Chinese actually prefer Chinese airlines, strange as that might seem, because ultimately mature markets will have their own localised preferences, and the outsider – however international they pitch themselves as – will never provide this as well. Of course, Hong Kong exercises a disproportionate position within the sentiment and consciousness of foreigners, because like locals, those foreigners need to believe that China would continue to need Hong Kong. If they do not, the role of foreigners and their comfortable if tenuous existence disappears also.

Arguably though, the end of that world was symbolised as long as ten years ago by the closure of the Far Eastern Economic Review, a journal valiantly propping up the viewpoints and pretences of the post-colonial 1.0 model. Looking forward, the people of Hong Kong will have to move on – either, optimistically into the GBA where house pricing and other pressures will be alleviated; or else through emigration or even lower birth rates. The positive version of this story is one where younger people embrace the opportunities in China and start making something of it; but having now lived and worked here, I would not hold my breath.

Why the Hong Kong passport is probably better than China, the US or Britain


Various sets of passport rankings have recently come to my attention, for the most part offered by private wealth management firms discussing how best to migrate for asset protection. Looking at this carefully though reveals a great deal of lazy thinking which mostly show rankings like the following:

Henley rankings

Source: Atlas & Boots 2019

This kind of assessment has become confused in recent years given the slow evolution from full visas to visas-on-arrival and electronic visas, as the above table demonstrates. For me, a visa-on-arrival satisfies the “get on a plane right now” rule, whereas electronic visas, whilst making life much easier, does not. Even without these nuances however, it should be obvious that the major problem with this simplistic ranking is that not all countries are of equal attraction, and the fact that one has visa-free access to Belize probably should not be considered on the same level as visa-free access to the European Union.

To combat this problem, a few more useful rankings have been created, looking at exposure to GDP and exposure to population for instance (a full overview of the various rankings can be found here). Both are useful in their way, but neither tell the full story. Of these various systems though, my preferred one is that created by Simon Black on his investment and thought blog The Sovereign Man (a great name, I must say) which basically uses a formula of 50% GDP and 50% “attractiveness” based on various things like UNESCO World Heritage sites and so on. This produces a rather different ranking and one which makes a lot more intuitive sense:

Sov Man passport rankings

The heart of the matter, as can be seen in the central columns above, really revolves around who has access to both the US and China, of which there are very few. It is pretty clear that of non-tinpot countries, Japan and Singapore have the best passports by some distance and reflects the two countries’ substantial efforts to build the access network over the last few decades. Given their economic model, this does merit praise for the foresight and dedication – Japanese people are restricted only from Russia and some parts of the Middle East and Africa, with Brazil needing an e-visa. Altogether a very generous deal.

Japanese passport access as of 2018

Japan passport

Source: The Sovereign Man

Yet there is still an additional angle I would like to look at, which returns us to the “economic opportunities” component of such an analysis. Currently, a GDP-based ranking typically favours OECD passports since they have access to the US, the EU and Japan. But the problem is, this reflects the past, not the future: if you were a businessman, investor or entrepreneur today the historical economic clout of individual countries is not the important metric; rather it is the areas of future growth. To this end, I wanted to look at where global growth is coming from and the best proxy I have devised is that of the 5-year forward incremental GDP additions, as forecast by the IMF. In other words, how much more GDP is being added by each country over the next five years, in dollar terms. Furthermore, I also applied the IMF’s PPP adjustment to these, which as discussed previously on this blog, is I think a meaningful if imperfect way of looking at spending power. This is again relevant from the perspective of someone trying to understand where real economic opportunity might lie.

Therefore when looking at this “economic opportunity access”, a completely different picture begins to emerge. I do not have the resources to put all the numbers through for every nationality but below take a small sample to give an indication of my point:

Passport rankings

Note: 5-year forward adjusted for PPP; e-visas (eg India) are weighted at 50% access

I have looked at just four passports (China and the US, Hong Kong and the UK); and looked at the access to the ten largest countries of future opportunity. In this analysis, Japan and Singapore would of course again come out on top since they have access to almost every country on the list. China and the US, as the largest economies, are included merely for benchmarking. But looking at third party countries one can see that Hong Kong maintains quite an advantage. The UK for instance represents most of those countries in the OECD which “side” with the US; whilst Hong Kong represents many of those who do not. Based on the top ten future economies, a Hong Kong passport holder has visa-free access to an additional US$7 trillion of GDP growth in the next five years compared to the UK. In many ways, it is positioned for the future like few others.

I will finish with the caveat about all this offered by Simon Black, and which applies to my analysis also:

The only goal behind The Sovereign Man Global Passport Ranking is to assess each passport’s quality as a travel document. We did not attempt to measure the merits of being a citizen in any country. This means we didn’t account for any country’s political stability, wealth of its citizens, freedom of press and speech, ease of doing business, or any other factors. And we didn’t account for the ability to move to another country with the passport. For example, Portugal’s passport didn’t get any additional points because Portuguese citizens can freely move to any other European Union country such as France or Germany. The goal of this project was to assess each passport’s quality as a travel document only.

Nonetheless, even with this caution I believe it is an important way to look at this passport analysis over which so many fight so fiercely. From a business perspective, not all economic access is the same.

Donald Trump and the right side of history

Trump TPP

The Guardian recently caused a splash by publishing a piece discussing Donald Trump’s remarkable resilience in the polls despite the near universal opprobrium being heaped on him by the media. It had some sage words for why media hostility was actually hardening Trump support, as well as pointing out that ultimately, Trump is giving most Republicans what they want. Both are true, but the piece also omits one major explanation for the stubbornness of the numbers; after all, 87% of Republicans support Trump, but that is far too little to explain 43% approval numbers. Instead, it is the support of 36% of “Independents” and even more surprising 9% of Democrats which he continues to command (both numbers which have increased markedly during the first half of 2018), which make up the difference:

Presidential Approval Ratings between Q1 and Q2 of 2018

Trump polling

Source: Gallup

In the climate of public discourse, his avowed critics find it incomprehensible to imagine who these non-Republicans might be. But yet it is these independents and Democrats who make up the group supposedly so “racist” that they voted twice for Obama before voting for Trump. Why, as the Economist asks, will the Democrats “struggle to win back Obama-Trump voters”?

The biggest problem for Trump’s detractors is the fact that he is, on some level, on “the right side of history” at a moment when hardly anyone else in public life is. By this, I mean that on some of the largest issues weighing on the public today such as trade, immigration and even international institutions, it is Trump who is pushing at an open door, not his opponents. We can be pretty certain for instance that whoever wins the next few elections will not be doing so on a wave of championing more free trade, more open immigration or more faith in organisations such as the UN, NATO, the IMF or the WTO. Instead, the winners are likely to be those who are talking Trump’s language, even if they are not using his vocabulary.

No doubt this idea will cause outcry amongst my liberal friends, but let us consider the evidence. The first such exhibits are the underlying macro themes. For instance, UBS released a note in 2016 charting the recent decline of globalization as a very natural part of the development cycle, and why also there are structural tensions being created in the current situation:

UBS - globalisation

The globalization cycle typically sees high growth in trade matching high levels of growth, followed by periods when trade and growth decline. These are the moments when societies spend a moment to draw their breath and “catch up” to the excessive changes that have been wrought. In an earlier blog I noted the limitations of explaining away trade deficits with capital surpluses for instance, as some commentators quite unashamedly continue to do. The reality is that those who gain from the latter are not the same who lose out from the former, resulting in a political and social tension unaccounted for in scholarship which is postgrad IQ but high school EQ.

Additionally, there is the element of inequality over growth distribution. In the UBS analysis, we can see that despite a substantial slowdown in growth, exports remain at an unrelentingly high percentage of GDP resulting in limited social recalibration. Furthermore, the growth even during the previous wave of globalisation mainly benefited the non-West as this recent HBR study shows:

HBR - gloablisation

This is supported from a different angle by HSBC’s analysis of which countries have gained in which era of the recent past:

HSBC - globalisation

Source: HSBC presentation, January 2017 (not available online)

In broad terms therefore, there is such a thing as “too much trade” and its corollary “too much freedom of movement” (aka immigration). For all these reasons, from the perspective of the American voter, the “right side of history” is the side which will make these changes.

The second piece of evidence for Trump being on the “right side of history” is the surprising consensus for change in these areas. The China “trade war” – an irresponsibly used term if ever there were one – has seen much fear and anguish in the media (very few of whom understand even the basics of trade economics) but actually commands widespread bipartisan support in Congress and has done for some time. The same applies to pulling the plug on TPP and questioning NAFTA – both positions that have long animated the party that produced Bernie Sanders, Dennis Kucinich and Howard Dean. Some determined anti-Trumpers of the Left have now painted themselves into the absurd position of defending the free trade of the WTO, when just a few years ago they were its greatest opponents. On this, they have a credibility problem if nothing else.

But it is not just trade. On immigration, the Democrats are caught between arguing against Trump’s policies even whilst occasionally defending the fact that Obama deported more illegal immigrants than any other president. The reason he did this was popular support for the general principle that borders mean borders. And even with regards international institutions, it has long been understood that many are not working for the US. Obama called his NATO allies “free riders” as recently as 2016, and abandoned the Quadrilateral and G7 to try and reach an agreement in Copenhagen in 2010 much to their anger; meanwhile George W Bush spent the best part of two terms criticizing the WTO and finally abandoned the Doha Round. Clearly, no-one thought these institutions were working well or serving best American interests.

Yet strangely the Democrats have done almost nothing about this, and have found no real successor to Sanders, the only candidate from their side who talked about this. Sanders’ various successors – whether Liz Warren or the newly crowned Alexandria Ocasio-Cortez, have surprisingly little to say on any of these themes other than wanting to abolish ICE. Instead they have left the field to Trump who therefore feels (to the average voter) more like someone who is looking forwards, not backwards, about the world we live in. Where a politician stands on that nexus of trade, immigration and institutions has become a defining and almost apolitical issue; once you strip that away, you are only left with the usual rancorous debates on gun control and whether to install transgender toilets. Those arguments though, pale into insignificance against the background of how to remedy (rightly or wrongly) median wage stagnation. Democrats and Republicans are navel-gazing whilst Trump is allowed to speak unhindered to large swathes of the nation that voted for him in 2016. At the moment, he owns that space even if his methods seem clumsy – as former Australian Prime Minister Kevin Rudd recently said, Trump has been “strategically comforting but tactically terrifying”.

(As an aside, I would point out that the liberal desire to cast Trump as some sort of “reactionary” does not ring true either. I do not believe most of the public actually see him as being particularly anti-gay or anti-abortion for instance. Instead, one of his defining moments on the campaign trail was the highly pragmatic response to the transgender toilets issue, saying they should use whichever one they wanted but business could not pay for new facilities. Mostly, he just does not care. Sure, he is not actively helpful to liberal causes but he is hardly aiming to contain them. Remember, too, that in the Republican primaries almost every sort of more extreme candidate ran: states’ rights fundamentalists, religious fanatics, neo-conservatives and Koch-ite free traders. Trump was none of these things and triangulated quite effectively between them all.)

Of course much of the support for Trump remains cultural, and on what is sustaining this one need look no further than the exceptional piece written by Joan C Williams in the days immediately following the 2016 election. It remains the best depiction of that amalgam of economic, cultural and social thought which passes for “what’s best for my family” in many voters’ minds:

One little-known element of that gap is that the white working class (WWC) resents professionals but admires the rich. Class migrants (white-collar professionals born to blue-collar families) report that “professional people were generally suspect” and that managers are college kids “who don’t know shit about how to do anything but are full of ideas about how I have to do my job,” said Alfred Lubrano in Limbo. Barbara Ehrenreich recalled in 1990 that her blue-collar dad “could not say the word doctor without the virtual prefix quack. Lawyers were shysters…and professors were without exception phonies.” Annette Lareau found tremendous resentment against teachers, who were perceived as condescending and unhelpful.

Michèle Lamont, in The Dignity of Working Men, also found resentment of professionals — but not of the rich. “[I] can’t knock anyone for succeeding,” a laborer told her. “There’s a lot of people out there who are wealthy and I’m sure they worked darned hard for every cent they have,” chimed in a receiving clerk. Why the difference? For one thing, most blue-collar workers have little direct contact with the rich outside of Lifestyles of the Rich and Famous. But professionals order them around every day. The dream is not to become upper-middle-class, with its different food, family, and friendship patterns; the dream is to live in your own class milieu, where you feel comfortable — just with more money. “The main thing is to be independent and give your own orders and not have to take them from anybody else,” a machine operator told Lamont. Owning one’s own business — that’s the goal. That’s another part of Trump’s appeal.

Hillary Clinton, by contrast, epitomizes the dorky arrogance and smugness of the professional elite.

This is a major part of the real world, and Trump has no competitors here. It has led, as the Economist lamented well before Trump arrived on the scene, to “the return of history”. Skillful as Trump is, he did not create these issues or the popular sentiment driving the polls; years of poor governance did.

The fact is that none of these things – free trade, more multiculturalism, faith in institutions – are going to be more popular in five years time than today. In the areas of policy most commonly associated with Trump, there is a near consensus amongst the population but yet he alone is telling the story. The Democrats are therefore reduced to hoping for a candidate to come along that will articulate Trump’s message better than Trump. That may happen; but it’s an audacious hope. In the meantime, whisper it: whilst the Democrats and Republicans are wrangling over tax cuts and repealing Obamacare, it is Trump who is on the right side of history. For now, anyway.

Taiwan’s spiral of economic and political decline


My attention was drawn to this piece, detailing a new book – Unfinished Miracle: Taiwan’s Economy and Society in Transition – which feels like it could be quite important. Whilst I await the final version, I nonetheless would offer a few thoughts on Taiwan, and not least its asymmetric relationship with China.

Few states are as substantially bound to and distorted by a single other large, connected country as Taiwan is by China (for the record, I do not acknowledge Taiwan as a sovereign nation but will for the purposes of this blog post refer to it in the short hand). The only other examples which spring immediately to mind are the relationships between the US and Britain, and between Brazil and Portugal – and both of those are largely historical cases. In each instance, the existence of the larger and younger frontier came to capture the economic imagination of the wealthier, older land – such that in many cases there was a disproportionate focus on these opportunities at the expense of other potentially more profitable ones.

Taiwan’s love-hate relationship with the Mainland along these same lines appears to be the heart of the thesis offered in the new book. In particular, the writers detail the “three-way trade” in which Taiwanese companies operate an export model using Chinese assets rather than domestic Taiwanese ones, creating employment and generating returns in China rather than at “home”:

One can see from employment figures that Taiwanese enterprises have created far more jobs overseas than in Taiwan. The top 500 companies employ about 2.5 million people abroad (mostly in China) but only 1.5 million people at home. According to estimates, for every 29 people these companies employ in China, they employ one less person in Taiwan.

Not every point makes sense to me. For instance the authors start off with the matter of SMEs accounting for a declining proportion of direct exports – which may well be true but I will have to wait for the book to see why it is relevant. After all any economy, as it develops and consolidates along the value chain, should see local export champions aggregate value so that a few higher end entities become the point of export, rather than SMEs serving as offshore suppliers to a foreign aggregator.


But the issue of how and where Taiwanese companies are making money is of great consequence. If the article is correct, Taiwanese companies are struggling to improve their gross margins despite moving their workforce into the PRC. This is clearly an issue about where they sit on the value chain. But there is another, even more gigantic elephant looming in the room: Taiwan is becoming nothing more than a remittance economy barely differing from the Philippines.


Consider that an estimated two million Taiwanese live abroad – one million in China alone (and half a million just in the Shanghai area). And these are not the old and invalid – they are the young, the brightest, the entrepreneurial two million out of a total workforce of only 11.8m people. Those that can, leave; those that can’t, remain. The social and cultural disjuncture between the diaspora and those staying at home, where graduate salaries are now lower than comparable roles in Shanghai or Beijing, is increasingly stark.

Furthermore, whilst domestic salaries are stagnating, business engaged in the offshore model discussed in this paper (“SMEs that become big companies in China”) are making huge returns, and often repatriating large amounts as a consequence. The earnings made from Chinese exports is leading to a huge asset bubble, particularly in property prices. Those same left-behind graduates are therefore experiencing not only depressed wages, but increasingly unaffordable housing. Even Chinese tourism is driving up the cost of living. The ongoing polarization of Taiwanese politics has its roots in this dichotomy. It is a perfect storm into which the DPP and the Sunflower Movement have emerged, but without any noticeable plan and only trite promises.

Political unrest is an outcome of the country’s inevitable economic model – inevitable because of China’s clever strategy of stymying Taiwanese attempts to trade elsewhere; but giving privileged access to China itself. This integration by stealth has paid huge dividends in terms of making the Taiwanese understand which side their bread is buttered. And it has led to two tangential outcomes – but only one is positive.

First, Taiwan has become a major centre for RMB internationalization. Much of the corporate earnings on the Mainland end up flooding back into Taiwan in its original currency. The island province therefore already constitutes the world’s second largest offshore RMB pool after Hong Kong (which occupies its leadership position for other reasons). Ordinary people are already getting used to RMB banking and wealth products on a day-to-day level, whilst corporates are beginning to issue RMB Formosa bonds. Mainland China is a fact of life for many people, accounting for the relative prima facie ambivalence towards independence.

Secondly and more worryingly, left-behind Taiwan has become increasingly parochial, with a poverty of means being matched by a poverty of ambition. Indeed the Taiwanese even have a term for this, the monstrous concept of 小確幸 which tells them that “good enough is good enough”, the ultimate expression of a “small country” mentality. Fewer and fewer overseas voters – “those that can” – bother to return for elections, especially in midterms, leading to legislative gridlock. And the media, who are left to focus on “those that can’t”, enter a downward spiral of navel-gazing such that news is more akin to a parish newsletter than real journalism.*

All this makes it far more problematic either for the KMT or any “One China” platform to succeed; and easier for peddlers of cheap myths for independence. In this sense, the Chinese strategy of binding Taiwan close may have the unexpected effect of creating a more troublesome rump population who have so little that they also have nothing to lose.

Taiwan’s economic decline is something of a tragedy. Of the four Tigers, its comparative decline is the most visual: Taipei looks like a city that simply stopped developing in c. 1990. Yet for many of us, it is a hugely romantic – and romanticized – version of much that is good about China. Unless someone can come up with a plan of action that captures the essence of all this, the island will continue slipping into a sea of irrelevance, regardless of any formal takeover by the PRC. That will be a situation where everyone is a loser.


* My own speculative thesis is that Taiwan, despite being very educated, has a lower per capita consumption of international quality media such as the Financial Times, the Economist or the Wall Street Journal than other equally non Anglophone societies such as Japan or Korea, or China.

A currency by any other name ….

Crypto currencies

With all the traction that crypto-currencies have been gaining in the media, it would be rude for me not to weigh in. One observation I would make is that since even my cousin has been invited to speak as an expert on the subject, we can probably safely assume that it is a bubble of the highest order – as alluded to by Charles Schwab in their recent analysis of similar phenomenon.


Source: Charles Schwab & Co.

On a more serious note however, I remain skeptical mainly because Bitcoin, Ethereum and the rest cannot fulfil one of the three primary functions of money. Yes, they can be used as a medium of exchange, and already are. Yes, I could see a point at which they could become a unit of account. But there is currently no pathway to being a store of value other than the value confidence ascribes to it. This is because it has no central bank or a state to back it up.

Proponents of “cryptos” like to mock conventional money by labelling them “fiat” currencies – in other words, money which has artificial value only on the orders of the government issuing them. “Look,” some gleefully point out, “most money today is not even backed by physical assets such as gold!” By doing so, they miss the point on two levels. First, the very purpose of money is to be an instrument of the state through its national treasury or central bank. In this resides the stability of the economy and society at all levels. Secondly, therefore, the official backing of recognisable assets such as gold is helpful but ultimately irrelevant. A functional government has the resources of an entire country at its disposal, which is why it has the power to issue, or at least back, legal tender in the first place.

At the heart of this lies a necessary understanding of the concept and role of “recourse”. In 2013 I wrote a paper on the why the dollar, despite pessimism from those seeing the end of American dominance, will likely remain the global reserve currency for a long time. Faith in a currency is more than just a confidence trick; it is more even than just the backing by specific collateral. What belief in a given currency rests on is belief in the power of a government to mobilise the totality of its resources in an extreme circumstance, for instance war. To wit:

Eichengreen has nowhere identified a much more substantial reason as to why institutions across the world, from central banks to investors, choose a given reserve currency: namely, the ability of the issuing party to hold recourse over actual assets. Whether these assets are physical (in the form of industrial facilities or natural resources) or financial, it is a government’s ability to ultimately take control over them – to mobilise them in support of government policy and national necessity – that is the final arbiter of how safe that country’s currency is to you as a holder. This is particularly true of non-resident holders abroad, since they do not suffer downside from asset seizures but are instead a totally arms-length counterparty.”

I went on to explore the concept of Total Resource Mobilisation (TRM) capacity as a mainstay of how a country – and with it, its currency – is supported. I noted that one  the interesting historical example was the delayed decline of the Sterling Area well after Britain had ceased to be the primary global trader – because of a perception that Westminster still held recourse over an empire. For all the contemporary fears of American decline – in trade, hard and soft power and its institutions – the dollar has been unmoved as a reserve currency, as shown by the statistics.

Dollar reserves

Source: Bank of International Settlements

The same lessons are true of the new virtual currencies. A form of money without a form of state will render the inherent value of that money limited to only supply, demand and confidence –  all fine, but these do not offer a store of value. With no central bank, and no government to back it, there is no recourse for comfort – no “liquidation value” to act as the backstop as it currently does for all real currencies.

On a side note, I also wonder if those pushing the new currencies are being rather too geeky about the whole thing. I have no doubt that in many ways, the technology behind cryptocurrencies are superior to conventional ones. But being more perfect does not necessarily mean it will supersede the less perfect product – indeed history is littered with examples of technically superior inventions which did not end up “winning”, not least because its backers were too worried about theoretical perfection: Microsoft vs Unix, for instance; Betamax vs VHS; even arguably the internal combustion engine vs diesel. The dollar is easily forged, and stolen, and inflated; but it is good enough, and that is good enough.

This is not to say that I see no use for Bitcoin and its ilk. I accept that they can perform a useful function, particularly as a cross-border payment system – which, incidentally, is what many of those currently inside the industry currently see it as. These currencies have the benefits both of allowing anonymity and, potentially, offering greater security of online transfer. But then the real competitors for cryptocurrencies are not so much the Dollar, Euro or RMB, but rather the nexus of Visa / Mastercard, UnionPay and even Western Union. I can also accept that since we are only at the beginning of the cycle,  the ultimate level of valuation of these currencies may still grow. However, short of finally moving into a post-national world, I do not believe they will replace national currencies. The eschatological nature of these crypto-evangelists concerns me.

As ever, it is a lack of awareness about macro historical trends which concerns me – a deficiency which would always see good money thrown after bad. I am going to stick my neck out and short this – and if anyone has any clever ways of shorting the whole sector, let me know!

Why Simplified Chinese does not mean simplistic

Far from being an act of vandalism, the Simplification process should be recognised as an intellectual achievement rivaling Johnson’s dictionary


The most extraordinary aspect of perusing the National Museum in Taipei is not just the artifacts on display, but the story it tells about Chinese history. Among the other unparalleled treasures, there is a room of printed texts from throughout the ages and it is almost incomprehensible to those of us schooled in the West that upon seeing some writings which look completely recognizable and fresh in terms of style and font, to look down at the label and discover it is in fact an original from the Song, the Tang or, in some cases, the late Han dynasty. In English, we could barely make out Chaucer in its original form, let alone Beowulf; yet an educated Chinese person could visually (if not intellectually) make out every word from these texts.

Purely as a numbers game, it seems inevitable that Simplified Chinese characters, as established by China in various rounds of reform from 1956 onwards, will win out in representing the Chinese language. By every measure, Simplified outstrips Traditional complex characters in usage and the education of new learners whether ethnically Chinese or foreign. Yet if one examines the rhetoric that still emanates from Greater China and in particular Taiwan, it becomes clear that although this is known, the declining world of Traditional Chinese still grips the moral high ground. But the common, non-academic proponents of Traditional labor under two common misconceptions.

The first and most obvious fallacy is that simplified writing reform was undertaken as random vandalism. It is frequently cited that learners of both languages often arrive at the conclusion that much of the shortening has been the work of Communist progressivism, purposefully disregarding the features of an ancient civilization. Yet this is far from the case. Only a small portion of the simplification process involved wholesale substitution of components or, in extreme cases, hatcheting of words. On the contrary, many of the new forms reached back into various strains of traditional Chinese including ancient alternative and vulgar forms, commonly used short hand and caoshu (cursive) print representations. The thousands of delegates meeting in 1956 searched far and wide for forms which could be best reconciled sympathetically with the language which already existed, and in many cases did so quite elegantly. The fact is that the simplification process, for all its imperfections, remains a monumental intellectual achievement which stands alongside Johnson’s first dictionary.

The second mistake is to ignore the fact that impetus for language reform has been long-standing, and natural. Simplification  had been discussed throughout the 19th century and a lesser version had even been implemented (albeit only for six months) in China under the Kuomintang in 1935. Lu Xun, China’s most prominent writer of the 20th century, had gone as far as to say that “if Chinese characters are not destroyed, then China will die”. Yet this is not the only evidence of natural evolution – Japan simplified its version of Chinese (kanji) in 1946 and the introduction of shinjitai was itself a form of linguistic reform. Likewise have the Koreans and Vietnamese slowly changed the usage of their hanzi (mostly for local terms) to the extent that both, like Japanese, have characters unique to their own language. And of course, controversial reordering of language is not just limited to logographic languages, as the much-debated 1996 German reform demonstrated. Of course, the timing and extent of the jiantizi was very much a choice of the Communist Party but they were only tapping into what was an ongoing debate about how the language should move forward. For sure, reform was not just a Communist conspiracy.

The question should therefore really center on whether the process has been executed well, and it is here that the communities in Taiwan and overseas have been particularly vocal. Without going into the details here, the reality is that there were good and poor simplifications in the process. Some of the less controversial changes might include the word meaning “to learn,” changing 學 [xué] to 学 for instance, since the original does rather evoke the over-burdening of a child’s head with the excesses of Traditional stroke counts. Likewise the adjustments of the word for “energy,” as 氣 [qì] to 气, or “to be” as 為 [wèi] becoming 为, which are both so “elemental” that not much is lost. Indeed the adoption of 台 [tái] (from 臺) even in Taiwan, is indicative of the necessity of some changes.

Against this are the changes whose aesthetics are so difficult to swallow, such as the change from 廣 [guǎng] to 广; the unsatisfactory merging of words based on phonetics such as both 髮 [fā] and 發 [fā] become 发; and those changes which are perceived as being purely political such as the conversion of 華 [huá] to 华, and the so-called “国-phenomenon” as identified by Zhao and Balduff in Planning Chinese Characters (2007). The most prominent rallying cry of all for the Traditional Chinese community is of course was the heartless [pun intended] extraction of 心 [xīn] out of 愛 to give us the word for love as 爱 [ài]. Without doubt, these could have been done more sensitively.

The balance sheet is mixed, and Simplified Chinese is not to be defended in and of itself per se. However (and leaving aside the arguments over literacy which – very broadly – support Simplified), the reforms have one important anthropological argument in their favor: they recognize constant evolutionary change. On the Mainland, there have been effectively five rounds of reform in 1956, 1964, 1977, 1986 and 2009; in Taiwan the written language has remained ossified, with a commensurate impact on its viability. The problem across the Strait and elsewhere in the Traditional Chinese world is that the social, intellectual and political opposition to Simplified script leads to the ultimate fallacy: that Traditional as we know it today is, effectively, “perfect.” It has been done, the process has finished and there is nothing left to fix. This can be neither logically or empirically true.

The truth is that, had the Communists never won the war, and had Mao and others not pushed the reform agenda strongly, Chinese written script would have changed at some point. Around the margins, evolutionary use would have materialized; and it is quite possible that a centralized standardization of some sort may have been instituted. Modern Chinese would therefore be something in between today’s Traditional and Simplified. It is probably time for the Traditional school to recognize that, even if they do not agree with everything that has been done, the cause was more natural and noble than has been given credit for.

This piece was originally published in Caixin Online in April 2015.