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November 13, 2017

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Trend-spotter upbeat on China’s prospects

Phillipa “Pippa” Malmgren is a trend spotter who advises investors and governments on economic policy and investment strategy.

The American policy analyst, who holds a doctorate from the London School of Economics, is a former special assistant to President George W Bush. She is now advising the British government on Brexit strategy.

Malmgren has also served as deputy head of strategy for UBS and chief currency strategist at Bankers Trust. In 2015, she was co-founder of H Robotics, an industrial drone company.

Her book Signals: The Breakdown of the Social Contract and the Rise of Geopolitics was translated into Chinese this year.

Shanghai Daily sat down with Malmgren on her visit to China last month to talk about China and the world economy.

Q: What are the economic signals you picked up on this most recent trip to China?

A: I’ve been trying to help people in the West understand the Belt and Road Initiative, but they don’t really get it. They think it’s the old Silk Road going from western China to the Central Asia. Since most Western businesses don’t operate there, they don’t really think it’s relevant to them. I keep saying, “No, it’s much bigger. It goes into Western Europe, East Asia, East Africa, Latin America.” It’s now part of the Party charter in China. The Asia Infrastructure Investment Bank is supporting it. The bank, opened in May, had a balance sheet larger than the World Bank’s on its first day. This is really a big commitment.

The other signal from the Party Congress was the announcement about the environment. That’s very important and will cause alignment between Western technology, Western institutions and China because the West has many innovations in this area and China needs to deploy them.

Even though China is growing more slowly than before, it still has a lot of new things happening. The Chinese are moving up the value-added ladder.

Q: But in recent years, some foreign companies have shifted their investments away from China. Do you still think there are opportunities here for multinationals?

A: Absolutely! No doubt about it. China has given a gift to the world in building new ports, airports, roads, highways, infrastructure. The whole world will benefit from it. Also, the speed at which China is importing Western goods is increasing. For example, sales of British goods into China have surged in recent years.

Q: Can you give me an example of an initial impression about China that has changed for you over time?

A: I first came to China in 1991, and I went from Hong Kong to Shenzhen on an official guided tour. Our tour guides kept an eye on us so that we didn’t get into any trouble. At that time, Shenzhen was nothing but chicken farms. If you told me then that the area was going to be an industrial center of China, I would have laughed. And I would have been completely wrong. To me China has changed so dramatically.

Q: What other issues are you monitoring related to China?

A: I’m closely watching the development of quantum computing. This is important because they say data is the new oil. I think China has recognized that.

Recently, Russian President Putin said artificial intelligence is the new arms race. So Russia, China, Europe and the US are all racing to develop their speed of computing. They say the Russians now have the fastest systems, and China is about to exceed that. I think in the past month the government announced a quantum-computing project in Anhui Province. They are building facilities that will have a million times the computing power in the world today. This is very powerful. In this way, I think China is going to be a pioneer in blockchain, government crypto-currency and quantum computing.

Q: You are now not only a professional financial and government advisor, but also the boss of a drone company. How did that happen?

A: Five years ago, I had a strong view that the percentage of financial services in GDP would be smaller in the West. A lot of intelligent people would leave financial services and go into the real economy. My guess is that they will deploy all their skills and make more money than we expect. I said this to clients, and one of them told me that I may be like the person I was describing. He and I began to collaborate on this idea of creating aero-robotics. We decided to build an industrial tool for use by big global corporations. So far, this has been successful because not many companies are making industrial drones.

Q: What’s your general impression about governments you advise? What do you tell them?

A: I advise both institutional investors and governments. My focus is on big trends in the world economy. All governments are different, but there are some universal issues. One is that governments everywhere are still depending on pieces of paper to tell them what’s happening in the economy. They literally still rely on forms. Even in the US, if you want to know about new businesses creation, you have to wait until people fill out forms registering their businesses. I think this is all going to go electronic and we will have greater clarity over what’s happening much faster. So I’m advising governments to automate their systems as fast as they can.

Another thing is understanding that the world economy is very fluid. It’s moving very fast. Quite often politicians will get an idea in their head, but it is 10 years out of date and may no longer be true. For example, many US politicians still think China is taking jobs from the US and China is a manufacturer of cheap goods. In fact, US manufacturing is very competitive now, and many Chinese companies are investing in the US. China has moved up the value-added chain to produce things like railway systems.

What’s more, most politicians and policy makers really don’t understand technology. They don’t realize that there are many problems that can be fixed by technology. I spent a lot of time helping them understand what’s possible.

Q: Where do you think the most important market is right now?

A: The No. 1 most dynamic location anywhere in the world is the Texas-Mexico nexus. This is strange because everybody says, “No, because President Trump will build a wall.” I disagree. Texas has the most dynamic industrialized economy. It is growing incredibly fast, creating huge numbers of new jobs. The new Silicon Valley is Austin, Texas. It is very strong in agriculture, oil and gas and property, with high-quality infrastructure and zero income tax.

Mexico, I argue, is the new China because its wages are 20 to 40 percent cheaper than in China and quality controls follow US standards. It’s deeply integrated into the US economy. What’s happening is that the Mexicans are no longer moving into the US because they have so many jobs in Mexico.

And, by the way, China is investing in Mexico very heavily, building new ports, new canals, and oil and gas infrastructure. The easy story is that the Trump wall means no investment opportunity. The real story is that Mexico and Texas together form the most dynamic place in the world right now.

Q: Where do you think it’s dangerous to invest?

A: I’m pretty optimistic right now. I’ll give an example. Most people are waiting for the stock markets to collapse. I think the stock markets are going to keep going up. That’s because we have US$18 trillion more in the economy today than nine years ago because of quantitative easing of major central banks. They are gently normalizing, but as though you created the Indian Ocean and are now taking two cups out of it. Against that backdrop, all the money is still out there. Much of the money is sitting on the sides waiting to go somewhere. Now we have a new phenomenon, which is inflation. When inflation starts to rise, it kills cash. What are people going to buy? I think stocks. The stock markets may continue to hit all time record highs. I’m way more optimistic than most people are.


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