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Recording of James Fok Fireside Chat 21 January 2022 with speakers:

Mr James Fok; Financial Markets Professional, Investor, Author

Ms Hannamiina Tanninen; Journalist and Foreign Correspondent for Kauppalehti


Ms Julia Charlton; Chairman, Commonwealth Chamber of Commerce, Hong Kong

This fascinating  fireside chat brought  participants from all over the world together to  hear about James’s newly released book: ‘Financial Cold War’ from James himself. The book presents a groundbreaking exploration of US-China relations through the lens of international finance,  tracing the development of the US and Chinese financial markets, as well as the current US dollar-based global monetary system.  James highlighted the imbalances in the structure of the international financial system and how they have  contributed to Sino-US geopolitical tensions today.

The interactive segment of the fireside chat with James and Julia gave participants the opportunity  to ask James  questions  ranging from his views of an optimum tax structure, response to the decoupling of the economies of China and the US and increasing inflation.

To know more about James Fok’s new book, click here.

Podcast Recording

[00:00:00] Julia Charlton: Hello and welcome everybody. And thank you for joining the Commonwealth Chamber of Commerce today for our live Fireside chat with James Fok on his new book, “Financial Cold War: A View of Sino-US Financial Relations From the Financial Markets”. I’m Julia Charlton, Chairman of the Commonwealth Chamber. And I’m delighted that James is kindly joining us today.

[00:00:22] So, who’s James Fok. He’s an author, investor and strategist in the finance area. Having been a senior executive at the Hong Kong Stock Exchange, James has been a key player in several internationalisation initiatives of the Hong Kong market. And prior to that, he worked at various investment banks spanning across Asia, as well as Europe. With such rich experience throughout his career.

[00:00:45] James has spoken extensively about market structure issues and the intersection between geopolitics and international finance, which has now resulted in this spectacular book he’s written. So, Financial [00:01:00] Cold War is a succinct and well captured account of a very intricate and multilayered phenomenon. Unlike many mainstream accounts, the book we’re discussing today, not only looks at the status quo through an unprecedented view of the financial markets, but also goes back in time to trace historical context from which our current issues originated, including the Bretton Woods Conference of 1944, that resulted in the US dollar dominating the global financial system as it does today.

[00:01:32] In my view, the book masterfully transformed dry historical accounts into an engaging chronological analysis of how fatal flaws within the international financial ecosystem can lead to instabilities in the international arena. It offers empirical and practical solutions for another wise, inevitable boiling point, some might think.

[00:01:55] And the book also hopes to educate the audience of the gravity of the [00:02:00] situation and suggests ways to collectively work towards balance and stability. So, joining us also today to explore the themes layers and nuances, we also have Hannamiina Tanninen, who is a journalist author, speaker, and podcaster who completed part of her university studies in Hong Kong.

[00:02:18] She’s the China and Hong Kong correspondent for Kauppalehti, the leading Finnish business newspaper. So she’s really a foreign correspondent and she has over 10 years of journalism experience, which is why I can’t think of a better person than her to lead a discussion of James, with James, of his book.

[00:02:37] So, how this will work is that the fireside chat between Hannamiina and James will be about half an hour and that will take place now. Then we’ll have a Q&A session where you can ask all the questions that I’m sure you’ll be dying to ask James, and you can put those questions in the Q&A box at any time during the fireside chat session, and [00:03:00] then carry on asking questions in the chat box when James is answering the questions. So, now I’ll move over to the discussion between Hannamiina and James. And we look forward to seeing your questions, which I’m sure you’ll be raising as we go.

[00:03:15] Hannamiina Tanninen: I think the first question is how are you feeling? As someone who writes professionally and I also have written a book myself, I know just how big of a task it is to put together a book about such a complex topic that we’re going to discuss today further. So how are you feeling?

[00:03:32] James Fok: It feels nice. It feels nice to have it finally in print, but, and it does feel like an achievement. Although I have been thinking about a lot of the things that I wrote about for some time. So it’s that has been with me a long time. And so it’s not a new thing for me.

[00:03:53] Hannamiina Tanninen: Yeah. So, few words about your background; this book discusses, you know, obviously financial [00:04:00] markets and economy and economic history.

[00:04:02] So could you tell us a bit more about your background and what inspired you to write this book?

[00:04:07] James Fok: I was born in, and grew up in, Hong Kong and then subsequently went to study for high school in the UK, in Scotland, and then went to university in Beijing. After that, I started working in an investment bank in London and had an investment banking career around Europe and around Asia.

[00:04:31] Almost by accident, I ended up, in 2012, working at Hong Kong Exchanges and Clearing. And in doing that work, I had a reasonably good understanding of financial markets and how financial markets in different parts of the financial services industry work. But being at the exchange particularly opened my eyes on [00:05:00] something new for me, which was the intersection between financial markets and public policy.

[00:05:09] Now, when you look at clearing and settlements and all this part of the plumbing of the financial markets, it’s not the sexiest part of the financial world. Have you ever been in a, if you’ve ever been in a room listening to someone talk about clearing and settlements it’s quite difficult to stay awake.

[00:05:30] But what I found was that suddenly I was in this world where I’d be invited to breakfast with finance ministers. I’d be receiving, on behalf of the Exchange, delegations from the IMF, talking with Consul Generals about what we were doing. And it peaked my interest in that I thought that this stuff actually might be quite [00:06:00] important.

[00:06:01] And it is it’s pretty critically important to many parts of the world and to our daily lives. But it’s also a part of the financial world, which is least understood by policymakers. And even most people in financial services themselves. And so I felt that I was, having done this, in a position to write about this topic in a way that I could help people understand this and understand how the system worked and particularly how the system perhaps isn’t working and driving some of the problems that we’re seeing around the world today.

[00:06:51] Hannamiina Tanninen: Within the book writing process, usually when you start writing about one thing and you think this is what I’m going to write about, but the further you research you [00:07:00] end up writing not necessarily from completely different thing, but from a different angle. So could you tell us a few things that you learned within the writing process?

[00:07:10] James Fok: I learned a lot about how the system works on a much deeper level. I had a good inkling of what I was going to write about and what I was going to say, but it pushed me to think about certain parts of how the system operates in a much deeper way. And actually, it also helped me to particularly understand how there are many- it’s very easy to point out the problems, but when you go to resolve those problems for every- it’s a little bit like a Jenga puzzle- every piece that you pull out or want to replace somewhere that runs a risk of displacing a whole load of other things in the tower.

[00:07:59] And so [00:08:00] it helped me understand how complicated the system will be to change, to address some of the problems that we see around us today.

[00:08:11] Hannamiina Tanninen: This is not a first book about the friction that US and China has. It’s probably not the first book that has been published this month about the topic, which is good because it is a very big change that effects our lives.

[00:08:27] And it’s good that more books is written about it, the more we understand about it, but what are the unique angles that your book brings that you think that weren’t available at the market when you started writing this book?

[00:08:40] James Fok: Well, first of all, that there’s a lot of very good, a lot of very good books, articles, research papers written about this topic of Sino-US relations and particularly reasons for frictions and conflicts. What I [00:09:00] found was that there wasn’t anything that particularly addressed this from a financial markets angle, was the first thing. And then what I also found was that there’s some brilliant books written, but they are so targeted towards a specialist audience, whether it’s China specialists, whether it’s trade specialists, whether it’s financial market specialists in certain areas, that it’s very difficult for the average person, the lay person to absorb. And what I set out to do in writing the book was to try and bring together a lot of the great work that’s been done by authors and writers far more accomplished than myself, and try and explain and articulate this in a way that the average [00:10:00] intelligent person could actually understand and appreciate, because I felt that it was so important for people to understand what the drivers of these conflicts are and how we’ve ended up where we are today.

[00:10:15] Hannamiina Tanninen: What are some of the tools that you have used in your writing to make such a complex- important but still complex- issue approachable for everyone?

[00:10:25] James Fok: I’m not sure that she would appreciate me describing her as a tool. My, my wife was very helpful in this, in that I started writing this while we were in, in COVID 19 lockdown. And, every section that I finished writing, she would be the first person to read it and take a look at it. And in her nice and diplomatic way, she, if she didn’t like something or felt that I hadn’t written it in a way that was engaging, she’d tell me right, [00:11:00] nicely that, hey, look, this is kind of boring or you need to kind of illustrate this with some better examples or better explain this.

[00:11:08] And so that was incredibly valuable to me as I was writing.

[00:11:14] Hannamiina Tanninen: The book is about friction between two super powers from the perspective of financial markets. What about the readers who are not necessarily from either one of those countries or have not even necessarily visited China or US? Why should they read the book and what could they gain from that?

[00:11:34] James Fok: I think there are probably two things that come to mind Many of the things that are described in this book, although there’s clearly a focus on the US and China, what the book talks about is how market cycles work and how those market cycles affect historical cycles and [00:12:00] impact on societies and nations.

[00:12:03] And so in many ways, those lessons are timeless. And I think for every society, every individual it is helpful to understand what history has taught us about how we might deal with the problems today and how we might look towards the future. The second reason why I think it’s important is because whether you’re sitting in Finland, where you come from, or Malaysia, Vanuatu, or Argentina, the fact is that America and China are the two largest economies in the world.

[00:12:55] What they do in trade, what they do in climate [00:13:00] policy, what they do in their military and social affairs has the potential to impact your life in a very profound way. And while you may not have a direct influence over policy makers in those countries, your political leaders have a voice. But in order for them to be able to exercise that voice, they need to understand what’s happening, and B, they need to be encouraged to do so because it is very important to each and every one of our lives.

[00:13:45] Hannamiina Tanninen: The name of the book is Financial Cold War. But however, in the book, you discuss a lot about that the current situation between US and China is not cold war and it’s not comparable to the previous cold war. So where did the name of the book [00:14:00] come from and how is the financial cold war different from the previous cold war that was seen?

[00:14:07] James Fok: Let me perhaps first explain what I mean about financial cold war, because I think it’s very, very easy to misunderstand my definition here. When you say financial cold war, a lot of people immediately think about financial sanctions. They think about financial containment of other countries. That is something which I call a geo-economic war, which the financial cold war has spilled over into because of the conflicts that it’s created. But what I define as the financial cold war is really the sources of those conflicts and tensions within countries [00:15:00] and between them. And in essence, you can think about the financial cold war as the invisible conflict embedded in the structure of the global financial system and in national financial policies, which have been driving rising levels of wealth and income inequality in many countries around the world. And the central theme of the book is that these wealth and income inequalities have been contributing to tensions within each of China and America.

[00:15:38] And between the two countries. When you look back on the cold war of the 20th century, the drivers of that cold war were fundamentally quite different in the 1940s. There was no economic or financial or [00:16:00] trading relationship between the US and Soviet union to speak of. So there was very little to lose through the strategic disengagement, which characterized that particular conflict. China and the US today are in a vastly different position.

[00:16:20] And given how intertwined and connected their systems of trade and their capital markets are today, the potential from disengagement or a new cold war that many people talk about is potentially so much more damaging. And I felt that by differentiating the drivers of this conflict or these frictions as a financial cold war, it helped better define both the sources of conflict, [00:17:00] how the conflict may be played out, and also reminds people that actually the conflict that exists today is very radically different from what existed between America and the Soviet union. And so a very different playbook is required in order to tackle the problems.

[00:17:27] Hannamiina Tanninen: Even though the US China relations have, well, have worsened or become definitely a bit more cold from 2016 onwards. But, say, on the trade between those two economies has still grown tremendously. So what are the, what is the lesson to learn or thing to take away from this?

[00:17:54] James Fok: Well, I think first of all, and I think this is a very important [00:18:00] thing to bear in mind is that most people in the US and in China, aren’t in conflict. They’re just trying to get on with their lives, provide for their families, trying to improve their standard of living. And so the conflict, to the extent there is a conflict, is actually within a very narrow segment of society.

[00:18:27] And so from that perspective, what I was trying to make people understand was that most people in both countries, their interests are entirely aligned. In their aspirations and how they want to live out their lives and certainly in avoiding conflict, between the two countries. And you, when you point to the growing trade, that is ultimate proof of the fact that whatever the [00:19:00] governments may be saying to each other or about each other; the reality is that people are getting on, they’re living their lives. They’re doing business as best they can.

[00:19:11] Hannamiina Tanninen: In your book, you have three major arguments or major themes. Let’s discuss those. So the first one is that the dollar based system, at the moment, the disadvantages outweigh the advantages of the dollar based system.

[00:19:28] James Fok: That’s right.

[00:19:28] And the dollar based system that we have today is a result of a set of agreements or an agreement that was entered into at the end of the second world war, which launched the dollar at the center of the global monetary system, in that all other countries are referenced against the dollar.

[00:19:51] Now that was frankly, always a bad design from the outset. People didn’t [00:20:00] widely understand that that was the case until over 10 years after that agreement, by which time the dollar had become, or was on its way already to becoming so embedded in the structure of the global monetary system, that it was very difficult to dislodge even when we saw the dollar remove itself from the gold standard in the 1970s.

[00:20:28] So many people believe the dollar to be in the US’s interest. There’s one former French finance minister who described this as an exorbitant privilege to the US. But I think that, really, is a matter of perspective. Certainly the dollar’s given the US access to very low cost funding and it’s avoided many of the currency mismatch risks [00:21:00] that other borrowers in financial markets have faced that. But the dollar system, in order to support the growth in trade and investment around the world and supply liquidity to meet those needs, required the US to constantly run a balance of payments deficit, which meant that unless the US was growing at at least as fast a rate as the rest of the world, the consequence would be ever rising levels of debt, which is what you’ve seen today.

[00:21:44] Many people in the US look at trade and the trade imbalances and accuse other countries, including China but mainly emerging markets, of artificially holding down their [00:22:00] currencies in order to “steal” US jobs. But when you look at it from the perspective of other countries, particularly less developed countries whose governments and whose corporations have little option but to borrow in dollars, the periodic currency volatility or dollar volatility that has existed has led to a series of financial crises around emerging markets from the 1980s.

[00:22:32] Now, following the Asian financial crisis, in which many companies that have borrowed in dollars because their currencies are pulling against the US dollar, suddenly found themselves unable to repay that debt, unable to service that debt. They had to cut jobs, creating huge unemployment and spreading economic misery around many of those [00:23:00] countries.

[00:23:02] What happened after the Asian financial crisis was that emerging market governments began to insure themselves against those periodic paths with all the volatility, by holding more US dollar reserves, which led to a structural overvaluation. Of the dollar. I don’t deny that there has been some level of mercantilism in some of those policies, but fundamentally what those emerging market’s been looking for is some level of currency stability.

[00:23:38] Not necessarily specifically to steal US jobs. Then when you look at within US society itself, although the dollar is widely perceived to give the US a huge number of advantages, but the reality is that really depends on where [00:24:00] in US society you sit. So if you were a shareholder, a wealthy shareholder, of a large US company, that’s been able to take advantage of that structural overvaluation of the currency to move production to lower cost countries or countries with undervalued currencies.

[00:24:20] Then you’ve been able to reduce your costs. You’ve been able to increase your profit margins and the shareholders have seen their shares go up. If you’re a US manufacturing worker, it’s not been so great for you. What you’ve seen over the last 40 years as this has happened is increasing displacement, loss of jobs, wage stagnation.

[00:24:49] And what I argue in the book is that certainly for countries around the world, the dollar [00:25:00] system has created a whole lot of risks and imbalances that have caused quite a lot of human suffering. But even for the US itself, from the perspective of the majority of Americans, having the dollar serve this central role in the global monetary system is probably not to their advantage.

[00:25:27] Hannamiina Tanninen: Your second major argument is that China’s current development model is coming to its end. So, because it’s the book about financial cold war, both of the countries have their advantages, but also their shortfallings. So why is the Chinese development model as it is running into a lot of problems at the moment?

[00:25:51] James Fok: First of all, China’s system or China’s model of economic growth has been remarkably [00:26:00] successful over the last 30-40 years in delivering the country from being poor to a moderate level of prosperity today. And so the model has been extremely successful. The Chinese leadership has also avoided many of the traps, which befell other emerging economies through that period, by limiting the extent of foreign indebtedness that they incurred through those growth years. In order to fund their growth, therefore, they’ve had to harness the savings of Chinese individuals, citizens, and they’ve done that very successfully. It was aided by the fact that China had this huge onetime demographic dividend. Not only did they have the baby [00:27:00] boom generation, but also because they implemented a one-child policy in the end of the 1970s, they had a far greater working level population with fewer dependents for those working age population to support. So that allowed the country to accumulate a significant amount of savings, which through the Chinese government’s relatively tight control over its financial system, particularly the banks, it was able to harness to put into infrastructure investment, which enabled the huge boom in exports and the economy that you’ve seen since the end of the 1990s.

[00:27:55] And so the model has been very [00:28:00] successful. The problem that China faces today is that the model is very dependent on continued investment. And as this demographic dividend turns into a demographic liability because of the very rapidly aging population, then continued dependence on investment;

[00:28:29] building more homes, more industrial capacity, is likely at some point to lead to huge capital misallocation, if that isn’t already happening today, which means that the more that that capital is put into unproductive uses, the greater the risk of some blow up at some later point.[00:29:00]

[00:29:00] And what I argue now is that the top down relatively centralized system of allocating and pricing capital now needs to loosen further and to allow markets to set the pricing of money and capital and to allow markets to allocate that capital to where it can be most efficiently used.

[00:29:34] Hannamiina Tanninen: Your third argument is that the rising inequality within both countries, that is a result of policymaking, is a major factor in this situation we are in.

[00:29:46] Why is that so?

[00:29:53] James Fok: Economic insecurity can drive [00:30:00] other forms of social tension. And when wealth inequality gets to a relatively high level, then by definition, you have a large part of your population that is struggling to get by. And when they’re struggling to get by, they become angry. And unfortunately, because many of the drivers of that growth in wealth disparity and those pressures have not been well understood.

[00:30:40] And because the issues haven’t been tackled, you’ve had that social tension build up and build up. And what you’ve seen, as a result in both countries and in other parts of the world, is a turn to populist nationalist [00:31:00] political rhetoric, which has further elevated tensions between countries and particularly between China and the US.

[00:31:09] Hannamiina Tanninen: So all of us, we are part of societies and part of the economy and part of the country. And therefore we all have our own responsibility in this situation. Not- at least trying not to cause more tension and whatnot, and myself being from the media. What do you think is the role and responsibility of the media within the situation and especially moving forward?

[00:31:33] James Fok: I’m glad you asked that question. The news media plays a critical role in any civil society and the importance of the news media beyond reporting on the news is also to present a balance of different perspectives. And unfortunately [00:32:00] what’s happened in many countries over recent decades, is that driven by the cost and financial pressures that they’ve been under

[00:32:13] and also by the incentive structures for individual journalists, the media has moved from reporting the news to a form of entertainment where the balance in providing different perspectives has been diluted or even entirely lost in some cases. And that has resulted in a gradual polarizing of views that has been compounded by the rise of social media or recently, which the effects of that are fairly well documented, [00:33:00] but it tends to feed into those confirmation biases by giving you more of the same that you’ve seen before. And so I feel that there are different views on the role of the major in different societies and while on the one hand, many believe in the absolute freedom of the press to say pretty much anything that they want.

[00:33:34] My own view, having looked at this in the society that I live in Hong Kong, but also in different parts of the world, you have to be sensitive to the cultural and historical contexts of the place in which that news media is being reported. [00:34:00] And media should not be there to sensationalize, but to inform and to provide different perspectives and certainly not feed into or feed any of the social tensions that are already building up below the surface.

[00:34:21] Hannamiina Tanninen: So in your final chapter of your book, you draw conclusions from your findings. And however, in this day and age where we have pandemic and the US and China relations are unlikely to become better or warmer in the next few years, we’re all very desperate to find solutions, or scenarios or advise what to do next.

[00:34:45] So what does your book provide in this sense?

[00:34:49] James Fok: What I hope that the book has provided, or will provide for readers, is an understanding of the issues. [00:35:00] A framework for thinking about what the issues are and how they’ve come about. I attempt in the final chapters of my book to provide a framework for thinking about how we reach solutions to many of the problems that we have today, but I’m not frankly arrogant enough to believe that I have all the answers.

[00:35:33] And so what I hope is that providing that framework will stimulate other people who are more capable, more accomplished than myself, to be able to find a path to resolution, which will inevitably involve compromise.

[00:35:52] Hannamiina Tanninen: Okay. James Fok, author of the recently published book, Financial Cold War.

[00:35:57] Thank you very much for your interview.

[00:35:58] James Fok: Thank you very much, [00:36:00] Hannamiina.

[00:36:01] Julia Charlton: Well, I hope you all enjoyed that very much, as much as I did. Anyway, I loved Hannamiina’s question about media. I thought that was very self-reflective of her. That was great. So we have quite a few questions from the audience, James. So, let me kick off and just go through some of them if you’d like to unmute James.

[00:36:18] So, from Susan Johnson, given the rising geopolitical tensions between the US and China, is the much talked about financial decoupling, a distinct possibility. And if that happens, would it impact the international financial order in any major way, or would the impact just be limited to the financial systems of China and the US?

[00:36:41] James Fok: Well, first of all, I think it would be extremely damaging to both sides, to financially decouple, even if that were a possibility. The reality is that the two countries not only have direct financial relationships, but have indirect financial relationships through other countries because surpluses in [00:37:00] some countries go to pay deficits with others. So effectively what would happen if they were to decouple? You’d have a reduction in total economic activity that would lead to a cascading series of impacts on other countries and possibly much bigger conflicts, for other countries as well.

[00:37:23] So I think ultimately it’s in both countries interests not to decouple, but certainly a financial rebalancing between them is required, given the size of the imbalances today.

[00:37:36] Julia Charlton: Right. Okay. So question from Anthony Wood, what’s the prospect of the RMB becoming convertable?

[00:37:44] I think

[00:37:45] James Fok: it’s already become much more convertible than it was and driven by very practical reasons in that they’re more Chinese people traveling abroad, studying abroad, doing business abroad today.

[00:37:56] And so the, the PBOC has been following a [00:38:00] gradual track of relaxation of capital controls. I think full convertability really depends on how much it’s in China’s interest to provide that full convertability and the problem is for Chinese policymakers that they’ve seen that actually the role that the US dollar has played has had huge costs for US citizens and US as a society.

[00:38:27] And so they’re very wary about going whole hog and trying to internationalize the currency on the US model. And I actually, although a lot of people believe that they’re trying to engineer a usurpation of the US dollars status by the RMB. And actually my experience, at least my interactions with them suggests that actually they’re not necessarily particularly keen for the Renminbi to play the US dollar’s role which is why I [00:39:00] think it’s instructive. In 2009, Zhou Xiaochuan, the former governor of the PBOC, actually did not advocate Renminbi to take over the role of the dollar, but he advocated the IMF special drawing rights, which is effectively what was advocated by John Maynard Keynes and the British contingent at Bretton Woods, although they ultimately were voted down by, or they were overcome by the US proposal.

[00:39:30] Julia Charlton: Right. So, given that the conclusion of Bretton Woods was driven by the US, how realistic do you think it is to suppose that any country, in particular the US which has the advantages as well as no doubt the problems of providing the world’s reserve currency, would voluntarily surrender that position.

[00:39:52] James Fok: I think it really depends on which level of US society you are speaking to, but I think, although it’s not widely recognized, I [00:40:00] think it’s become clear that the majority of Americans are not benefiting from the dollar serving this global utility role. And so there’s actually a precedent for this.

[00:40:10] So at the end of the second world war, rather in 1947 pound sterling accounted for 87% of global foreign exchange reserves, what happened at this end of the second world war? The UK was very significantly exhausted by its spending and efforts during the war.

[00:40:30] Julia Charlton: Pretty much bankrupt, right?

[00:40:32] James Fok: Pretty much bankrupt, the US is pretty much bankrupt today. It owes more money externally than it owns foreign assets. So in that sense, the positions are not vastly different. The big difference is that at the end of the second world war Winston Churchill was voted out of power.

[00:40:49] And you had a Labour government that came into power, and they looked at what the consequences of trying to retain Sterling’s global reserve [00:41:00] status would be on UK workers. And clearly what it meant was that if the UK or the sterling was to continue to play that role, it meant the UK would have to continue to absorb the financial imbalances for much of the rest of the world, which would have disadvantaged British exporters because the pound would have continued to be overvalued and it would have cost UK workers’ jobs.

[00:41:28] So ultimately, although there’s a widespread belief that the sterling’s move away from its global reserve status role was a rather ignominious retreat. That the reality is that it was a, it was a conscious strategy that was taken in response to what was the best for the majority of UK citizens.

[00:41:51] And it was done leveraging on the support of other countries and the IMF over a period of 30 [00:42:00] years, given the size of the imbalances today, if the US were to do the same, the reality is that it would likely take much longer to unwind the US dollars role because that the imbalances are so much bigger.

[00:42:13] And also you’ve had in the intervening period, the creation of huge markets in derivatives, repos, and other things, which didn’t exist at the end of the second world war when Sterling was handing over the baton.

[00:42:27] Julia Charlton: So what do you think the counterfactual would have been if the UK had not been so willing to hand over that role so readily?

[00:42:36] James Fok: Well, I think what will have happened was that they’ll have tried to model through and pound Sterling would not have been able to undertake the several devaluations it did over that 30 year period. Other countries wouldn’t necessarily have supported and provided the funds for the bailout.

[00:42:55] And so either what would have happened was that you would have had a mass scale dumping of [00:43:00] UK gilts at the end of the second world war over a very short period of time afterwards, after it became apparent that it was difficult for the UK to maintain that role, which would have meant a huge de-stabilizing set of impacts around the world for both the reserve holders and for selling itself. Or the alternative would have been if that had not happened, then the UK would have just been more and more uncompetitive in global exports and trade, and it would have built up into possibly huge social instability and riots and an overturning of the UK regim which we find difficult to imagine, but which has happened time and again, when these imbalances have built up to a certain level throughout the course of history.

[00:43:53] Julia Charlton: Actually I don’t find that difficult to imagine. Cause I do think what happened in the UK at the end of world war two was somewhat of a [00:44:00] revolution. It was just a very kind of British revolution in its own way.

[00:44:03] But we’ve- the EU, or many parts of the EU is also in recent years seeing increasing wealth disparity and inequality, such as in Greece, Spain, Italy; massive youth unemployment stagnating economy in Italy and so on. So how does your thesis explain that because they’re not US dollar dependent on or not wholly anyway.

[00:44:26] James Fok: They’ve got actually very similar types of problems because in the past, when you had relatively higher productivity in some European countries, countries with lower productivity were able to gradually devalue their currencies to regain that competitiveness. And so, the Euro system has effectively denied them that ability to use the currency as a buffer or a pressure release style mechanism, which is why you’ve had these types of occurrences in Greece and in the Southern, [00:45:00] particularly the Southern European states.

[00:45:02] Julia Charlton: Right, right. So actually we have loads of questions people are asking. Here is one, how should China integrate in the world and in what ways? How should China and the US cooperate together to turn the world atmosphere into something more harmonious? And what should Hong Kong do as the sort of in-between player?

[00:45:25] James Fok: Well, I think where we stand today, we’ve been through a period of huge pressure buildup that created these social tensions. That’s created these conflicts and frictions between the two countries. I think it’s incumbent initially on the leaderships to start to treat each other with a level of respect, the rhetoric at the moment between the two sides is hugely unconstructive.

[00:45:51] And the real risk is that they backed them by engaging in these populous nationalists type rhetoric and “Wolf Warrior” type [00:46:00] diplomacy. Both sides are guilty that they remove the ability for themselves to deescalate tensions, when they come about. And so it is very easy for accidents wherever they might occur to be essentially built up and built up into a far worse conflict.

[00:46:18] So I think both sides need to take a pause. Reflect and start to treat each other with the degree of respect. Now, with regards to my book focuses on the financial aspects of the tensions. And so I’ll limit my comments here on what they can do in financial services or in financial markets, which is that one, the dollar is really at the root of a huge amount of financial imbalance all around the world.

[00:46:47] It’s a system which is creaking at the seams. You saw in March, 2020, that you suddenly had this huge dislocation in US treasury markets that if the Fed hadn’t stepped in and started buying [00:47:00] in massive scale, could have led to a worse than 2008 type rupture in financial markets with knock-on effects on the global economy and on jobs and livelihoods.

[00:47:13] We need to move to a different system now. And in order for that to happen, it’s going to require cooperation, not just between the US and China, but between lots of countries all around the world. I think the other aspects of the financial cold war things like the fiscal competition that you’ve seen between countries. You’ve ended up with these tax systems that were the wealthier paying far lower rates of taxation than average middle class workers.

[00:47:46] The reason for that very simply is that all countries want to attract investment to themselves and capital inherently is far more mobile than labor, it’s very easy to move your money. But if you don’t like what’s going on, or if you’re facing high levels of tax in [00:48:00] the country, it’s quite difficult to sell your house up and move, or it’s a bigger decision.

[00:48:04] And so what’s ended up happening is there have been deeply inequitable systems of taxation in countries around the world. Now the G-7 agreement last year on the global minimum corporate tax is a good first step in the direction of finding harmony, but that’s an agreement which still needs significant T.

[00:48:25] Within individual countries then, they need to look at their industrial policies. China certainly with this top-down model is at risk of huge capital misallocation and creation of huge industrial overcapacity, which if it continues to build up, it is going to create instability around the world because it’s going to be under pressure to export that industrial overcapacity. Competition policy is hugely important.

[00:48:55] Both countries have not necessarily done as good a job [00:49:00] as they should have done over antitrust enforcement, although China’s now moving forward at pace, particularly on the monopoly, internet and technology platforms. The impact of these monopolies not only is on siphoning of innovation and on reduced services and higher costs to customers.

[00:49:20] But when you have industries that are rounded down to one or several players, there’s less competition for employees. And so wages also get compressed. So there’s a whole host of financial policies, both internationally and nationally that need to be dealt with.

[00:49:39] But the critical thing here is that it’s a little bit like one of those whack-a-mole games where whenever you change one thing in the global financial system, then another problem might pop up elsewhere. And so it is necessary for the countries to [00:50:00] have some level of dialogue and some level of cooperation as they go through and make these changes.

[00:50:08] Now, I think we also need to recognize that when you’re trying to change something there inevitably will be unintended consequences. And I think there needs to be some level of understanding and empathy that when those things occur, that there needs to be some resolution mechanism between the different countries to allow them to be resolved rather than becoming bones of contention that just feed further frictions and tensions.

[00:50:34] Julia Charlton: Yes, but I mean, we do have many multilateral organizations don’t we? World Trade Organization, we’ve got Davos, we’ve got the G7, the G 20, what structures would work to create the level of cooperation that you’re aspiring to?

[00:50:51] James Fok: Well, I have a particular view and this comes out of experience working on the Connect programs.

[00:50:57] Many, many people look at these [00:51:00] Connect programs and they think of this as well, foreign investors like to come through Hong Kong because Hong Kong has a nicer, prettier, legal and regulatory system versus the mainland one, or at least one that’s more familiar to international investors. The reality is that all of that can be blown up. What, what provides the ultimate protection to the international investor going through those schemes is the fact that Chinese investors also are invested in our market. When the foreign investor sells their security and once they get their money back out of the mainland, then the obligation is on Hong Kong Exchanges.

[00:51:40] But when a mainland investor wants to sell that their Hong Kong security and get their cash back into the mainland it is our clearing house that ultimately has to deliver that money to China clear. And so for want of a better description, we’ve each got a gun against each other’s head.

[00:51:58] If they [00:52:00] cause us to default on the foreign investor, then we will end up defaulting on the Chinese investor. So there’s a consequence for themselves, but by hurting our state, they would hurt their own market, which is why they don’t do it. Or at least it provides a level of guarantee that I think is far more solid than any legal contract.

[00:52:25] And out of this model that we’ve created here in Hong Kong, I believe that that can be replicated across financial systems in the rest of the world where you effectively create interlocking and mutually dependent structures, such that there’s no single country that controls enough of the system, that they can abuse their power over that system, which is what you see a little bit with the dollar system today, where the US is able to unilaterally [00:53:00] impose sanctions and other controls on strategic rivals, irrespective of whether its allies and the UN and other partners support those sanctions. Which is what you saw with the Trump administration’s blowing up of the UN back to Iran nuclear deal in 2018. And so I think this is a matter of design, which requires careful thought into creation of mutual dependencies, which guarantee security for all.

[00:53:30] Julia Charlton: So sort of a mutually assured destruction in the financial-

[00:53:34] James Fok: I, effectively call it sort of mutually MAD for markets.

[00:53:38] So mutually assured destruction for financial markets, but it’s a policy in seriousness, though. This is effectively the nuclear guarantee that, that carried us through the cold war. And although there were certainly instances where things got shaky, it [00:54:00] effectively ensured that there was no nuclear strike on any country during the cold war period.

[00:54:06] And I think that philosophy could apply in financial markets.

[00:54:12] Julia Charlton: So, we have a lot of questions, so maybe we’ll just keep going for a little bit longer than we had intended if that’s all right. So there’s a lot of questions on tax. And I know you’ve pointed out in your book that lower rates of capital taxes are perhaps undesirable as compared with income taxes, particularly on lower paid workers.

[00:54:30] What would you see as the ideal tax structure?

[00:54:32] James Fok: Look, I think ultimately tax structures need to be fair and they need to provide the government with the amount of income that they need, such that governments don’t become over indebted and they can provide for the basic needs of society, the infrastructure and other support.

[00:54:55] Different countries will have different levels of [00:55:00] meat. In Hong Kong, we are effectively- because our tax system is not mixed with the rest of mainland China, we’re effectively a city state, which is inherently much more efficient than a large state that has got an agricultural backbone where, you know, for instance, in the UK, London taxpayers are contributing to paying for roads and hospitals and schools in Scotland and Wales, which are far less densely populated.

[00:55:28] So I think that there needs to be a recognition that different countries will have different needs, but there needs to be also some minimum standards that prevent other countries from undermining other governments abilities to impose fair and progressive tax on their populations.

[00:55:52] I also think that the types of taxation that you saw in the 1960s and 70s, where the US had [00:56:00] in excess of 70% in income taxes on top owners, those are not ideal because they create massive disincentive.

[00:56:07] Julia Charlton: The UK had 98% at one point.

[00:56:11] James Fok: Yes, but I think also one thing, and this may not be popular with everyone.

[00:56:18] The taxation system within an individual’s lifetime, you know, they’re all sorts of things are going to drive different lifetime earnings and wealth accumalation including ability opportunity, and frankly luck and what we as a society and over multiple generations want to avoid is the buildup of huge wealth and income imbalances.

[00:56:44] And so there are natural points at which tax taxation can be levied, particularly in the form of inheritance taxes that’s stopped the creation of these essentially sort of intergenerational [00:57:00] aristocracies because it is ultimately, for most people, it’s not necessarily the absolute level of absolute standard of living beyond a certain standard of living that the people require. It’s that they need to see that they have fair opportunities and that the trajectory for themselves,

[00:57:25] and at some point in people’s lives for their children, becomes better rather than worsening. If they see their own lives worsening or they see the prospects for their children worsening, then that has generally been a major driver of social instability in the overturn of regimes.

[00:57:45] Julia Charlton: Yeah. Yeah. So another question that’s been asked is what can policymakers do to ensure tax evasion is penalized adequately or what non-monetary incentives can be provided to these individuals, I [00:58:00] guess, to stop them evading tax.

[00:58:04] James Fok: Well, I mean, the problem with tax evasion and tax evasions clearly criminal in most places, so they’re already penalties. The, issue is really around disclosure. The US right now through FATCA has an incredible disclosure regime imposed on the rest of the world.

[00:58:22] But equally it’s not imposing that on its own states. So, you know in Delaware and Nevada, etc you can have anonymity on company registries. You can have tax competition within the different states within the Federation of the US so I think ultimately transparency needs to be provided, but transparency needs to be provided on equal basis.

[00:58:48] I think modern technology, if it’s utilized cleverly and in a coordinated way can allow us to do that on a much, much more efficient [00:59:00] basis than has been the case since 9-11 to now.

[00:59:06] Julia Charlton: Quite a lot of questions about the US; how would you see what seems to be an increasing level of political instability in the US affecting tensions between China and the US and if the US fragments in some way in the next 10 to 20 years, what would that mean for China and the world?

[00:59:25] James Fok: Well, first of all, I think that a big part of the conflict between the U S and China is driven by these sorts of domestic tensions. The domestic tensions are built up because there are deep inequalities and hence deep divisions within US society. And many politicians have chosen to deflect that onto the outside rather than necessarily take the hard steps of addressing that the US has domestic problems.

[00:59:58] The, division of the [01:00:00] US as an entity. I really hope it doesn’t happen because, you know, although there are a huge tensions between the US today. If the US was to split, it’s difficult to see how that given US history and the history of the civil war. It’s very difficult to see how that might be achieved peacefully.

[01:00:25] And so the knock on effect of civil war in the US would be catastrophic for global economies and livelihoods and prosperity around the world . Even if you were able to see a split, the particular sort of divisions in the US if you look at the electoral map is that have two coasts that are fairly aligned in terms of their politics. And then you have a huge backbone in the middle dividing the country, which is in a different place. That’s not [01:01:00] necessarily going to make for a split into two entities. It could make for a split into multiple different entities, which would further complicate at least that division, even if it could be affected peacefully.

[01:01:15] Julia Charlton: So another question, can the Chinese government threaten the US government by selling bonds?

[01:01:21] James Fok: Yeah, it would be an incredibly self-defeating thing to do.

[01:01:24] Julia Charlton: That would be part of your mutually assured destruction scenario, wouldn’t it.

[01:01:28] James Fok: No I, think, unfortunately China’s, by selling office treasury, I mean, China would be trying to significantly hurt itself.

[01:01:38] It holds about $1.1 trillion of these things is a large part of the national savings. If they would dump treasuries then it would crash the market. And so the value of those treasuries would be significantly less valuable than they are today.

[01:01:56] Julia Charlton: So, are your policy suggestions or possible scenarios [01:02:00] for the two major powers guided by optimism, pessimism or realism?

[01:02:06] James Fok: I would hope that they’re guided by realism. I have no illusions that any major reforms to global financial system are going to be easy. T hey’re necessarily going to require a huge amount of debate disagreement and, and hopefully compromise.

[01:02:24] And, but I am optimistic that can be done because quite simply the alternative is so unimaginable. And today we have a better understanding of history and better access to analysis of historical events than any human society has ever had before us. It would be frankly, crazy of us to repeat the mistakes of history that have occurred over and over again.

[01:02:56] Julia Charlton: So I think we’re already about 10 minutes over time, James. So [01:03:00] one last question just about history. You’ve obviously had an amazingly, I would have said fun time. I’m sure it was very hard work writing the book and obviously, your wife’s contribution with the stories was a great addition, I think, to make it so readable, but tell me, who did you think was the most interesting or colorful character that you came across when you were doing this writing and perhaps you’d like to think or write more about them in the future?

[01:03:26] James Fok: Oh gosh. I mean, there are a lot of them. I think what- there are a number of Chinese leaders of the past 30/ 40 years that in understanding how the, where China’s come from and how the Chinese system is worked and how they’ve affected those reforms, I felt much greater respect for, but if you’re asking me about the most colorful character. John Law, who became the founder of the central bank in France and finance minister, as well as running a commercial business who [01:04:00] effectively crashed the French financial system to an extent that ultimately precipitated the French revolution probably has to be the most colorful character in the book.

[01:04:12] Julia Charlton: Absolutely. Well, thank you so much, James. I really thought that was great. And it brings us to the conclusion of our event and I apologize to everyone for going on somewhat, but there still are some unanswered questions. Thanks so much to James and also to Hannamiina, who so kindly chatted with James earlier.

[01:04:30] James Fok: Well, thank you very much, Julia and to the Chamber. You can buy the book from the end of the month in most major book sellers; Amazon, book depository are good if you’re in Hong Kong for mail order. You can find out more about me and other articles and about the book on my website, James A Fok dot com.

[01:04:49] That’s J A M E S A F O K dot com.

[01:04:54] Julia Charlton: Thank you very much. And goodbye, everyone. Look forward to seeing you again soon.