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Recording of James Fok Fireside Chat 25 January 2022 with speakers:

Mr James Fok: Financial Markets Professional, Investor, Author

Ms Mary-Anne Kong: Partner, Asset and Wealth Management Industry Leader at PwC


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


This second  fireside chat with James Fok on his new book  ‘Financial Cold War’ provides insightful commentary on the  US and Chinese financial markets and  the history and current standing of the  US dollar-based global monetary system. James highlighted possible soluctions to the imbalances which have arisen as a result of US dollar dominance in the world financial order 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.

[00:00:00] Julia Charlton: Hello and welcome everyone. 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 Relations from the Financial Markets”. I’m Julia Charlton, chairman of the Commonwealth Chamber. And I’m delighted that James is joining us today.

[00:00:20] James Fok is an author, investor and strategist in the financial arena. 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 in various investment banks, spanning Asia, as well as Europe. With such rich experience throughout his career, James has spoken extensively about market structure issues and the intersection between geopolitics and the international financial arena, which has resulted in this spectacular book. Financial Cold War is a succinct and well captured account of a very intricate and multilayered phenomenon. [00:01:00] Unlike many mainstream accounts, the book we’re going to be discussing today looks not only at the status quo through an unprecedented view of the financial markets, but also goes back in history to trace historical context from which our current issues originated.

[00:01:16] The Bretton Woods Conference of 1944 resulted in the US dollar dominating the global financial system. This book masterfully transforms dry historical recounts into an engaging chronological analysis of how fatal flaws within the international financial ecosystem can lead to instabilities. Offering empirical and practical solutions for what some might see as an otherwise inevitable boiling point, the book hopes to educate the audience as to the gravity of the situation and ways to collectively work towards balance and stability.

[00:01:50] Joining us today to explore the themes, layers and nuances of this is Marie-Anne Kong. Marie-Anne is a member of the Institute of Chartered Accountants in [00:02:00] England, and is a partner at PwC Financial Services Division and leads PwC’s Asset and Wealth Management Division. Having over 30 years of experience, not only in wealth management, but also in advising asset management firms on operational effectiveness, best practices in areas of corporate governance and internal controls, fund startups, regulatory compliance work; Marie-Anne is extremely well-experienced in the financial domain to discuss Financial Cold War with James. So now over to James and Marie-Anne for their discussion.

[00:02:32] Marie-Anne Kong : I’d like to kick start the discussion by just trying to understand from your perspective, in terms of what really motivated you to write this book, right. So much information you’ve done so much research, you know. Before you put forward your point of view, but what was the key motivation.

[00:02:50] James Fok: I was born in and grew up in Hong Kong. And I had the good fortune of being able to [00:03:00] study, live in, and work in different places around the world before I moved back home. In the last few years, Hong Kong has been through quite a lot of turbulence, like many other parts of the world.

[00:03:15] And from the work that I was doing in financial markets, understood at a high level some of the drivers of some of the social tensions that you’ve seen. But over the past 10 years working at the intersection between policy and financial markets gave me a much deeper understanding about the imbalances in the financial system and in financial policies which have precipitated not only social conflicts in individual countries, [00:04:00] but conflicts between countries and particularly the frictions that you see between China and the US today.

[00:04:08] And I felt that it was important for people to understand that in a much deeper way. I’ve dealt with policymakers, I’ve dealt with people in financial markets, who’ve been in financial markets for a long period of time, but many of these issues are very poorly understood and let’s face it the plumbing of the financial system is not the place where most people spend most of their focus or is one of the really most exciting places to be in financial markets.

[00:04:50] But what I found when I began working at the Exchange and, you know, as a novice, at that time, I had very little [00:05:00] understanding of many of those issues. But what I found was I started being invited to breakfasts with finance ministers, I started being invited to consulates and receiving delegations from organizations such as the IMF and it piqued my interest in that I realized that this stock is perhaps pretty important and actually fundamentally it is.

[00:05:30] It’s just so poorly understood by many of the decision-makers driving most of the important policies. And so what I wanted to do was write something that was able to explain these, not to the specialists, whether it’s the China specialist or the financial market specialist who, necessarily because of the expertise, [00:06:00] operate within a very narrow, specialized field.

[00:06:03] But to be able to explain the issues holistically in a way that everyone could understand and grasp, because I believe that these issues are so fundamentally important to each and every one of our daily lives.

[00:06:20] Marie-Anne Kong : So, why did you feel that, having dedicated, you know, almost half of a book to some of this history, why did you feel like the history was so important right before you then lead into explaining some of the tension that’s happening now?

[00:06:35] James Fok: That’s a good question. I really gave a lot of thought at the outset of writing this book to two things. One is how could I make people really understand the issues at stake. And the second was how could I make people understand where the other [00:07:00] side was coming from? Because the reality is that when I talk to friends in the United States, or I talk to friends in China, neither groups of people seem unreasonable.

[00:07:16] They hold their different views. In many instances, they hold the same views. And yet we’ve landed up in this situation where we’re at odds. And I thought that was important to put down in a digestible way, where each side had come from. So as to be able to increase the mutual understanding and hopefully the empathy that’s required for some of the compromises that are inevitably necessary in rebalancing the financial system where imbalances exists today.

[00:07:54] Marie-Anne Kong : We keep hearing about every time there’s a new pronouncement, comments that’s made to basically [00:08:00] exacerbate the conflicts between US and China. Right. So it seems to be never ending from where we’re sitting here.

[00:08:06] So what do you think are the biggest challenge, right, going forward? It’s like, how do we resolve some of these conflicts?

[00:08:14] James Fok: So the central theme of the book is that rising wealth and income inequality in both countries and in different parts of the world have been at the root of many of the social tensions that we are seeing and experiencing today.

[00:08:35] And those social tensions are spilling over into international conflicts. Now I think the problem fundamentally is that without a full understanding of A how those social tensions have come about, but also B, how the system [00:09:00] has conspired to drive those social tensions. There’s a serious risk of misdiagnosing the problems and therefore applying the wrong solutions, which simply exacerbate the issues. Now, certainly we’ve seen as tensions have built up, and these issues haven’t been addressed we’ve seen a rise in populist nationalism, around many different parts of the world. And unfortunately, when that happens the tendency is just simply then to focus on the conflict and the escalating tensions. The huge risk, as we’ve seen in past situations, whether it’s before the First World War or the Second World War that as those tensions have escalated. [00:10:00] The populist nationalist rhetoric tends to remove the ability or diminish the ability for leaders to stand down and deescalate problems. I don’t believe for a minute that the US and China want to end up in conflict. It is certainly not in their individual self interest to do so, but we’ve seen time and again in history that he does paint themselves into corners through these situations. And that is what I’m seeking to help explain in the hope that we will avoid.

[00:10:47] Marie-Anne Kong : Now I’d like to get your views on this. It’s like, do you think this is a question of like dominance and power? Right. So, I mean, obviously, you know, China has really reason, you know, to [00:11:00] the level that we would not have contemplated 20 years ago. Right? So the group has been extremely, phenomenal. Just this week, you know, they announced, I think a growth rate of 8.1%, in terms of the growth in GDP which is above expectation, which essentially market sentiment is, this is narrowing the gap between the biggest economy versus the second-largest economy, which is China.

[00:11:26] Right? And soon maybe China will overtake the US economy. And then at the same time, an interesting comment by the Chinese is power and dominance is not the priority. Alright. So they’re looking at really trying to enhance the livelihood of their population. All right. So, ‘Common Prosperity’ , is a terminology that everybody’s talking about right. So- and already we are seeing a number of initiatives that various organizations operating in China or trying to [00:12:00] lend support towards that Common Prosperity. So I’d like to get your views on what does that mean for people who are basically watching what China is doing.

[00:12:10] And a lot of organizations have huge investments in China. And I would say that that investment is also continuing, right. So, what kind of advice would you give to international players who are looking at China from that lens?

[00:12:25] James Fok: Okay. I think to answer the last part of that question first, I think we all have our biases and prejudices myself included. And in fact, probably one of the most embarrassing professional experiences I ever had was when we were discussing with the Shanghai Stock Exchange on implementing the first Stock Connect. I remember it clearly a conversation that I had with my opposite number at the Shanghai Stock Exchange, Fu Hao, who’s mentioned in the book.[00:13:00]

[00:13:01] We were discussing the details of implementation of the system and it was a particular point of implementation and I found myself getting very frustrated because I had a particular view on how it should be done. And he didn’t agree.

[00:13:23] He then asked me why I thought it ought to be done my way. And I said, well, this is international market practice. This is how it works everywhere. And he looked at me and he said, but why? And it suddenly dawned on me that it wasn’t, that he didn’t understand what international market practice was. He understood perfectly well.

[00:13:51] He just didn’t agree with it. And I wasn’t in a position to justify why [00:14:00] it should be done in that particular way. It also dawned on me at that point that really, he had quite a good understanding of international practices and my understanding of the domestic market practice was very limited. And it suddenly spurred me to educate myself a lot better, but a lot of these things are positioned around power, the word you used. Wealth; most people don’t really think about the concept of power and wealth in that way. The vast majority of humanity is just looking to get by day by day and hopefully each day do a little bit better for themselves and for their families. And so what in my view is most [00:15:00] important is really the trajectory. And the problem that we’ve got today is that for many of today’s younger generation, given the wealth and income disparities that have opened up, they find themselves in the unenviable position of possibly facing a standard of living which is lower than that which their parents had and being able to offer to their childrens’ needs, even if they can afford to have children, a lower standard of living with them.

[00:15:35] And so I think when you look at- it’s very easy, if you sit in this top layer where you’re thinking about the big problems of the world and geopolitics and money politics. It’s very easy to lose yourself into thinking that this is all about wealth and power, but [00:16:00] if it’s just about wealth and power for a very small group of people then they’re not going to have an entire nation following them. But what’s been driving the tensions is in each country has been an increase in income wealth disparities, which means that the trajectory for people’s standard of living and their children’s standard living has diminished versus what it might once have been or what they had hoped for.

[00:16:35] Marie-Anne Kong : So, in essence they’ve also looked at how to improve that imbalance, within the country which has meant that they’ve had to clamp down on certain industries. Right? So the technology industry, for example, has been hard hit, right? So they went through a stage where there was a lot of innovation, you know, they all rose very, very fast.

[00:16:58] And now so the new policies [00:17:00] being introduced within China, you know, is creating some uncertainty you would say, right . So I take the example of the Ant Financial’s IPO, right? So which everybody was really watching very carefully in terms of, wow. How can something like this happen? Right.

[00:17:18] And what does that mean for going forward? Right. So. I’d like to get your views in terms of, you know, for any advice that you could give to international players who are looking and watching China. All right. So, because I come back to that because we are sitting in Hong Kong, we feel that, you know, we’re closer, we understand a bit better, you know, in terms of some important policy changes or implications of a business.

[00:17:40] But for people who are not as close, right. So what would be your advice or what do you think, they should watch going forward? It’s like a, you know, we get this question all the time and it’s like, should we continue our investment into China? So given all these changes in policies.

[00:17:58] James Fok: That’s a very good question. [00:18:00] And actually this is a great question because it highlights one important issue, which is that both countries actually face very similar challenges. But when you look at internet platform monopolies, and the winner-takes-all dynamics of those businesses, there’s clearly huge opportunity for the creation of monopolies and oligopolies.

[00:18:33] And there’s huge potential for abuse of that monopoly power. In the short term, we all experienced these as more services, free services, additional convenience, and all that is really great. But over time that concentration of power [00:19:00] and the ability to lock out potential competitors and innovators, ultimately stifles long-term development and growth. Countries have taken very different approaches to this. The US, while it has looked at antitrust enforcement in certain areas, it really hasn’t particularly cracked down on some of the abuses and potential abuses that exist within those platforms.

[00:19:39] China has taken a different approach, which is that it’s while wanting to push the development of its technology companies, it has sought to contain their ability to abuse the huge power [00:20:00] that they’ve developed given the scale that they’ve reached. Now, you can quibble about whether due process was followed, whether it was too hard to crackdown, et cetera. But ultimately these are problems which are common to both countries.

[00:20:23] Now in certain respects actually the antitrust enforcement is something which possibly would be to American consumers and American workers long-term benefits. US obviously has much greater constraints over your ability to crackdown. You have to go through the courts. These companies are very powerful.

[00:20:55] They’re able to employ reams of expensive [00:21:00] lawyers to fight their case. So it’s more difficult. China has cut through that in certain cases to do what the government feels is the morally right and systemically right thing. From the perspective of a Western investor, that may be difficult to understand because it doesn’t follow all the due process that might be followed in another country.

[00:21:34] It also may seem arbitrary and sudden, and for China, there’s also a consequence to that which is that large part of China’s success over the last 40 years has been the ability to attract international capital and investment, international expertise. And so there is a [00:22:00] balance that must be struck if it is felt that those crackdowns are egregious in their approach, then it might put off foreign investors, which will ultimately be to China’s detriment.

[00:22:20] But, I think with respect to the fundamental problems, they’re pretty much the same problem and it’s entirely understandable given the two countries’ culture, history, and legal traditions as to the approach that they’ve taken.

[00:22:42] Marie-Anne Kong : The other angle is also, you know, coming back to the discussion we had early on in terms of the prominence of the US dollar in your book, you know, you talk about a lot of this. I want to- in terms of what could be a replacement, right? So, I think you talk about the evolution in terms of somehow some other [00:23:00] currencies, like for example, the pound Sterling at some point was quite dominant, right? And, when the US I think now the US dollar is clearly the currency that everybody’s using. And, we keep hearing questions about whether the Renminbi could be replacing that.

[00:23:17] I think there is time and time again, people talk about China may not necessarily want that, right. To have their currency. That’s why there’s so much capital controls and so on, but what could be an alternative if it’s not the US dollar? What could be an alternative?

[00:23:33] James Fok: May I first take a step back? Because I think that there’s one important thing to understand, which is one of the key points in my book, the dollar serving in this central role in the global monetary system has been hugely useful for a very long period of time.

[00:23:57] And reform of the [00:24:00] global monetary system is not something which can be undertaken lightly or easily. So the question really comes down to what are the consequences of the dollar playing that role? I think that there’s a general belief expressed in the term “exorbitant privilege” that the US has benefited exponentially through the dollar serving in this role.

[00:24:32] The reality I think is quite different. So the fact that the dollar serves as the primary unit of international trade and investment has created a demand for dollars around the world. And in order to feed that demand that the US has had to continually run balance of payments deficits. And when the [00:25:00] US economy is unable to grow, at least as fast as the rest of the world, that leads to ever higher levels of indebtness which, if taken to extreme, ultimately will undermine the currency and the dollar system. We’ve been close to the precipice before, but we haven’t crossed over as of yet. When you look at it from the perspective of international users of the dollar, it’s very efficient to have a single unit that you can reference for your currency hedges, your interest rate hedges, a common currency that people are able to transact in and a huge bank of securities and other investments denominate in dollar into which you are able to park your capital and make long-term investments.

[00:25:59] But [00:26:00] that means that for a lot of countries in particularly less developed economies they’ve had to raise capital in US dollars so their governments and their corporations have had to issue you a stolid debt. And we’ve seen throughout the 1980s, 1990s, and even beyond. But whenever those currencies have fallen sharply against the dollar, that’s made it very difficult for those countries and those companies to repay those dollars on native debts, which has precipitated bankruptcies, which has precipitated job losses and a huge amount of economic misery in the affected countries.

[00:26:46] So when you look at this narrative, it’s two different perspectives on something. The US sometimes sees this as other countries holding down their currencies artificially to [00:27:00] steal US jobs. The other countries’ perspective on this is that they’re not so much stealing US jobs, although they are sometimes mercantile intense, but it’s about maintaining currency stability in order to plan for the long term. And what you saw after the Asian Financial Crisis, particularly in late ’90s, that less developed countries started to insure themselves against those periodic, dollar volatility by building up reserves of US dollars, in particular US treasuries, that led to or worsened a problem of the overvaluation of the dollar. And even that you have to look at from the perspective of different levels of US society. So if you’re the wealthy shareholder of a large US [00:28:00] corporation that’s been able to outsource that production to lower cost parts of the world.

[00:28:05] You’ve seen your costs decrease, your profit margins go up and your shares increase in value. But if you’ve been a US manufacturing worker in the export sector over the last 14 years, it has meant huge displacement, has meant job losses or wage stagnation.

[00:28:28] Marie-Anne Kong : But then James at the same time, we do see many central banks trying to introduce cryptocurrencies. Right? So what do you think the future of that cryptocurrencies’ potential replacing to some extent that dominance of the US dollar.

[00:28:49] James Fok: So markets always innovate. And I think that cryptocurrencies are a symptom of a [00:29:00] loss of confidence in the US dollars value.

[00:29:04] So investors and individuals around the world have been looking for alternatives. With a specific case of cryptocurrency there has also been an element of speculation in that that’s driven some of the rises that you’ve seen in some of these cryptocurrencies. But when you look at this and- let me get back to this question of the Renminbi, the Chinese policy makers have looked at the role that the dollar has played and are quite wary about allowing the renminbi to so-called “usurp” the dollar’s status as the global reserve currency, because actually the dollar role has precipitated these imbalances and huge costs for the majority of people in the US.[00:30:00]

[00:30:01] Without the renminbi being sort of an alternative the market has looked for different solutions and that could take the form of these novel cryptocurrencies. My personal view of these is that they are a very interesting development and the technology that underpins them will be game-changing in the global financial system. But whether individual cryptocurrencies, stable coins survive in the long term, that I have no idea.

[00:30:42] Marie-Anne Kong : Time will tell.

[00:30:43] James Fok: Time will tell. But when you look at -when you look at that particular shift when the new technology is introduced, infrastructure is developed around that. The dollar system that’s been created has been accompanied by the [00:31:00] creation of payment networks like SWIFT, safekeeping infrastructures like Euroclear, Clearstream, and so forth.

[00:31:10] And this legacy infrastructure that’s built up around the dollar system has given the US huge control and influence over those networks and channels for payments and settlements. If we shift into new technology, then there’s a possibility that a huge amount of power transfers from the US and those institutions that control the incumbent infrastructures today to the parties that control those new infrastructures. And so in the context of the Renminbi, China’s been one of the [00:32:00] pioneers in the development of central bank digital currencies, it has huge potential and huge potential benefits. Not least in terms of payment and settlement efficiencies, reduce costs, also better ability to track money laundering, financial crime and other nefarious activities.

[00:32:25] China so far has introduced this for domestic retail payments, over time that could be extended to international trade but the fundamental problem still exists for China, which is that any party outside of China receiving renminbi still needs to find a use for that renminbi otherwise he or she will not be willing to accept renminbi as payment.

[00:32:57] Marie-Anne Kong : And I think that’s a constantly [00:33:00] evolving aspect, and it’s clearly something that we need to continue to watch. Right. So, that, expansion there.

[00:33:05] James Fok: Well, the issue there at stake ultimately is that in order for that amount of investment to build up ultimately is going to be a question of trying to being able to relax some of the outbound investment because Chinese investors, the natural holders of renminbi and the natural ambassadors in renminbi denominated assets, until and unless China allows outbound internationalisation of their securities markets to take place on a much greater scale than it has done today, there’s sort of likely to be a relatively limited pool of investments internationally for people to deploy their renminbi into.

[00:33:53] Marie-Anne Kong : So, James within the context of this US-Sino tension, Hong Kong obviously got [00:34:00] caught into it as well. Right? So Hong Kong experienced some turbulent times a few years back. And what’s your view in terms of the outlook for Hong Kong and its role in the international landscape?

[00:34:14] James Fok: Hong Kong ever since it was ceded to the British in 1842 has played a massive role in bridging China and international markets initially in trade and more recently in actual markets and given the differences in the systems between China and the rest of the world.

[00:34:42] There’s still a huge role for Hong Kong to play. And in fact, given what I expect to be increased needs for China to access international capital markets going forward. I think that the prospects for Hong Kong going forward [00:35:00] are extremely good, but that is also predicated on the fact that Hong Kong positions itself to capture those opportunities.

[00:35:11] Now what you referred to pre-COVID was actually the social instability unrest that you saw in Hong Kong. These are fundamentally driven by livelihood and wealth and income inequality issues which have plagued Hong Kong and which our society and our leaders haven’t dealt with as well as they should.

[00:35:39] And those are problems that must now be addressed with urgency. But also equally Hong Kong, having been in this privileged position has reaped a huge number of rewards, but [00:36:00] in reaping those rewards hasn’t necessarily invested for future opportunities. And I believe that Hong Kong needs to more aggressively reach for those opportunities.

[00:36:16] And that involves both setting up the regulations, setting up the infrastructure, but also educating the population and training the local workforce to be able to play a part in those opportunities and to benefit from.

[00:36:36] Marie-Anne Kong : So, James, you know, it’s been a fascinating discussion with you and so just to finish off, I’d like to get your views in terms of all the readers, what are the three key concepts that you think, you know, you would like the readers to take away from reading your book?

[00:36:52] James Fok: Well, I think I will name one because I think this is so fundamental. I don’t want to dilute [00:37:00] it. The interests of China and America each individually lie in the economic and social welfare of the other.

[00:37:14] That is a fact that has been created by the level of intertwining of our global economy through trade, through investment. That’s just in trade and finance. Equally, you could make that case for issues of much greater importance, such as the survivability and the sustainability of our planet. So I think in that sense, the one most important point that I hope readers will take away is that there’s no option but to find a way to work [00:38:00] together.

[00:38:01] Marie-Anne Kong : That’s an excellent way of ending this discussion, right?

[00:38:05] Let’s work together. James, thank you so much for your time. It’s been a delight to be able to have this discussion with you and thank you.

[00:38:12] James Fok: Thank you very much Marie-Anne.

[00:38:14] Marie-Anne Kong : Thank you.

[00:38:16] Julia Charlton: Hi there everybody. Wasn’t that fantastic? Thank you so much, James and Marie-Anne, that was really fascinating. So we have a lot of questions. So I’m going to dive straight into them, James.

[00:38:27] Here’s one from Dr. Robert Waller, going back to Ricardo in the early part of the 19th century, the basic assumptions that wealth was created by labor and the three basic factors of production, land, labor, and capital couldn’t be moved across national boundaries, but nation states have an interest in protecting their interests.

[00:38:45] Don’t you think this is a sufficient argument for China wanting the renminbi to become a replacement currency for the dollar?

[00:38:53] James Fok: I don’t necessarily believe so. And I think, you can look at this in terms of China’s behavior. [00:39:00] China has had the opportunity to significantly increase the pace at which it internationalises the renminbi. It’s chosen not to do so, basically, because it’s seen that within the much more globalized world for capital and even labor versus back in Ricardo’s day, there are huge costs to allowing your currency to play that role.

[00:39:26] And so in that sense, I don’t necessarily- there are huge advantages in the short term of currencies being reserve currencies and they allow countries to live beyond their means for a long period of time. But if you look over the long run, if you allow that to happen, and the inevitable consequences we’ve seen throughout history is the debasement of those currencies, which has led to the fall and decline of empires.

[00:39:57] And so, in that sense, I believe that the Chinese [00:40:00] government is looking at this from the very, very long-term perspective. And in that sense, perhaps trying to, lengthen the survivability of the existing. regime and the existing cycle. And so the alternative for them is what they’ve been pushing much more aggressively is a global utility such as the IMF SDR, which may not be a perfect solution, but it forms the basis on which to possibly redesign the scheme.

[00:40:37] And in fact, was the alternative presented by John Maynard Keynes’ back at Bretton Woods.

[00:40:43] Julia Charlton: Thank you. Thanks. And here’s another question. You speak a lot about the continuing structural misplacing of capital. How do you see this massive issue being approached by the mainland in the coming years?

[00:40:56] James Fok: I think this is ultimately going to be a very [00:41:00] difficult transition for China to make, not least that there’s already been significant misallocation of capital in terms of excess industrial capacity, excess home building, and so forth with which needs to be digested. There’s also the freeing up of the allocation of capital necessarily touches on the legal system and the relative power of the government and of private enterprise.

[00:41:31] And so I believe that China will, I think it will, go through a debate, you know, at a societal level, but ultimately this will take the form of some struggle between different factions in society to find an accommodation. And hopefully they’ll come through that peacefully in finding the accommodation.

[00:41:54] I think the ultimate answer ideally would be more [00:42:00] power to the market to allocate and price capital, but accompanied with higher level rules and regulations that really police this to a much better and more complete level than is being done in the free market of the US or so-called free market of the US today.

[00:42:21] Julia Charlton: Do you think that China, through Hong Kong or possibly within China, would benefit from a truly NASDAQ style stock market, which would allow all comers, with probably less regulation and finding other ways to control malign behavior, in terms of capital allocation.

[00:42:41] James Fok: I think in terms of providing it’s ultimately down to a level of providing for competition, innovation, and a level of equality of opportunity.

[00:42:52] And in that sense a NASDAQ style small cap market I think would be very beneficial [00:43:00] because it would allow smaller and medium enterprises much easier access to capital, inevitably that’s going to be accompanied by- it tends to be the case that this segment tends to have higher rates of failure, tends to have, more regulatory and disclosure problems simply because of the relative smaller scale of these companies, I think those are risks that if they are managed well are certainly worth taking because of the benefits to be reaped from that system.

[00:43:35] Julia Charlton: Yeah. Yeah. Thank you. Here’s another question. In relation to Hong Kong, referring to the afterword in your book is Hong Kong making an increasing error and departing from Cowperthwhaite’s positive non interventionism and starting to “pick winners”, has this not raised expectations unrealistically rather than reducing wealth disparity?

[00:43:57] James Fok: It’s a very good question. [00:44:00] And I hesitate to venture a response. I make criticisms about some of the decisions taken by the colonial regime during the sixties and early seventies, simply because they didn’t invest for the longer term, particularly in the area of education, which I think has been damaging to Hong Kong at the present time.

[00:44:29] But, you know, vis-a-vis the aspects of that regime, vis-a-vis a relatively free hand to the market to allocate capital. I think that was generally a good thing because I think governments don’t necessarily have the expertise in particularly in a small place like Hong Kong where you can’t necessarily afford to maintain the size of bureaucracy to have expertise in many areas.

[00:44:57] It’s not necessarily a great thing [00:45:00] to try and force on to the government the capital allocation decisions where they don’t have the requisite expertise. That said, I do think that in order to have a well-functioning system there needs to be certainly a high degree of regulation.

[00:45:22] And I believe that there have been, regulatory and policy failings in certain areas, not just in education, but in Hong Kong housing policy which require I think a heavier hand of government at the regulatory level. Rather than necessarily the capital allocation and pricing level.

[00:45:43] Julia Charlton: Thank you. Thanks. Here’s another question that the point’s been made that international regimes are a necessary feature of the world economy and are required for efficient operation of the international economy. Do you find that a function of the nation state for it to advance its own interest [00:46:00] as China’s doing now?

[00:46:03] James Fok: Well, I think it’s just a fact of life that, not even nation states, I mean, each individual is going to advance their own interests. The conflict which I talk about in my book is really about when individuals or individual nation states pursue that their own interests to an extreme that possibly creates conflicts, which are not in their interests.

[00:46:31] And so what I would ultimately advocate is for everyone to look at the lessons of history and take a more enlightened view to what their individual self-interests might be, including at the national level. And I would say that at the national level today, you’re finding a better, more stable global monetary system and finding a [00:47:00] better equilibrium around the balance of trade and other aspects of international interaction, not certainly in all countries’ self-interest.

[00:47:13] Julia Charlton: Thank you. Thanks. You mentioned in your book, James, that financial markets have failed to address problems like climate change, what would you advocate as a solution for that?

[00:47:25] James Fok: Right now the whole ESG theme and, you know, good corporate behavior has become a big theme.

[00:47:35] And while not seeking to denigrate any of the good work that is being done there. This is happening largely because I feel that governments have abdicated their responsibility to establish clear rules and to regulate. And so in this sense, I think, you know, if we want to have [00:48:00] a reduction in carbon emissions or whatever other climate objective or ecological objective, we have. I believe that the government needs or governments collectively need to enact very clear rules and not just rely on companies or individuals to take actions on their own because in aggregate they’re unlikely to do so. And also they’re likely to- or different regimes that are then likely to compete against each other to lower standards, to give advantage to their own companies and their own citizens.

[00:48:46] Julia Charlton: Thank you. Thanks. One thing that occurs to me is that parts of the EU have also seen quite a lot of wealth disparity, you know, for example, between Greece, Spain, and Italy and say Northern Europe, Germany. So how does [00:49:00] that fit in with the thesis of the global domination of the US dollar causing disparities?

[00:49:07] James Fok: Look, I think because it was a book focussed on the US and China, I necessarily focused a lot on those two countries. With regards to the EU, I think one of the big challenges they have, which was highlighted by the Euro crisis, was that in the past they had without fiscal unity in the past they were able to adjust to different levels of productivity growth in different parts of Europe by having periodic currency adjustments and devaluations of currencies in less efficient nations, typically around Southern Europe.

[00:49:50] Now that they’ve got a common currency, they don’t have the ability to make those adjustments. And the mechanism therefore for [00:50:00] rebalancing should necessarily be through fiscal means. But that is at the moment stymied by the lack of essentially a common fiscal regime across the EU.

[00:50:14] Julia Charlton: Right, right. You write quite a lot about tax and the inequality of capital taxes and favoring the wealthy by being lower and actually then the lower earning members of society are tending to pay higher rates of tax proportionately. What would you see as the optimal tax structure?

[00:50:34] James Fok: This has come about basically because it is much easier to- everyone wants to attract investment to their countries.

[00:50:42] And it is much easier to tax labor than capital because capital is much more mobile than labor. This is what’s brought about these rather unfair tax systems that exist today. I do not advocate [00:51:00] a reversion to the extremely high rates of taxation that existed around the world back in the 1970s, because they were a big de-motivator for enterprise and innovation.

[00:51:14] I would advocate some level of global minimum standards. I believe that there still needs to be some competition between countries, because I think that it forces governments to make themselves more efficient. But ultimately I think when you talk about equality and the sustainability of the regime, it is inevitable that individuals over the course of their lifetimes, for reasons of different levels of ability, different levels of opportunity, and frankly just blind luck will have different levels of lifetime earnings.

[00:51:53] The natural juncture at which to affect redistribution is [00:52:00] through inheritance taxes. That redistribute part of what an individual has accumulated during their lifetime to society. That’s not necessarily going to be a particularly popular view in somewhere like Hong Kong, where we have no inheritance tax today.

[00:52:17] But I think if you want to create long-term sustainability and survivability to any regime, that is something that should be considered.

[00:52:29] Julia Charlton: How do you see the digitalization of the RMB and the sort of RMB cryptocurrency, the government backed Yuan affecting internationalization of the renminbi.

[00:52:42] And will that be significant, do you think?

[00:52:46] James Fok: I think it will be marginally helpful for two reasons. One is that it may have some greater level of efficiency and lower cost versus existing channels [00:53:00] of payment. And so may encourage some counter parties dealing with China to accept more renminbi in payment. I think there’s certainly an element in which it rebalances the level of power in the system, because by bypassing some of the incumbent US control or US influence networks for payments and settlement, China creates for itself better financial security. That all being said. I think the impact of it is likely to be limited until and unless China is willing to significantly increase the pool of renminbi denominated securities off shore, because the counterparties at the moment receiving RMB in international markets have very little that they can do with that renminbi other than to put it back into China, which isn’t always feasible or [00:54:00] easy. So I think for China, the way that they want to proceed is to pursue a much greater level of internationalization of renminbi they should enable their citizens to invest more easily in international markets. Since their citizens are natural renminbi denominated investors that would naturally create a much greater demand for issuance in renminbi in order to tap that pool of capital.

[00:54:30] Julia Charlton: Thank you. And we’ve talked a lot, obviously, about the US dollar and Hong Kong. One of the features of Hong Kong stability has been it’s pegged to the US dollar floating within a narrow range around 7.8. How long do you think that will continue to serve Hong Kong’s interests? And do you think it will change in the long run the US dollar peg of the Hong Kong dollar?

[00:54:51] James Fok: I’m not clear that it’s serving Hong Kong’s interests more broadly even today. It has [00:55:00] been a huge boon. It’s been a huge force for stability, but what it’s also meant is that when the economic cycle in Hong Kong diverges from the US economic cycle, where we’re tied into either interest rates that are far too high or too low, and that over the past 13 years since the global financial crisis has been a big driver of the huge increases in low interest rates that have contributed to huge increases in property prices, which have been one of the major causes of social tensions in Hong Kong.

[00:55:42] So I think that it is time to consider a more balanced mix that reflects the mix of business that Hong Kong is actually doing. And much of that is now with the mainland.

[00:55:59] Julia Charlton: Right. So what [00:56:00] would you advocate in that regard?

[00:56:02] James Fok: Well, the Singaporeans have moved to a basket approach in their currency, which, you know, still provides that the benefits of this stable currency regime, but allows for greater flexibility, for adjustments to that currency and provides for greater flexibility in the setting of their domestic interest rates.

[00:56:25] And I think that’s something that, you know, certainly should. And I think Hong Kong- HKMA has looked at it but I think that that’s something which may be considered with more urgency or immediacy.

[00:56:39] Julia Charlton: Thank you. Thanks. So James, your book is a wonderful read. And for anyone who hasn’t read it, I do urge them to do so.

[00:56:46] And not least because of the- some of the great storytelling and some of the characters that you talk about who sort of leap off the page. So could you tell me who from all your research and writing was your favorite character in this incredibly [00:57:00] important story of the world’s financial markets?

[00:57:02] James Fok: Well, I think if I can pick several. In terms of favorite, having studied in much greater detail, the challenges that the Chinese leaders went through the period of reform and opening up and the acceleration China’s commercialization and internationalization in the 1990s, early 2000s, I’ve certainly developed a much greater respect for the individuals who steered that. But in terms of a colorful character, I think you have to give it to John Law. You know, as a Scotsman who ended up effectively running the Central Bank, the finance ministry and a massive commercial enterprise in France, who then ended up bankrupting the regime, which ultimately precipitated the French revolution later, is probably the most colorful, if not reputable, character.[00:58:00]

[00:58:00] Julia Charlton: Thank you. Thank you, James. Well, it’s really been great to talk to you, and that brings us to the conclusion of our online event today. Thanks to everybody who’s joined us. And thanks especially to James and to Marie-Anne.

[00:58:14] And James, could you please tell us where people can find your book and where they can find out more about you before we depart?

[00:58:23] James Fok: Thank you very much, Julia. You can get the book at all major booksellers. If you want to find out more about me or get links to those, you can reach through my website, James A Fok, J A M E S A F O K dot com.

[00:58:39] Julia Charlton: Thank you. And thanks everybody. We’re looking forward to seeing you again. Bye.