James Chau
Let's begin with China where in the first six months of 2022, GDP expanded by about 2.5%. There is that target though for the full year of 5.5%, that's more than double that. How and will it achieve that number?
Lawrence Lau
Shanghai's GDP is less than 4% of China's GDP and Shanghai's industrial value added is less than 3% of China's industrial value added. You've got to ask why do they have such a serious impact? The answer is that Shanghai is the station through which all or most of supply chains, domestic or international, they all pass through Shanghai. So, Shanghai stops, everybody stops. I personally believe that Shanghai has already more or less recovered. I expect for the rest of this year, an average rate of growth of 5.5% or a little bit higher. But that we will not get you to 5.5 of the whole year. Right. That will get you to somewhere between 4% and 4.5% for the year. I think we have to settle for that. But if you think about it, that is still much better than the U.S., UK, Germany, and so forth, it's still better than almost all developed economies.
James Chau
As you said, numbers need not necessarily be cast in stone. But whether you're looking at 4%, 4.5%, 5%, 5.5%, what are the challenges to achieving a meaningful growth, and as you said, a growth which would far surpass global expectations?
Lawrence Lau
China has already come out even earlier this year, to say that the emphasis is now on the quality of growth, rather than the quantity of growth. Part of the quality of growth has to do with the quality of public health. That is, from amongst 1 million people, 3.7 persons die from COVID since 2020. Do you know what's the comparable number for the rest of the world? I did the calculation. For the rest of the world, it's 993 persons per million.
James Chau
The World Bank says the global economy is hurtling towards a recession, possibly even stagflation. Do you agree with that assessment?
Lawrence Lau
There's no question that the developed world is heading towards a recession. Stagflation is something that Larry Summers has talked about. Now, stagflation basically means that you have a long recession, coupled with persistent inflation. Now, whether that's true or not, you know, we don't know, it's hard to tell at this moment because it is very hard to disentangle the effects of the interruption of the global supply chain, with a monetary phenomenon of basically, expectation-driven inflation. So that's how to. That's hard to tell.
James Chau
When I interviewed Larry Summers, for this show, a couple of months ago, we spoke also about the global supply chain, a very fragile international environment continues to create problems for it, is that likely to continue and worsen?
Lawrence Lau
I actually think that decoupling has some advantages because what that means is that with everything, every product, every service, there's a second source. There's diversification, so that it's not possible for everything to collapse all at once. It doesn't have to be a geopolitical, it doesn't have to be a pandemic, it could be an earthquake, tsunami, tornado, whatever, right? So, you want to protect yourself against all these possibilities, which means that you should never put all your trust into a single supply chain. Now, my suggestion, because of what happened recently in China, is that China should move away from Shanghai a little bit and create a different, independent supply chain, perhaps centered in Chongqing. China is big enough to have two supply chains, right, so that they won't all fail at once. And I think that's true of the world, too. Right? You don't want to have just one single supply chain.
James Chau
What would be the outcome if the supply chain issue continues, accelerates, worsens as well? And how should we, as consumers, but also just as members of humanity, prepare ourselves for those changes?
Lawrence Lau
I actually think that the key is really what I said, is diversification and second source. Because once you have a second source, what happens is that the monopoly power enjoyed by the first source disappears. The world really should not allow a single firm to dominate everything.
James Chau
Who are you thinking of?
Lawrence Lau
Like, Amazon, right? Or in China for example, Alibaba. Because once they dominate, they will make use of the monopoly power to make more money. I have nothing against making money, but not by using monopoly power. So, I think that in the long run, we hope that the supply chain issue will be solved, because there is competition, so it won't all stop at once.
James Chau
Professor Lau, I'm going to end with a 'crystal ball' question which I shouldn't do but you are eerily correct all the time. The global supply chain issue has exacerbated inflation. Question one, when will inflation peak? Question two, when will inflation fall?
Lawrence Lau
James, you really have to think nothing of inflation as one single worldwide phenomenon. Inflation is very high in the United States, it is also similarly very high in Europe for many different reasons. But it's not that high in China. I think part of the inflation is artificial. Let me give you an example. If you really think of oil prices, think of it before the Russia Ukraine conflict. This pretty much balanced their supply and their demand. And the conflict itself didn't really change supply demand very much. But why does the price go up so much? Because the buyers are still those buyers, the suppliers are still those suppliers. Why? I think it really has to do with price gouging on the part of some of the major oil companies. They will basically say, oh, great, the Russians can't sell their oil anymore, so we have more customers, and we'll raise our price. That's the only way to understand why the fundamental supply and demand basically should have stayed more or less the same. I think there is also the underlying monetary phenomenon that too much money is being printed. I think the interest rates will continue to go up and they will have some impact on prices in two different ways. One is that it will reduce demand. The other thing that will happen is that the higher interest rate in the U.S. will drive up the dollar. The dollar is now at the all-time high.
