 Well, good morning, ladies and gentlemen. Welcome to this first issue briefing on day three of the annual meeting of the new champions. My name is Oliver Cairn. I work at the World Economic Forum. It's my pleasure to introduce this session. Before I do, I want to give you a little bit of a potted rationale for these format issue briefings. We try to tackle some of the more topical issues and items on the news agenda in issue briefings. They tend to arrive on the programme quite late. We tend to organise these in the days before the meeting. But really what we're looking to do here on the outer edges of the meeting and convention centre is really get a good handle on some of the more critical issues facing either the global economy or the global state of industry. So, very few subjects more topical than the subject of global debt. We are ten years on from the global financial crisis. We're 20 years on from the Asian financial crisis. If everything comes in threes like London buses, then we should be concerned. We have two very esteemed speakers for this session. I'm very, very honoured to be joined by Mr Juning, Professor Juning, the PBC School of Finance and Associate Dean of the National Institute of Financial Research at Tsinghua University. Llywodraeth Cedric is just finishing another session, actually, and he'll be down in a couple of minutes. But we only have 30 minutes. I encourage you all to be as energetic and proactive as possible. So if you have any questions, please do stick your hands up. Just to get the party started, I'm going to get a few of my own in there quickly. Professor, by way of brief introduction, your blog that you published on our agenda websites this week is the most popular blog we've published during the whole meeting. 20,000 people have viewed it in three days. So it's obviously a reflection on the quality of your writing, but perhaps also it's a reflection on the fact that this is a subject which is top of people's minds. We are looking at, as you point out very, very clearly in this article, we're looking at 10 years on from the Lehman crisis. Some people are saying that there's many similarities are still here, we've in fact grown global debt by around 50% or 60% since that time. So the obvious way to start off this session is to ask, have we been sleepwalking into another impending disaster? And I don't mean to be sensationalist here. Well, I hope not. Actually, I've personally lived through the bankruptcy of Lehman Brothers. I joined Lehman Brothers three months before its bankruptcy in Hong Kong. So I think, I mean, we are in uncharted order in the sense that, well, the non-traditional monetary policy that has been carried out by major central banks, including the US Federal Reserve, is really something unprecedented. So if we have lived in the traditional world, I think I will be far more confident that we are going into another debt crisis or something like that. But given that the unprecedented large amount of liquidity that has been injected into the system and also given the concerted efforts from central banks trying not to walk into the same problem again, I think that's sort of giving me some confidence or alleviation in a way that, well, back in 2007, not too many people are raising the alarm saying there is a crisis coming up. Whereas now I think we have more discussions of that. I've done quite a bit of research on bubbles and crisis. I think one key nature of bubble is bubble often formed when people don't think it is a bubble. But if we are concerned with crisis, I think certain precautions have already been taken trying to prevent one or at least reduce the marginal impact of one. OK, that's very interesting. So on one hand we have an expansion in global debt but we also have greater awareness of it. And which of those forces is bearing out? We don't want to talk up the prospect of anything going wrong. We really, really don't. But what are the big risks that we need to get a grip on? Well, I think if we talk about an expansionary policy, I think the bigger concern with that is, probably twofold, one is the accumulation of debt. The second is the labor productivity is not growing as much as what is warranted by the increasing level of debt. So I think two things are both at work in the sense that if you look at Europe, I think the labor productivity is really not going to grow anywhere fast. But then we're still living in the aftermath of the sovereign debt crisis which is about a decade ago. But I think the picture in the entire emerging economies are more encouraging in a way that many emerging economies have been making the efforts of trying to engage in meaningful structural reform and they have better foreign reserves, their economies more resilient and they have engaged in more market oriented reform. So I'm hoping that that is paving the way for a more sustainable and more resilient system for the emerging economy. Because I think that the problem with crisis is always, even though it often started with a policy from the developed economies, it is always the emerging economies that's going to take the bigger part of the impact. And then I think with the ever increasing integration between the developed and the emerging economy, I don't think it is realistic to talk about decoupling anymore. So whatever happens in the emerging economy will eventually circle back and haunt the developed ones eventually. Which is a really interesting point because you're right, decoupling has kind of exited the vocabulary in the past 10 years. Exactly, yeah. In the past 10 years. But we also need to be mindful of that very fact. So we have interest rates in the US likely to continue to rise. We've already seen a couple of problems around the world in Argentina and in Turkey. I was reading this week and I forget the research paper but other countries, Philippines, Hong Kong, Mexico, other South Africa, there are other at risk countries and they're sizeable economies as well. So bearing that in mind and bearing in mind the close integration of a global economy, what is the kind of status of the risk at the moment? Well, I think it is probably fair to say that it is very difficult to see the occurrence of the risks beforehand in a way that when the risk comes, it's always taking the shape of the Black Swan event. So I think it's very hard to see that coming beforehand. But I think there are two things that's really alarming. One is it's not about the absolute level of debt, it's about the pace by which the debt has been increasing. I think in particular in many emerging economies, in particular China and to a certain extent some of the countries which are already in trouble. So I think it's the speed by which the debt is increasing is quite alarming. Second is I think there is sort of this false sense of complacency in the way that what the foreign reserve has increased, what the fundamentals of the economy has been improving, but I think many of them are heavily dependent on the assumption or of the expansionary monetary and the fiscal policy that has been happening in the past decade. Once that tight shift or when that tight comes out, I think that is concerning in a way of the asset prices will fluctuate and that will quickly eat into the bottom line of those companies or governments which are on the reasonable level of debt right now but with the deflation of asset prices I think they're going to face increasingly difficult challenges going forward. Thank you Professor. Lucy, thanks so much for joining us. You've just come from a live television debate where you've been discussing, which is absolutely fine. We like to work here so we're very glad that our strategy is paying off. Look, you're a visiting professor in practice at the London School of Economics. You're also adjunct professor at the National University of Singapore. Previously, again, Managing Director at Global Investment Bank. We've just been hearing from Professor Juning who joined Lehman Brothers three months before the global crisis in 2008 and since then adopted a more sustainable career path possibly. Part of the reason why I'm backing academia. I'm honoured that you're a member of our Global Future Council on long-term investing and maybe long-term investing is something that we should be talking about. Just to pick up the pace and the conversation. We've been talking about that kind of the trade-off between better greater awareness of the risks of bubbles growing but at the same time a greater increase in build-up of debt and possibly even worrying exteration of debt acquisition around the world. We're trying to make sense of that. What are your thoughts? I heard the last bit I think, let me pick it up from there, which is that it's the piece of growth that is of the greatest concern. If you look at it as a global aggregate, the speed of credit growth in the last five years, it's been relatively slow and stable in the developed world. So much of the about 80% of the growth has come from the emerging markets. But that also in itself is not necessarily a matter of risk and concern. What matters is the mismatch. Mismatch is inherent within it. So let's argue for the moment that China is a closed system and you have a bulk of reserves and you have a huge potential growth in a huge part of the country yet to be urbanized, fourth industrial revolution only beginning. So of course you need more finance and capital to invest for the future. And if it's a closed system, it's possible at a macroeconomic sense that it can carry a lot more debt. It's a greater problem if there are mismatches of the kind that you have. Argentina and Turkey are seen as the poster children right now. But you don't have to go as far out as that. Argentina and Turkey stand out because their current account deficit is about 5.5% of GDP. Indonesia is less than 2%. But for them it's a concern because the mismatch comes from the fact that about 30% of their debt is denominated in US dollars and about 40% of all of their government debt, domestic currency and foreign currency, is held by foreigners. So it matters who's holding your bonds because if they buy and hold, they don't mind market to market fluctuations. That's one kind of investor. But if they have to sell at the slightest sign of concern, then that's another type. It matters who holds your credit and it matters the currency mismatch and the duration mismatch. So a lot of their credit is due in the near term. And those mismatches are what we need to be mindful of. Of course, the trade war context has made it even more urgent in that many emerging markets are stuck in a pincer movement where on the revenue line they depend on China buying their stuff and on the cost line they depend on US dollar interest rates or the US dollar not being too strong. And if rates go up and the dollar strengthens from the denominator and China is not buying your goods as much as before because they were predominantly intermediate goods that were aggregated and going to the US, then you get hit from both sides. And then your debt carrying capacity becomes even more of an issue. Let me stop there and see if there's anything else. I've got a feeling we're going to have quite a few questions. But before we slip into that phase of this very brief session, let's just kind of look at the kind of angle of what we do about the situation we're in at the moment. We're not raining in dead, it's growing. Are we managing it successfully at the moment as the big seaward contagion keeps kind of rearing its head? So far Argentina and Turkey has isolated, but you've mentioned a couple of countries before you arrived. I was reading a research note Philippines, Hong Kong, Mexico, other vulnerable economies too. So what is the best way to manage it? Are we being successful or have we been lucky so far? We've been lucky so far and I think contagion is hugely dependent on investor behaviour. And I think investors are thoroughly disorientated. It's less than a year ago when Argentina came out to issue a 100-year bond. They wanted to raise 3 billion. They got orders of 10 billion for 100 years at an interest rate of less than 8%. What happened? We just had one bad harvest and we've completely changed our opinion on them so quickly. I think we have lost our nominal anchor. So if you take US interest rates, 10-year treasury rates have halved and doubled in the span of the last four years. That's meant to be the anchor from which every other valuation is determined. So investors, for a whole host of reasons, quantitative easing is one of them, are disorientated and therefore they are very jumpy, very jittery. And I think this is something which is a concern because when reactions are exaggerated, reactions are based on herding behaviour. I'm going to sell because you're selling because I bought when you were buying. I didn't know why I bought. I bought it because you bought it. And now when it's come to selling I'm going to sell it because you sold it. And that prosyclicality is amplified in the current environment. And that is a concern we need to be mindful of. Craig Sheffhans, who's more concerned now than they were at the start of this session? Three people are back. I think it was a back front thing. I'm interested in this and I'm interested in your disorientation or rational. And I think you were alluding to irrational. And it kind of plays to your comment professor about the fact that we know more about it. That we're better prepared and there's more kind of wisdom and knowledge of bubbles. And yet there is still this irrationality or disorientation to give it maybe a kinder word. I'd like to echo what Leffie has said about it. I mean, because I enlarge it to my research in behavioural finance. So I totally agree with the herding behaviour, the irrationality and invested reactions. But I think it's probably particularly in this particular period of time in two ways. I think the quantity of easing and the tapering off of that is unprecedented. And people are known to not be able to make very good decisions in any environment which they are not familiar with. The second is I think many of the policies, especially in light of the escalating China-US trade tensions. And it's not based on economic reasons anymore. So in that regard, even if you are irrational investors, you'd have a very difficult time interpreting and predicting what each government is going to do. I think that's going to add a lot of uncertainty to the data problem. And regarding, well, what can we do? And I really don't have any other better recommendations. I wrote this book titled, The China's Guaranteed Bubble, and then people asked me what should Chinese government do. Well, I think that the same answer applies here, which is trying not to get into this situation in the first place, which is already probably too late. No, I think, sorry, to agree with all of that, but to say that I think what authorities can do is let debt be debt. So not foster an atmosphere of implicit guarantee. Totally agree. Where you're buying into debt, but what you think, you're taking the word fixed income to literally. And I think there is a structural risk inherent in this assumption that I'm buying these safe assets, even if they're triple A assets, that they are going to pay me in all scenarios. And particularly at a time when there's been a lot of talk about disruption, fourth industrial revolution, trade wars. I think we are disoriented, not just in terms of the nominal anchor, but we're also disoriented in terms of how to frame all of these uncertainties. In the classical textbook sense, we're not in a world of high risk, we're in a world of high uncertainty, where the framework is unknown. And when you're in a world of high uncertainty, you should not be selling options. And that's what you do when you are issuing debt, is I give you the option to receive only the upside, and I'm going to take the downside. So the other thing that can be done is I think we need to move more towards equity type finance. This is true in the private sector. This is true in the public sector. Governments, for example, I think, should be seriously considering GDP-linked bonds, bonds where the return goes up and down based on performance in the real economy. It's trying to separate underlying performance from this promise of a fixed return, which makes debt structurally problematic. On top of that, you layer in the mismatches that I just mentioned. On top of that, you layer in issues of trust and transparency. That's a cocktail. A heidi brw. Now let's just see who in the room would like to ask a question. Can I have a show of hands, please? Just one so far. So if you could remind us where you're name and where you're from before asking your question. Hi, thank you for this informative session. So far, my name is Josh Levent. I come from Switzerland. Professor Dunning mentioned earlier that rapid productivity growth would make high debt manageable. And so I'm wondering in this age of the fourth industrial revolution and accelerating technological changes, why are we not seeing rapid productivity gains in the economy? It's a fine question. Any more before we take a few more? Gentleman at the back says productivity is a key one. That's what I was going to ask actually. It's a very good question. Hi, my name's Alex. I'm a university lecturer in the UK here with the Young Scientist community. I think there's some really interesting points about different types of debt and coming up with new ways to structure debt to make them a little bit safer in the long term. But one of the really interesting points I think is the speed at which money can leave a given economy, because if that starts to happen, that's when you get a contagion, right? So I'm just wondering, and this may be a slightly radical point, whether there's an argument for stronger capital controlled in international markets and that sort of thing, and I'd just be interested to hear your views on that. Okay, capital controls. Let's do productivity first. It's key. We've been producing competitiveness rankings 40 plus years at the World Economic Reform. This year we're completely, we ripped up our methodology and we're publishing again later than planned and it still took a bit of time to find tuning in, but the basic underlying architecture is radically different and we're basically, I think, I'm not breaking my own embargo, when I say the terms of competitiveness have completely changed and they need to be completely re-engineered for the fourth industrial revolution. And yet, whether it's traditional productivity or gearing for that uncertain future that we all face, it seems to be the more difficult option compared to the easier option of issuing money. So, apart from the obvious answer which is, it's easier to issue debt. What are we going to do about that? Did I go? Okay. So, on productivity, the short answer is I don't know. This is a conundrum, but I have theories and I'll give you one or two. How is productivity measured? It's the sum of all of our incomes, recorded incomes that is transacted with an invoice passing amongst us or a pay slip involved, divided by the number of people in the room. If it turns out that a lot of us are now doing and getting for free what we had to pay for in the past and the income is aggregated by a small number of platform economies with a dramatic shrinkage in the margins, profit margins that they are charging for the isolated services, then there might be a measurement issue that the sum of invoices divided by the number of people is giving us a smaller number or the rate of change of that, growth of that is giving us a smaller number. Other theories are about spare capacity being used a lot more. So, if my car used to be my own asset now when it's free from between 2 o'clock in the afternoon to 5 o'clock in the afternoon and I drive it on Uber, then suddenly that is an asset but I'm not making any new capex on that because I'm utilizing assets that I already owned before, likewise with my spare bedroom that I'm putting on Airbnb. On the capital controls question, the answer is yes, the IMF now agrees, and this was a few years ago, that capital controls and more macro-prudential policies is a perfectly fair game set of tools in the toolkit that countries have, particularly small open economies. This was not the orthodoxy even 10 years ago. Can I just add a couple of things regarding the labour productivity? I think my concern, I agree with what you have said, my concern is about the increasing disparity in wealth distribution. It used to be that, well, I have the money and I want to buy something and I will put that into the market but now it's like there's a divergence in what the wealth here are getting the wealth here and they have the money poured into the financial assets or in real estate which is not looking back into the productive side of the economy. That's one concern. Regarding capital flow control, I think in theory we all agree that that is one thing which is not good for the efficiency but then in light of the potential of contagion or financial crisis, I think that is probably the second best that many countries would have to resort to, hopefully not too soon in the future. Anyone else for any more questions? Let's just touch again on the fourth industrial revolution then because as they were kind of, we're tooling up for it. We produced a report this week, Future of Jobs. We conservatively predicted that all of the work tasks, workplace tasks can perform today. Over 50% will be done by machines in the year 2025 which is not so far in the future. Short answer, there's a huge amount of disruption and emerging markets as well as having to contend with the kind of ripple effect from developed economies could possibly find themselves less able to leverage the traditional drivers of development, manufacturing, led growth, et cetera, et cetera. Is that an extra threat for them or is it a kind of isolated and singular challenge? I'm actually quite uncertain about, well, I think the first industrial revolution is definitely going to increase or improve the labour productivity but then at what cost or at whose expense I think. It seems that we can make things far more efficiently and do things in a far more efficient way and normally that means less demand for labour force so I'm not too sure about that one that actually we're seeing in certain areas in China, in the e-commerce area, in the logistics area where we're already seeing the start of a reduction of labour force in certain areas. So the implications are? So I think the fourth industrial revolution is bad if you let it be on its own. It's structurally inequality widening, it's structurally polarising and I think it is extremely good if it's proactively shaped. So there is a case now for activist action. I think government action but also action from companies and that's why the WEF report I think is very useful because it highlights the fact that left to our own devices we have a prisoner's dilemma problem where individually we're not incentivised to act but we do need to act because if you don't shape it it's pretty bad. The way you would shape it is to make sure that people are able to train, learn, unlearn, relearn on a continuous basis and really rise above the old binary politics of left wing and right wing which is unfortunately what's paralysed democracies in the west is that you're either in favour of government intervention or you're not, you're either a high spender or you're a low spender. What you really need here is greater market driven flexibility in the labour market and greater spending by the government for skills retraining and so on and parts of Asia have risen above that false binary but that I think has not been appreciated and so I make this distinction between the two cases where it can be, the fourth industrial revolution can be about huge potential but it can be huge peril depends on which path we choose. It's a nice point and we've got a couple of minutes left so let's just touch upon this because I like the words activist and the idea of being proactive and I like the idea of innovating as well you mentioned GDP link bonds. What are the new tricks, the new tools that we've got in the toolkit that could help us ward off any potential crisis or what would you like to be seeing more commonplace? On the debt front? So in an economy like China's I listened to the Premier's speech yesterday as everybody else did and it's very hard to question any part of that. I think rightly the focus was on the real economy. The number of times he said new growth drivers the number of times he said innovation ideas so new sources of growth, re-profiling to consumption services which basically means we're removing mismatches which makes debt risky what I started off by saying mismatch is being a source and the number of times he said we will not stimulate our way out of this through monetary means although you have to I think accept that the trade war makes it harder for China to do the credit market reforms as quickly as they would have liked to do because what's the optimum thing to do? The optimum thing to do is to let small accidents happen so that big ones are averted and in an environment where you're feeling a bit challenged already you don't really let small accidents happen. At an international level I remember 2009 Gordon Brown in the UK chaired the G20 meeting and that was seminal. That was the high point of global coordination, global governance at its best. If we were to hit any risk event right now which is contagious, which passes through complex networks I don't see us having the ability to convene something like that any more. So for those of us who are playing on the field not only is the world uncertain, we don't know whether we're playing football, hockey, tennis or what game it is the referees are fighting amongst each other and that is an extremely uncomfortable position to be in. Can I add a few things? I would very much like to do that. I think I agree with you about to let little accidents happen or let little risks pop up so that you can prevent systematic financial risks. I think that is what Chinese government is saying and that is what it is trying to do at the moment. Is it easy? It is absolutely not easy but then we'll see how they can stick to their ground. The first comment. The second is I'm only using China as an example in a way that's probably true for many other emerging economies. It's not just about the amount of debt, it's really about how to use the debt for. The fiscal expenditures do use that efficiently, do use that in a proactive way and do use that to be more inclusive when it comes down to economic growth. And the last thing, I know it's cornyn, but then international collaboration. I think it's really hard to believe in such an internet-linked era. I think the beliefs, the behaviour, the government policies are still so segregated from each other and then you can see the one policy which is really in the best interest of one country but at the expense of almost everyone else which will eventually feed back to her that one country which at the beginning seems to be quite innocent. So I think that's a score draw, isn't it? On one hand we have better knowledge of bubbles and better preparedness and some innovative tricks that we can kind of apply. On the other hand, the ability to collaborate is reduced and the irrationality is still hanging around there. Just one point that I should have mentioned is that we need to move more towards equity type securities. In the West, large chunks of our pensions have moved away from defined benefit to defined contribution which is really basically admitting that we cannot guarantee you a pension anymore. That is a huge structural change. It's required and is requiring a lot of attitude, mindset change and that is the kind of change we need if we're to move away from being overly dependent on debt and move more towards equity type capital. Is the political will there? Differs from country to country but Western democracies are harder to get these done in than it is in other types of governance. OK, right, let's just start wrapping things up then. Last quote I'd like to give you, it's not a quote, it's a, I'm paraphrasing, the hedge fund legend Ray Dalio I read this morning in Business Insider says the economy looks like it did in the late 1930s in many ways. Interest rates hit zero in the early stage of each crisis. Asset prices are near full capacity. Interest rates are still low, the wealth gap has widened, populism is on the rise and global tensions are rising. How correct is he to relate 2018 to the late 1930s? The only phrase that comes to mind is that history never repeats itself but it does rhyme. And I think the rhyming is now a lot more frequent. I felt we were here as recently as 2015 when people were talking about divergence. US is breaking away from the rest of the world. Kiwi had just tapered and the US was going, the Fed was going to hike four times in 2015. In the first quarter of 2015, the rest of the world had to cut 22 times and in the end the Fed ended up hiking only once. And I feel the same sort of conversation happening right now. Everyone talking about the US decoupling divergence, all of that. I think the US will feel the blow back of what's happening in the rest of the world very, very quickly. And that's why the straight war is going to harm them as well. It's not that they're immune from this. Agur was every single word that he has just said. I believe that was a message in your blog she published a couple of days ago. Wonderful. Thank you very, very much indeed for joining us gentlemen. Thank you for joining us here in the room and thank you for watching us live online.