Book Review: Red Flags: Why Xi’s China is in Jeopardy

Most of my professional life as a securities analyst was spent living in Hong Kong, focusing on analyzing Chinese companies and the direct and indirect impact that China had on industries and companies.  Anyone following markets, economies or geopolitics over the last two decades has similarly needed to understand the Chinese economy given its rapid growth and emergence as the world’s second largest economy.  

Surprisingly given its size, the high quantity and generally good quality of reporting and commentary on the large economies of the developed world does not exist for China.  Moreover, many popular books on the Chinese economy tend to two extremes:

1. Breathless cheerleading and/or fascination with the sheer size of the country (“if every Chinese person just bought one more [insert product in question], demand for [product in question] would [choose as appropriate: double/quintuple/the world would run out of raw material X”]); or
2. Warnings of an imminent crash given various imbalances.  

George Magnus’ Red Flags: Why Xi’s China is in Jeopardy is by far the best book I’ve read on the Chinese economy.  Given the sheer size of China’s economy, the world’s second largest since 2010, Red Flags is a must read for anyone interested in geopolitics or markets anywhere.  

Magnus no ordinary economic commentator. Currently at Oxford University’s China Centre, he was UBS’s Chief economist for a number of years and has travelled often to China.  As such he brings a historical perspective when he describes China’s current economic challenges.  He gives one of the better summaries I have read as to how China has achieved its remarkable economic growth over the last four decades.  

Do not be fooled by the provocative subtitle--Red Flags is a sober analysis of the serious challenges facing China today and how the country has gotten there. The Trump trade war is not one of these challenges. Magnus details and explains the four key challenges now facing China: excessive debt, an overvalued and not freely convertible renminbi, the classic middle income trap, and finally, challenging demographics.  The greater centralization and authoritarianism in China under Xi Jinping helps with none of these challenges. Magnus echos and expands upon the themes of the book in this Financial Times post: https://ftalphaville.ft.com/2020/05/11/1589192248000/From-peak-China-to-China-pique/

Magnus avoids making any sweeping predictions for the future of China or its economy, but he dispassionately lays out the relevant issues which equips readers with the ability to have a more nuanced view of China’s further evolution. Red Flags is a must read for anyone interested in China.