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An Exclusive Interview to Professor Didier Sornette: Demystify Truths from the Misleading Signs

Time:2018-05-24 15:32:33  Hits:[]
by Sophie Wu, Media and Public Relations Office, PHBS

“China has been the powerhouse of the world for economic recovery since 2008.” Professor Didier Sornette uttered his impression of China in this interview after his keynote speech at the 2018 PKU Global Financial Forum, Beijing. This professor at ETH Zurich seemed to enjoy the face-to-face dialogue and answered questions carefully with a gentle yet clear voice, using some jokes and hand gestures to elaborate on his views or indicate a topic change.
 
Professor Didier Sornette is on the Chair of Entrepreneurial Risks at the Swiss Federal Institute of Technology Zurich (ETH Zurich) since March 2006. He is also a professor associated with both the department of Physics and the department of Earth Sciences at ETH Zurich, and a professor of finance at the Swiss Finance Institute.
 
As a world class economist, physicist and geophysicist, Professor Didier Sornette has long been working on the prediction and control mechanism of extreme events and crises, bubbles and boom-burst in finance and economics. This has led him to develop the Dragon King Theory. The term “Dragon kings" embodies a double metaphor implying that an event is both extremely large, and born of unique origins ("dragon") relative to its peers.
 
In this interview, Sornette shared his insights on China’s debt bubbles, China’s economic growth and blockchain. 
 

English editor of Media and Public Relations Office, PHBS interviews Professor Didier Sornette

Q1: By one account, China has expanded credit by nearly 100% of the nation's GDP since the end of the credit crisis. Through the theory of “Dragon Kings”, is there any bubble in China’s debt? If there is any debt bubble, is it “about to burst”?
 
Professor Didier Sornette: I would not be panic that China’s debt would be a bubble. Firstly, the debts problem is misleading. There are different kinds of debts, such as government debts, local government debts, private sector debts, public debts and conversion debts at the aggregate level. Here’s an example: China’s government debts is almost 300% of its GDP, while the US debts rated to 350% of GDP, so the bubble is almost in the same place for both countries. On the other hand, China’s represents 15% of the world economy, it has been the locomotive of the train pulling the rest of the world out.
 
The second reason is that China has an effective governance to support economic growth, which goes in the right direction. Thirdly, I would not be panic that China’s credit would be a bubble. There is another important dimension, which is who own the debts.
 
Take Greece as an example, the debts amounted to 180% of Greece’s GDP and was owned by French and German banks, which lead to a negative consequence that the country now is restrained by its liability to foreign creditors. Japan, with the largest debts in the World, has even more debts than China, but Japan’s interest rate is the lowest in the world. Citizens and local companies own the debts of Japan, down-sizing its market risks. In the same way, China’s debts are owned internally by Chinese citizens, corporations and government, so this is much more stable. If we see the data now, China’s debts have completely stop growing, and China has been very strongly going through a quality growth.
 

Professor Didier Sornette in this interview

Q2: China has maintained an average annual growth rate of 7.2% in GDP since 2013 to 2016, and has reached a GDP growth of 6.9% in 2017, in your opinion, is China’s economic growth steady or not?
 
Professor Didier Sornette: I would see it as a steady economic growth. Growth in any country won’t stay always at the same level. A robust stylized fact is that, if there is no volatility in the growth rate, it cannot be large. In other words, we should not be surprised by fluctuations in growth rates, which is a healthy phenomenon. Growth means new opportunities, new territories and new innovations, while “new” means a lot of uncertainty and a lot of potential, we can’t predict what is to be discovered.
 
For China, the situation is more complex because China has undergone social transition from low to medium and large income with its process of building moderately prosperous society. We should not just focus on growth rate, it is often misrepresenting the reality.
 
Take Greece as another example: From 1999 to 2010, Greece was called “the European tiger”, reached 8% of growth rate in GDP, but the growth was based on debts and consumption rather than investing on factories, education and innovation. While it’s different situation in China, China has been growing by increasing debts, by investing on a lot of infrastructures for long-term developments. Looking at the snapshots of growth at different times in China, it is not the same growth, it is fueled by different engines.
 
I have visited 6 universities in Shenzhen, Guangzhou and Beijing during my visit until now, I can see very positive signs of extraordinary investment in technology, passion to become the leader of technology. China has become the leader of nuclear technology, and has the potential to become a leader in biotech and medicine. I can’t predict the future like this, but the good sign is that China is in the right direction, if all people work the best as they can, they can continue the optimistic situation.
 
Q3: In your keynote speech, you described blockchain to be “useful social bubble”, what is your opinion about blockchain? Is it in a super-exponential growth?
 
Professor Didier Sornette: We need to distinguish between so-called cryptocurrencies and blockchain. Referring to cryptocurrencies, there has been many bubbles since 2012 and a big decrease since the end of 2017. However, blockchain is very different, it has a lot of interactions with the cryptocurrency coins and tokens. Tokens are different from coins: they are like coins, but are limited by platforms or companies which are based on an existing blockchain. Tokens are living on the cryptocurrencies like bitcoin, they are more associated with the ICOs and their innovation dynamics.
 
Blockchain is actually part of fin-tech, there are many blockchains, people use blockchain within networks of financial companies, for instance as a future potential alternative to the SWIFT interbanking payment system. So far, we have discovered there is indeed what I call a “social bubble” on blockchain, namely a healthy over-enthusiasm that may eventually lead to great gains for society, but not without a lot of volatility and risks. By the way, blockchain is not the magic solution that people offen claim it is, this is a big hype, because blockchain is nothing but a digital ledger with different underlying mechanisms. Many of them are not efficient, but globally blockchain is in a useful social bubble, with a “widespread endorsement and extraordinary commitment”.
 
There is so much hype and so much belief that blockchain will solve everything. Such social bubbles do not give immediate return, but take one to two decades to really see the truth coming, but they are very useful. So I think it’s positive overall.
 
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