#477 – Keyu Jin: China’s Economy, Tariffs, Trade, Trump, Communism & Capitalism

0:00:05 The following is a conversation with K.U. Jin, an economist at the London School of Economics
0:00:11 specializing in China’s economy, international macroeconomics, global trade imbalances,
0:00:19 and financial policy. She wrote the highly lauded book on China titled The New China Playbook,
0:00:26 Beyond Socialism and Capitalism, that details China’s economic transformation since 1978
0:00:33 to today. And it dispels a lot of misconceptions about China’s economy that people in the West have.
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0:08:10 with folks who might find it interesting. And now, dear friends, here’s KU Jin.
0:08:31 What is the single biggest misconception the West has about China’s economy today?
0:08:38 The biggest misunderstanding is somehow that a group of people or even just one person
0:08:44 runs the entire Chinese economy. It is far from the reality. It is a very complex,
0:08:50 large economy. And even if there is an extreme form of political centralization,
0:08:56 the economy is totally decentralized. The role that the local mayors, I call this the mayor economy,
0:09:03 plays in reforms, but also driving the technological innovation that we’re seeing right now,
0:09:09 it is actually not run by just a handful of people. It’s more decentralized than the US is. And I think
0:09:15 more broadly, a big misunderstanding is really the relationship between Chinese people and authority.
0:09:17 Can you elaborate on that?
0:09:22 Well, you know, people think that somehow there’s almost blind submission to authority in China. We have
0:09:29 a very nuanced relationship with authority, whether it is, you know, between kids and parents or
0:09:35 students and their teachers or with your bosses and the Chinese government. It’s kind of the same thing.
0:09:43 There’s paternalism. They think that they’re responsible for you. But deference, a certain
0:09:49 amount of deference to authority is not blind submission. It’s been written implicitly in our contract
0:09:57 for thousands of years that in exchange for some deference, we are given stability, security,
0:09:59 and peace, and hopefully prosperity.
0:10:05 So there is some element that we have in the West of freedom of the individual. So a little bit of the
0:10:10 rebel is allowed in balance with the deference to authority.
0:10:15 Yeah, absolutely. Without that, how can you have this radical, dynamic entrepreneurialism
0:10:22 you see in China? If you don’t have a sense of self, a sense of the fact that you can find
0:10:29 opportunities, you look for opportunities, you drive opportunities, it’s all self-motivated.
0:10:36 Is there still a young kid in China that’s able to dream to be sort of the stereotypical Steve Jobs
0:10:42 in the garage, start a business, and change the world by doing so?
0:10:48 There are millions of young kids like that in China. They might not be thinking about changing the world,
0:10:52 and this is where the Chinese approach to innovation is very different from the Silicon Valley one,
0:11:00 I’d say. But they see opportunity. They see a country with a billion consumers. They see scale.
0:11:07 They see speed. They see that with their dreams and the team that you have in China with engineers
0:11:12 and the digital transformation, you can do so many things. And this generation of young people think
0:11:17 about transforming their local economy. I think we’re going to get into this, but it’s no longer
0:11:20 going to just be manufacturing. The young kids are entrepreneurs.
0:11:28 Let’s stay on the big picture a bit. There’s a perception that China is a communist country.
0:11:32 So to what degree is China a capitalist country and to what degree is it a communist country?
0:11:43 I’ve rarely seen a more capitalist society than China from the pure economic side. I’ve rarely seen
0:11:51 companies that are as competitive as Chinese companies, people as ambitious and obsessed with
0:11:58 making money as Chinese people. Kind of ruthless, actually. And look, you know, consumers shop,
0:12:06 firms invest. If you invest well financially, you’ll get great returns. What is not capitalistic about
0:12:13 the Chinese economy? At the same time, the social fabric is highly socialist. First of all,
0:12:18 the state or enterprises dominate in many of the sectors. The state banks control the financial system.
0:12:25 We often talk about common prosperity, about equal opportunity, just and fair society. But
0:12:31 even, you know, daily stories, a walk in the park behind my parents’ apartment, you’re going to find
0:12:40 at least 50 organized social groups on a daily level, singing, dancing, exercising, doing whatever these
0:12:47 fantastic idiosyncratic hobbies they have getting together every single day. And free courses for the
0:12:54 elderly and retired, right? That sense of communalism, that sense of belonging, that strive for harmony
0:12:56 at the societal level is there.
0:13:04 So just to go back to something you said, there is a value for competition culturally. So on the business side,
0:13:12 on the economic side, there is sort of a cultural value of people competing in a meritocratic way.
0:13:18 Competition is ferocious in China, especially when it comes to Chinese companies, but also
0:13:25 in education. I should be thankful that I’m not, you know, born later than I am, because I thought China
0:13:30 was pretty competitive already, going to the schools and studying for the exams. It is a different level
0:13:37 today. Competition is not necessarily in the culture, I’d say. It’s driven really by the changing economic and
0:13:43 social circumstances of the day. The Chinese companies are all hardworking. They’re all going after the market
0:13:48 share. They all kind of want to do the same thing. You know, it’s not quite like in the U.S. where you open a
0:13:54 coffee shop. Well, next door, I’m going to, you know, open a bagel shop, right? In China, if the coffee shop
0:13:59 does well, everybody wants to open the same coffee shop. And I think, again, I’m sure we’re going to get to this,
0:14:04 but there’s a lot of that kind of competition, which really drives the world sometimes crazy
0:14:12 of replication. But it’s because it’s not easy, right? It’s not easy to make money. In the education
0:14:18 system, there are not enough jobs for the young people. So how do you get ahead? How, as let’s say,
0:14:23 if you’re part of a lower stratum society, how are you going to make sure that your children are going to
0:14:30 have a better life than you, you invest in education. So everything is about competition in a country with 1.3 billion
0:14:32 people. That’s somewhat to be expected.
0:14:40 Let’s go back to the roots of that. So you described that China’s economy model is rooted in its history.
0:14:47 So can we talk about Confucianism? Can you explain to what degree those roots run back to Confucianism and in general
0:14:49 to other parts of Chinese history?
0:14:57 Yeah, Confucianism is more of a moral philosophy than, let’s say, religion or a belief system.
0:15:08 It prioritizes social harmony above anything else. It’s not about metaphysics, but more about ethics.
0:15:16 And at the individual level, the responsibility, the duties are all meant to preserve that social order.
0:15:26 So it’s filial piety. It is loyalty. It is how to be a Chinese gentleman. But things like saving,
0:15:33 frugality is part of the moral discipline. Education is part of the moral cultivation. So there’s a very
0:15:40 strong emphasis that you as a citizen have a responsibility to contribute to society as a whole.
0:15:48 On the education side, a part of Confucianism is a value for meritocracy. So how does that permeate
0:15:54 the education system in China? You’ve already spoken to it a little bit, the value of competition and that
0:15:58 it’s already getting more and more intense. But it would be very interesting to get your
0:16:02 understanding of the education system, its history and as it stands to there.
0:16:08 If China were relatively successful economically, a huge part of the reason is, by and large,
0:16:18 it’s been meritocratic. That is changing somewhat now. But the only way that you have still that many
0:16:26 poor people, especially a couple decades back, still be in harmony with society, seeing all these rich
0:16:31 people, you know, make tons of money and you’re still belonging to that lower stratum, the only
0:16:37 reason is that you believe that your children have a future through meritocracy. And even though it’s
0:16:43 imperfect, it’s highly imperfect, standardized testing, all this competition, all of the hours and the
0:16:51 tutorials to studying for standardized exams. Well, that is a very realistic scenario in China because
0:16:56 there’s that many people, you know, when I was growing up in school, we had 60 people per class
0:17:02 and there were 10 classes in one grade. Now, imagine that many people applying for colleges
0:17:10 in the American way. How many essays would have been written and need to be scrutinized? But also,
0:17:16 that gives room for total corruption, if you, you know, if you know what I mean, just connection-based.
0:17:23 Actually, the standardized exams, as imperfect as it is to select talent, is still, by and large, fair.
0:17:31 And that’s how that whole generation of, you know, entrepreneurs, but bureaucrats, government
0:17:36 officials were selected. If you look at the Chinese premiers, the presidents of the past,
0:17:42 they all went to great schools. You know, a lot of them were engineers. And same thing for civil
0:17:47 servants, it has changed somewhat. You know, the meritocracy, I think, is eroding in China. I’m
0:17:53 worried about that. Because it is fine that you get into a good university based on your own merit,
0:18:01 but finding a job now becomes much less meritocratic. People with connections get jobs more easily than
0:18:05 others. Of course, this is not just a unique Chinese phenomenon. It’s actually everywhere. But
0:18:10 I guess what I’m saying is that that meritocracy, which was so fundamental to the Chinese,
0:18:16 ancient Chinese education system, by the way, civil servants were selected based on standardized
0:18:21 exams in the past. That’s always been throughout Chinese history. And that relates to Confucianism.
0:18:27 Now the opportunities, and coming back to the competition point, is that the opportunity is
0:18:32 getting slimmer and slimmer. And again, this is not a unique Chinese phenomenon. Jobs, where are the
0:18:37 jobs going to be, right? So meritocracy has become more of a problem.
0:18:42 Do you have any memories of your own experience in terms of competition, the good and the bad of it?
0:18:49 And maybe from that, can you pull out the thread of the value of that kind of competition?
0:18:55 Basically, you know, I grew up in the Soviet Union, so there’s a kind of brutality to the competition.
0:19:01 But I think it ultimately molds really interesting people.
0:19:06 There is a good and bad part of competition. I remember when I was going to middle school,
0:19:14 every single midterm exam, final exam, you are ranked from number one to number 800 in your entire
0:19:16 grade and publicly displayed.
0:19:17 Nice.
0:19:18 Nice, right?
0:19:18 Very nice.
0:19:23 Imagine, you know, the majority of people and how they feel.
0:19:33 But it does drive ambition, in part. And you don’t take anything for granted. And you work hard. You
0:19:39 keep, you know, you keep the spirit up. But, you know, going to the U.S., I finally realized that
0:19:45 Americans are totally competitive. It’s just that they don’t display it. It’s not as apparent. I
0:19:49 remember I went to a very competitive high school, but everyone’s like, so chill. Oh,
0:19:57 I’m not studying. Oh, you know, they’re studying. They are secretly studying. When I was doing my
0:20:01 PhD at Harvard, people said, oh, you know, my parents, they don’t work so hard. You know,
0:20:07 people say, don’t say you worked. They’re working hard, right? Just, you don’t show it. In China,
0:20:13 it’s kind of a noble thing to show that you’re working hard and that you’re number one or
0:20:17 that you’re top of the class and you want to display it and you want to let everybody know.
0:20:21 But in the U.S., everybody’s like secretly doing it.
0:20:29 Yeah. Some of it is the signaling. The culture emphasizes the signaling of, is it better to be
0:20:34 kind of for everything to come easily, thereby showing that you’re a genius, it comes naturally,
0:20:40 or is it better to show that you worked extremely hard for the thing, but the ultimate result is
0:20:49 there’s still competition. But I don’t know. When you’re visually displaying and explicitly stating
0:20:54 that it’s good to be number one and it’s bad to be number 800, I think that permeates throughout the
0:21:01 culture to where you understand. First of all, you understand that hard work is the only way to
0:21:11 improve to succeed in life. And second of all, you just create this framework of early on understanding
0:21:19 what it means to live a good life. And a part of that is to find the thing you’re damn good at
0:21:26 and get even better at it, master it, become hopefully the best person in the world at that
0:21:30 thing. I don’t know. That’s an extremely important lesson for society to teach.
0:21:36 That’s the right, I would say, the right kind of competition or the efficient kind of competition.
0:21:41 I feel that in the Chinese education system, it was not necessarily efficient because it kind of
0:21:47 frames you and molds you to be thinking in a certain way what’s been taught to you. You don’t
0:21:52 have the bandwidth or the time or freedom to be more creative and to think outside the box. There,
0:21:58 it’s just the box. You maximize the box and that’s it. You don’t actually know what’s outside of the box
0:22:04 and you never actually go there. That’s the bad part of Chinese competition. And when I got to
0:22:10 the U.S., the high school teachers were asking us to question authority, to question text. I’m like,
0:22:13 wow, really? You can do that? So I started asking why.
0:22:22 All right. So there has been this miracle in the Chinese economy from after Mao under Deng Xiaoping,
0:22:29 where the Chinese economy got transformed and grew incredibly. So can you explain what happened,
0:22:35 the different transformations that happened, the different reforms that happened under Deng Xiaoping?
0:22:43 Deng Xiaoping was by far our most pragmatic leader. And I think everybody’s grateful to Deng Xiaoping. My
0:22:51 father’s generation would not have seen that amount of prosperity and peace and opportunity without Deng Xiaoping.
0:23:00 It started in the late 1970s when Deng Xiaoping came out with this open up and reform mandate. And it was
0:23:05 very tough. Again, coming back to the big misunderstanding of China, it’s not as if one leader decides that
0:23:09 that that’s what we’re going to do and then everybody follows order and does that. No. There are tons of
0:23:16 political barriers, tons of incentive compatibility problems at the local level. In the end, you need the
0:23:24 local provincial governors, the mayors to do the job. And how many prefectures are there in China, right?
0:23:31 A lot. And they have their own interests, right? We know this around the world. Politically, it’s the most
0:23:38 difficult thing to do. But somehow Deng Xiaoping was able to break tradition, break convention,
0:23:47 come out with this completely new way of thinking about society, life, and the economy. And it was so
0:23:55 transformative. I remember people of that generation told me one time that, you know, society was going
0:24:02 to focus on the economy. Really? Why would they do that? Wasn’t it politics? Wasn’t it everything about
0:24:07 politics and struggle and ideology? So for them, that the whole country and the government is going
0:24:15 to focus on the economy was just so shocking, even though we take it for granted now, that shows you
0:24:27 that breaking that mold was incredibly difficult. But I think opening up was a really momentous thing
0:24:31 that China did. And it wasn’t just joining the WTO. I mean, they were doing a decade of work in
0:24:37 preparation leading up to that. What’s called, you know, special economic zone is really to turn
0:24:43 Shenzhen from a fishing village to an export platform now to a Chinese-style Silicon Valley,
0:24:49 right? And there was the agricultural reforms in the 1980s that meant that farmers could decide what
0:24:55 they were going to grow and keep the surplus. Whereas it was a collective system before, you know that
0:25:02 very well. And then of course, the ultimate transformation was when China actually joined
0:25:10 the WTO in 2001. And the rest was history, right? We’re still talking about the aftermath. But reforms
0:25:17 was the single biggest impetus to Chinese growth. And every time there was a major reform, it was followed
0:25:25 by a good decade-long growth. Every time growth went down, there was a new series of major reforms rolled
0:25:34 out. And then, oops, that, you know, led to another wave of good growth. But I’d say that reform pace has
0:25:42 slowed in the last 15 years. But are there reforms to be done? Yeah, absolutely. You know, has China
0:25:50 reached even close to its potential? Not at all. But again, it comes back to politics, right? Now,
0:25:54 it’s less about economics. It’s more about national security. It’s more about politics. And I think that
0:25:59 is probably the single biggest barrier to continued good economic growth.
0:26:05 Maybe, can you speak to what it takes in such a large system, in many ways, such a successful
0:26:10 economy to do reform? So you mentioned pragmatism. Deng Xiaoping famously said that it doesn’t matter
0:26:16 whether the cat is black or white as long as it catches mice. So there’s that pragmatism
0:26:19 that I think underlies a lot of great reforms.
0:26:26 As a contrast to Soviet Union, the Chinese economy, as I mentioned, was extremely decentralized. You know,
0:26:33 in Soviet Union, the ministries were in charge of essential bureaucracy. But a lot of the power
0:26:39 were given to these provincial governors, party secretaries, mayors of different sorts. And they
0:26:45 were incentivized. That’s the key, is that these mayors were incentivized to do a good job. If I
0:26:52 were successful on a radical reform, if I were successful, I’d be a national hero. And then that
0:26:57 reform will be rolled out in every single city in the country over time. And I will be promoted to the
0:27:03 higher run of the central government. And who knows, I might even become vice premier, premier president
0:27:12 one day. That was how the individual was motivated to carry out these really tough reforms. Now,
0:27:19 China has changed a bit, right? It’s not about being radical and radically successful. It’s about being
0:27:27 safe, right? So when you shift from basically an entrepreneurial state to a safe state, then the
0:27:32 objective function changes. And you see it in different economic outcomes.
0:27:38 So maybe can you speak to that? What are some important things to understand about the structure
0:27:39 of the Chinese state?
0:27:46 Well, the central leadership politically is extremely powerful and it’s very consolidated. But they hold a
0:27:52 very crucial key to the local governments, which is that they decide their fate. Am I going to promote
0:27:56 them? Am I going to put them in jail? Am I going to fire them? Am I going to reward them? Am I going to
0:28:03 punish them? They hold that crucial key. And I think what was, you know, very surprising for
0:28:08 most of the Western audience is that when I mentioned about the mayor economy, there’s like, you know,
0:28:15 why don’t our American mayors in each city do these very radical things and then push for GDP growth and
0:28:21 technology and innovation? It’s quite different. I think this is where China’s very unique in the world is
0:28:26 that political centralization, economic decentralization, and the yardstick to measure
0:28:36 local mayors’ competence through, in the first stage, it was GDP growth. So I am a mayor of, you know,
0:28:42 the city of Nanjing in Jiangsu province. I’m going to like peek at my neighbor’s mayor’s city’s GDP
0:28:46 growth and I’m going to be very, very competitive. By the way, I forgot about that. Competition
0:28:52 is extremely competitive among the local government officials because you are competing with other
0:28:58 mayor for a top job, right? So you need to do better than them. And whether that was efficient
0:29:07 structure or not, I cannot comment, but it certainly just fueled this massive and rapid expansion,
0:29:14 economic expansion. First, it was industrialization. Everybody wanted to do exports. Then they discovered,
0:29:22 fiscal revenues coming from land, right? Selling land and real estate. Let’s build real estate and
0:29:27 let’s urbanize. And then the money kept coming in to these local governments and that they can spend it
0:29:33 on nurturing more companies or supporting real estate or supporting investment and they can do a
0:29:39 better job. So then it was geared towards real estate. And that’s how the property cycle became the big
0:29:47 thing. Everything was at double speed because of what the local government’s incentives were designed
0:29:53 to do. I say now that China’s biggest challenge is consumption, right? It’s not production. We know
0:29:58 that China is very, very competitive in production and supply. China needs to be a consuming country to
0:30:04 be a rich country. Why don’t you put consumption as part of the yardstick for measuring local governments?
0:30:08 You know, for a while, it was environmental protection. Guess what? Very few of them really want to do it
0:30:15 seriously because it goes against the incentives of driving growth, right? They would suffer on GDP
0:30:20 growth if they were very serious about environmental protection. So for a couple of years, nothing
0:30:26 happened in China on that front. And then the central government got really kind of concerned and
0:30:32 even angry and frustrated. So they decided to put that as a penalizing factor. And then guess what
0:30:38 happened? Well, actually, environmental protection sped up. And, you know, in a matter of short,
0:30:42 short few years, I see blue skies every day in Beijing. That’s how it works.
0:30:51 So GDP is a measure of success in production. What’s the measure or what does it mean to be successful on
0:30:55 the consumer side? You said it’s important to improve that. What does it mean to be a successful
0:31:02 consumer nation? The metrics shouldn’t be geared just towards growth alone, GDP growth alone. It was
0:31:09 just singular GDP growth and you can borrow heavily and just spend on infrastructure. That’s not a
0:31:13 productive way to drive the economy. And that’s what the local governments were doing for a long period of
0:31:20 time. You know, in the last few years, innovation, unicorns have kind of been an implicit yardstick for
0:31:26 local governments. That’s kind of how we’ve seen these great, you know, EV companies, 80 cities doing
0:31:33 EVs. I mean, do we really need 80 cities to do their own EVs, right? Solar panels, now DeepSeek has
0:31:39 become, you know, a star. Semiconductor companies, you know, each local government wants to have their own
0:31:48 national champion. So implicitly, technology was part of the yardstick competition as well. But if you can
0:31:54 more accurately have a metric for consumption measures really focus on, you know, making sure that it’s
0:31:59 coming from consumption, this GDP growth, rather than from investment or infrastructure, then I think
0:32:07 that it might focus the government’s objective a bit more on thinking about how to make people feel
0:32:12 more secure so that they want to save more. For instance, creating more jobs, for instance, more on social
0:32:19 security spending on health care, on elderly care. Because for the longest period of time, this political
0:32:25 economy model was brilliant at scaling up supply. But it was extremely weak at raising personal consumption
0:32:32 because the incentive does not lie in consumption, it lies in production. So you shift the objectives a
0:32:36 little bit and maybe the local government will do more to stimulate consumption.
0:32:42 Okay, you mentioned the mayor economy. That seems like an incredibly powerful idea. And you also mentioned that
0:32:51 perhaps you’re not sure exactly how perfectly efficient it is, and what efficiency there means. How good are you at
0:32:57 quickly figuring out the best ideas? That’s what an efficient market does. There’s a kind of component to what you’re
0:33:04 saying where you’re a little bit critical of, do you really need 80 EV companies, but maybe you do. It seems like an
0:33:09 incredible thing to do, right? So what are the pros and cons of this? Maybe you can speak to it a little bit more.
0:33:17 I think it depends on the timing. If you’re starting something, starting a new emerging strategic sector like EVs or
0:33:25 batteries or solar panels, you need the local governments to be involved, to mobilize, right? The big push to
0:33:30 coordinate the supply chains. If you wait for the markets to develop over time, it’s going to take a
0:33:34 long time. Maybe they don’t even want to do it, right? Look at the U.S. The U.S. is very, very behind on some of
0:33:43 the new strategic sectors. But once you’ve reached a certain level of market competition, I think the state
0:33:52 needs to withdraw or to retreat. Because ultimately, the state is not the best at allocating resources,
0:33:58 picking winners. You want the private actors, whether it’s the venture funds or the, you know, through market
0:34:04 competition to ultimately decide who gets the most resources. But in the beginning, that big push is
0:34:09 not really in any of the canonical models that I’ve studied in economics in the Western school of thought.
0:34:17 State push, state mobilization, state initiation, that’s not there. But I think if you look at EVs,
0:34:24 solar panels, even just thinking about the idea of reforms in the first place, that initial state push
0:34:35 was vitally important. The other negative, although I think by and large positive aspect is, I don’t think
0:34:41 that we need 80 cities to do their own EV brands, but to get started, maybe that’s what it would have
0:34:47 taken to drive that incentive. And then ultimately, it’s up to the market to decide who are the last
0:34:52 five remaining EV companies, right, through market mechanisms. That’s Chinese-style industrial policy.
0:34:59 Industrial policy was heavily criticized. And again, if I talk to my Harvard professors, they will be very,
0:35:07 very, very skeptical about the role of the state, especially in such a major way. But if you look at the
0:35:14 Chinese experience, the evidence for success is all there. The cities that have pushed the most
0:35:19 on supporting that particular sector ultimately did the best in terms of production, but also in terms
0:35:26 of innovation, measured by patents. It’s all in the data. But the downside is that a lot of the capital
0:35:32 is wasted. And this is what I also discuss in my book, is that it is inefficient, although maybe it’s
0:35:40 necessary. The amount of waste of investment plowed into these companies that will ultimately just
0:35:47 go under, but also the misallocation of resources because it’s led by the state are some of the
0:35:53 downsides. But I guess on balance, it’s been positive because look at China’s internal combustion engine
0:36:01 effort. Nothing, right? Semiconductors. Thanks to Biden, thanks to Trump, it’s improved dramatically.
0:36:06 But all these things that they tried to do before, they couldn’t do. But when it’s a new thing,
0:36:12 like something that there’s no incumbent, no particular advantage in any country, actually,
0:36:16 China is really spearheading these sectors. Can we linger a little bit more in this mayor
0:36:22 economy? It just seems like such a powerful thing where one mayor looks over to the next and looks
0:36:29 even just a trivially simple number like the GDP. Why don’t we do that in the United States or in the
0:36:31 Westmore? Just compete on GDP?
0:36:38 Well, you need to be elected and reelected, right? Is that what your electoral base cares about,
0:36:44 right? In China, it’s what the central government, your boss cares about. If you ask the consumers,
0:36:48 they’d rather you spend on social spending, right? The things we talked about that stimulates
0:36:55 consumption, on education, on healthcare, things that stimulate demand. So that’s the political,
0:36:57 it’s the difference of political system.
0:37:03 So maybe can you speak to the difference? Another difference is the long-term multi-generational
0:37:10 thinking that permeates Chinese culture. So how does that differ from the West, sort of the Western
0:37:14 style capitalism of quarterly focused thinking?
0:37:25 The Chinese are both the most patient and the most short-termist economic actors I met. The
0:37:31 patience I don’t need to explain because I think the political continuity means that they can make
0:37:39 plans for two decades ahead, right? Even longer. The investment of Chinese parents in their children
0:37:47 is a multi-decade long project. And they save, you know, Chinese people love to save because they think
0:37:53 that they’ll have even more money if they save that money rather than spend it on a ski vacation.
0:38:01 So that, I think it’s patently obvious to most people around the world. But I think that most of
0:38:07 them would not have known that there is a very popular motto in China, which is called short,
0:38:14 flat, fast. That’s the impatient part of the Chinese culture, especially with respect to the economy.
0:38:21 Short, flat, fast was used to describe a winning volleyball strategy that eventually became adapted
0:38:28 to describing the society as a whole and economic decision-making. If you’re an investor, you only want
0:38:32 to invest in things that you can quickly turn around, make a lot of money and don’t need to do
0:38:39 much work. It also applies to marriages. So a short courtship, a very flat emotional relationship and a
0:38:49 fast divorce. That is how you see these companies rise, you know, within a very short period of time.
0:38:55 Of course, investors are only interested in those companies that can turn around and exit in a very
0:39:02 short period of time, making many, many multiples. And so in that sense, people are very, very impatient,
0:39:10 right? I sit on some boards of these longstanding companies and the values are just so different,
0:39:16 even though a lot of these public companies are constrained by the quarterly results and so forth.
0:39:23 But the values are about sustaining something, a company for a long time, thinking about organic growth,
0:39:29 thinking about investments for the future, sustainability. Maybe it’s that competition.
0:39:36 Maybe it’s the speed that we’re used to in China. People think about short. So, you know, this dichotomy is
0:39:37 very, very interesting.
0:39:39 That’s surprising to me.
0:39:40 Yeah, well…
0:39:47 It’s a surprising idea, right? So that there is a kind of, in the West, conception of Chinese culture,
0:39:54 Chinese economy that everything is 50, 100, 200 years out, you have this long vision. But you’re
0:40:00 basically saying that there’s a deep, in the business sector, impatience about everything.
0:40:07 That’s a transitory phenomenon, I’d say. But if you look at the cheaper stuff, poor quality,
0:40:10 that’s a reflection of that. The copying, it’s the same kind of mentality, just get ahead quickly.
0:40:17 But again, that is all shifting. That is all shifting because China is now in a different
0:40:22 stage of development. If you ask the younger generation, they really care about quality.
0:40:28 They care about values. And these companies, these very successful companies, successful in five years,
0:40:32 10 years, found themselves in a very difficult position after a longer period of time.
0:40:38 So that short, flat, fast attitude, which was so popular, especially before the pandemic,
0:40:44 that’s actually somewhat disappearing. So in some sense, this economic downturn is not that bad for
0:40:50 China, because it made the Chinese realize that it’s not always going to go up. And it made them
0:40:57 really look down deeper into what they really should be focused on, that there will be cycles,
0:41:04 there will be up and downs. And so these very short termist thinking and opportunistic way of driving
0:41:13 business will ultimately fail. It’s bad for China that we’re having a sustained economic softness,
0:41:19 sustained economic softness. But I think it’s also a very, very important lesson for the Chinese
0:41:19 people to go through.
0:41:26 Let’s go, if we can, a bit to the personal. So you grew up in China. What are some moments from
0:41:33 childhood that were maybe defining to your understanding of Chinese culture and Chinese
0:41:33 economy?
0:41:39 You know, we look back at those moments when everybody in China was very poor with a bit of
0:41:49 nostalgia. I remember no doors were locked. I was in Beijing. And I remember every day in the summer,
0:41:56 everybody just went downstairs and chatted with everybody else. It was very social. It was very
0:42:05 community-based. The neighbors help each other. We had very, very little small apartments, very limited
0:42:11 access to certain goods. When I was born, even in Beijing, there were these vouchers for how many eggs
0:42:19 you can buy. And even Beijing, there were three or four blackouts per week, typically. There was a sense of
0:42:26 community. There was a very strong bond between people and within the family because they were going after a common
0:42:33 goal, making your life better, right? Struggling, striving to make your life better. And I remember being on the back of my
0:42:42 father’s bike, getting up, you know, 6 a.m. every day and going to nursery. And, you know, that’s the typical day.
0:42:51 Not a lot of material goods, but people had a sense of purpose. And that’s radically different. It’s completely
0:42:52 different now in China.
0:42:59 Do you think that, if you go to the human condition, do you think that nostalgia has some truth to it? Or is it just
0:43:07 nostalgia like any other? Is there some aspect of an intense, competitive, vibrant economy that loses some
0:43:09 element? Absolutely.
0:43:11 Of everybody being poor together?
0:43:18 Well, everybody having a common goal and a sense of community, right? That is what’s missing in these
0:43:24 extremely individual-based capitalist societies. And I think what the Chinese government is striving to do
0:43:31 with Chinese socialistic characteristics is to somehow try to preserve a bit of that socialist
0:43:37 character while still relying on markets, market-based incentives. But if you’re an extremely
0:43:43 individual-based society, I think you do lose a lot of that. And I think some of the backlash that we’re
0:43:52 seeing from society is a reflection of that, right? People being alone more and more. The death of despair
0:44:01 in the U.S. The addiction, you know, that they’re lonely, right? And competition means that you kind of
0:44:10 have to be somewhat badass. And you sometimes put down values and you forsake harmony in order to get
0:44:14 ahead. That’s certainly the Chinese society now. That was not the case before.
0:44:21 You think that’s a natural consequence of capitalism almost always, that you become more individualized,
0:44:31 you become lonelier, you feel lesser if you’re not winning, and thereby somehow that breaks down society,
0:44:34 community more and more?
0:44:42 I think it’s a spectrum, right? And Europe is somewhere in between, I’d say. But Europe also
0:44:48 is not as technologically and innovative as the U.S. But on a social level, there is more social
0:44:54 protection for the people. There is a stronger sense of community, I’d argue. It’s not perfect.
0:45:00 Ultimately, it is a choice. And this is what I think that China has to decide, right? Do you want
0:45:06 technological supremacy and radical breakthroughs? Well, yes, if you do, then you have to tolerate
0:45:12 that there are going to be some people who are going to be just going to be uncomfortably rich,
0:45:18 right? Like in the United States. You can’t say that you detest the financial system for its greed,
0:45:27 but then not accept the fact that it is what fuels innovation, right? Risky capital fuels
0:45:34 uncertain investments, which allows for countries like the United States to be making these breakthroughs.
0:45:40 That’s what China wants. But at the same time, China can’t tolerate these extremely rich people
0:45:48 around and the power that is accrued to them. They want to be a leader in technology, but then
0:45:55 the financial system is not liberalized. It’s highly regulated, but there’s also intervention.
0:46:03 Even if we look back at the French civil law versus the English common law, well, the former protects
0:46:10 creditors and the latter is more friendly towards debtors, which gives them more breathing space
0:46:17 to innovate, but also to fail and to innovate again. And that makes a big difference. So it’s all about a
0:46:25 spectrum. Right. But you can’t have it both ways. We don’t often enough have that nationwide conversation
0:46:31 about what we want to be as a country. There’s just a group of people yelling, we don’t want billionaires
0:46:37 and another group saying we don’t want communists or whatever. It’s a very trivialized kind of
0:46:44 chanting, but there is a balance. There is a spectrum and you get to decide, uh, do you like the nice
0:46:51 things, the nice toys and the power that the U S has and the power, the geopolitical power, the military
0:46:56 power, cultural power influence on the rest of the world. Yeah. You get to choose which, which do you
0:47:05 want. Um, so the first time you went to us, what was that like mentioned Harvard? How did that change
0:47:11 your understanding of the world? Um, well, it’s funny that we’re talking about this now because I was able
0:47:17 to go to the U S on a scholarship to an American high school because the U S at that time want was open
0:47:25 arms, all open arms towards international students. They kind of wanted to be the country that was going to
0:47:32 educate the future leaders of the world and their elitist in, uh, institutions like Harvard was really
0:47:37 going to be, you know, they’re the center of the world. So they welcomed students like me and many, many
0:47:45 others, uh, to be exchange students to study in the U S. Um, and what we thought, wow, we’ve never seen a
0:47:53 more generous country. Um, and I was able to, uh, go to high school, an American high school and live with an
0:48:01 American family, which was, wow. Can I say a big change, uh, from, from China, not only because I was
0:48:06 plucked from the communist youth league, uh, party and then straight to supporting their democratic
0:48:11 campaign because the host family was running for state attorney general in New York. So I was kind of
0:48:16 going to these conventions and handing out flyers and trying to get votes. And I don’t know, in China,
0:48:23 like Chinatown or something, but, um, but it was, it was so interesting to see that’s how the system
0:48:30 worked. Um, but in the course of doing that, I realized that people had a very simplistic understanding
0:48:38 about China and that’s probably, um, um, even when I was 14, I decided that one thing I wanted to do
0:48:47 was to dispel some of these deep myths about China because the China that they knew, and again, it was
0:48:55 all the three T’s back in the late 1990s, Taiwan, Tibet, and Tiananmen square. That’s, that’s, they thought
0:49:00 about China. They thought about these three things. And I was like, well, that’s strange because that’s
0:49:07 not how I’m feeling in China with all this, you know, bidding for the Olympics before 2000 and all
0:49:13 these buildings going up and down, all this excitement about, you know, joining the WTO on these radical
0:49:19 reforms that are, there are, that are taking place. And then all this effervescence that you feel in the
0:49:25 air, you, it’s not GDP growth as numbers. You actually see it. I said, this is really, you know,
0:49:30 and they’re describing China as if it was a place shredded white terror. And so I thought,
0:49:37 Hmm, that’s, that’s interesting. Uh, there’s a big gap, big gap of understanding. And even today,
0:49:45 that many years later, um, people know China a little bit more, but the sentiment hasn’t profoundly
0:49:52 changed. It’s still the three T’s. I feel like some variation of that. Uh, so what, what about the
0:49:58 level of misunderstanding of Chinese people of the West? Is there a similar level of misunderstanding
0:50:03 the other direction as well? I don’t think to the same extent because there’s Hollywood,
0:50:11 uh, that you can see daily American life, although it might not be totally realistic. Um, there was
0:50:19 a huge amount of admiration of U S, um, technology innovation, but also the American dream.
0:50:28 Uh, I think our newspapers, even though there’s bias everywhere is not focused only on reporting
0:50:33 the really bad stuff and portraying a negative side. I think these few years have been a little
0:50:39 bit different, but so many students went to the U S right. Um, so many people traveled to the U S
0:50:48 and this is an interesting thing. I’ve rarely met an American who has been to China and who still
0:50:55 goes on about how bad China is. I think that going to China makes all the difference.
0:51:01 I feel that’s like one of the big gaps of my life that I need to, uh, alleviate is to travel in a real
0:51:07 way for a long time to really experience the people and the cultures. And China is a big place.
0:51:10 Go, go dig deep and don’t just go to Beijing and Shanghai.
0:51:20 Um, let’s go back to the economics. So can you just, uh, dig a little deeper on the relationship
0:51:26 in China between the government and the companies in the private sector? So how much freedom do companies
0:51:34 have? Another big misunderstanding and a fundamental one is that people somehow think that the state
0:51:41 suppresses the private sector. It’s not at all as simple as that. Um, for the most part, if we look
0:51:47 at the local government’s incentive system, they want to help the best private companies, which are the
0:51:51 most promising because it makes them look good. It adds to their GDP as to the jobs investment.
0:51:58 They are so helpful to these private companies. Actually, I, I, I know many of these local
0:52:05 government officials working tirelessly day and night, especially in bad times, uh, to coordinate
0:52:10 between debtors and creditors and to kind of smooth out and to find relationships with banks.
0:52:17 They want to help these private companies because again, their incentives are aligned. Uh, deep seek is
0:52:24 private company by the way. So it has done the country proud. And why would the state want to go
0:52:30 and suppress these private companies, which ultimately is kind of a beacon represents a beacon success for
0:52:39 China. Um, now on how much freedom they have, it’s really ranged from too much freedom. That’s part of
0:52:44 the problem where you have defense companies buying art auction houses, real estate companies like
0:52:53 Evergrande buying soccer clubs, doing EVs, uh, uh, companies, uh, uh, investing in real estate that has
0:52:57 nothing to do with their core business. That’s how much latitude were given to private companies.
0:53:04 And there were consequences, uh, they were not reigned in. And then you go to the other extreme
0:53:09 where they’re scolded, they’re reprimanded, they’re reigned in, and they’re kind of folded into
0:53:15 submission. So that, that is the whole spectrum. You have the whole range, but I guess what we’re
0:53:24 really getting at is it is a country that is moving from a no rule of law or very little rule of law,
0:53:32 very immature markets to something that is being gradually, um, uh, uh, uh, established bankruptcy
0:53:39 laws, you know, corruption laws, uh, rules and regulations on what’s possible. Uh, one interesting
0:53:47 point is that, uh, in China, you, you ask the companies to innovate first and then you regulate
0:53:54 after, right? So that has led to things like P2P platforms that, you know, it’s led to,
0:53:59 lots of kind of financial innovations, some of which has actually been very helpful and good,
0:54:06 some of which had been disastrous, but the intention to regulate after the fact is to really
0:54:10 not, um, slow down or hinder the innovation. This is a very different approach from Europe.
0:54:16 You regulate first and then, you know, companies have to work around that. Um, so the,
0:54:21 this is why Chinese economy is so complex. Uh, you cannot reduce it to simply a statement saying
0:54:27 the state is unhelpful for the private or, or, or something like that. Um, there are certain
0:54:32 sectors where this SOEs dominate, right? Uh, when it comes to national security in terms of energy,
0:54:39 but let’s not focus on these few sectors. By and large, most of the economy, if you actually
0:54:44 admit to the fact that China’s highly innovative and highly entrepreneurial means that it must be
0:54:46 the private sector that is driving the show.
0:54:55 Innovate first, regulate after, really interesting. Uh, I also, in my mind, am contrasting it with the
0:55:01 way the Soviet Union and Russia since operated. That doesn’t sound at all like this model. And it’s
0:55:08 interesting that countries that at least on the surface had a similar cultural communist problems,
0:55:13 you know, the bureaucracies that form inside the communist state. It just seems that, um,
0:55:18 China broke away from that somehow that don’t understand exactly what happened.
0:55:23 In the West, they group these economies together as if they’re the same thing. No,
0:55:27 it’s not the same at all. There’s so many differences, uh, so much more flexibility.
0:55:33 You can have dynamic entrepreneurialism at the same time, have socialist characteristics. And I think
0:55:40 this is what China has been able to shape and mold a unique model that balances between government
0:55:47 industry, between state coordination and market mechanisms, and between individualism and communalism.
0:55:51 It’s not necessarily black and white. You can have all these things at the same time.
0:55:55 So what are the pros and cons of being an entrepreneur in China versus the West? Like if you
0:56:02 get a choice, you have a dream, you want to build epic things, what, and you get to choose where to start
0:56:05 that business? What are the pros and cons of each path?
0:56:12 In China, the speed is just all inspiring. You have a good idea, you implement it, you realize
0:56:16 your dream very fast because there’s also the support system, right? The infrastructure there,
0:56:19 the digital infrastructure there, the engineers are there, the talent is there and they’re cheap.
0:56:26 And the market competition is there is to keep, to keep you going. The consumers give you a very,
0:56:31 very fast feedback, you know? Look at Xiaomi. It was making phones and now it makes one of the
0:56:39 world’s best EVs. 270,000 cars sold in one day, a few days ago with a new model. They were phone
0:56:49 makers. So there’s an advantage to that, okay? But I would not feel safe. Not because of danger of
0:56:56 expropriation or nothing like that, but the bankruptcy laws are not there, right? It’s not necessarily always
0:57:03 fair competition. Things don’t happen in an orderly manner. If you have a competitor, you can have a
0:57:08 very evil competitor and evil competitors are there everywhere in China. They would, you know, call the
0:57:13 police on you, put you in jail, spread false rumors about you. Maybe that happens also in the US, but
0:57:21 there’s a different, it’s a different level in China. And also the mold that you can have to protect
0:57:26 yourself. The IP protection, right? That’s much weaker in China because the legal system is not very
0:57:31 effective. You have a good idea, you’ll be copied. And there’s a lot of work. You have to, you have to
0:57:37 dine and wine with the local governments. I mean, that’s not allowed anymore, by the way, but you dine
0:57:41 and wine, you know, figuratively speaking, you have to have a very good relationship with them. That’s a
0:57:42 different kind of work.
0:57:49 The wine and dine and the evil competitors is an interesting challenge that in some maybe distant
0:57:55 ways akin to the problems of the Soviet Union. I think, I guess in the United States, there’s less
0:58:02 of that. And I don’t even know if that’s based on laws because there’s a lot of lawyers in the US
0:58:05 that could do the same kind of evil competitor stuff technically.
0:58:12 That’s true. The potential negative ramifications are there. But I think personal protection is a big
0:58:19 difference. If you make a mistake, if your company’s not run well, you know, you go to jail. I think that
0:58:24 the US is much, much more tolerant on entrepreneurship, entrepreneurs on failure.
0:58:29 Since we’re talking about it, there was a lot of controversy around Jack Ma disappearing,
0:58:36 quote unquote, and reappearing a bit later. And there’s been sort of rumors of some tense relationships
0:58:44 that he has with the Chinese government. What is important to understand about the whole situation?
0:58:50 Like, to what degree is it reflective of the issues entrepreneurs face in China?
0:58:59 In the US, capital controls politics, one could argue. In China, it has to be the other way around.
0:59:07 Capital must be reined in by politics. As part of the capitalist class, do not have the ambition to
0:59:14 exceed the powers of the political class is really at the core of it, I’d say. The biggest difference
0:59:25 between US and China. There are important details that I think the West has not fully provided to the
0:59:37 public, for instance, and financial as innovative as it was, was doing banking jobs without being
0:59:45 regulated like a bank, right? So that obviously poses a host of financial stability questions and
0:59:52 rules and regulations and so forth. So the fact that IPO was halted, you could say that there were strong
1:00:00 economic regulatory grounds for that. But I think more broadly speaking, if you’re an entrepreneur,
1:00:08 part of the capitalist class, keep your head down, make money, and that’s fine, right? Do some
1:00:14 philanthropy. There are also many, many other billionaires that are just fine, that are actually
1:00:23 very much in favor of the political leadership. And they do their thing. Now, I’m not saying what’s right,
1:00:28 what’s wrong. It’s just a very, very different culture and different country. In the US,
1:00:34 it’s great to be colorful. I mean, you have a very, very colorful president. He would never have been
1:00:40 able to make it in China. You have the likes of Elon Musk. It’s great to be different. It’s great to
1:00:49 stand out. You do not want to stand out in China. So the moral of the story is that the top leadership
1:00:57 understands that it needs these top entrepreneurs, the likes of Jack Ma. And they have done so many great
1:01:04 things for the country, even for the world. But in China, garnering too much influence and power,
1:01:12 even through social media, doesn’t make you look that great. It’s not a good thing for you personally.
1:01:18 And there’s a saying in China that you just don’t want to be the tallest tree, right? The tallest tree
1:01:26 gets the most wind. So I don’t agree at all with the Western conclusion that this anecdote, this story,
1:01:30 has meant that entrepreneurs don’t want to be entrepreneurs anymore. The young kids don’t
1:01:35 aspire to be people like Jack Ma. That’s not true at all. The incentives are still there. It’s a different
1:01:38 kind of rich elite class in China.
1:01:49 So on what dimensions do you think that the height of the tree is measured? Is it more about just
1:01:56 mouthing off in public? So can you still be the richest person in China and actually not
1:01:58 clash with the state?
1:02:04 Absolutely. Don’t be too outspoken. Don’t try to get too much attention and too much influence.
1:02:09 And just, you know, again, it’s a cultural thing, but just keep your head down. Be humble.
1:02:17 You know, contribute to society. Do philanthropy. Work or collaborate with the government. And you’re
1:02:26 kind of OK. So the signal the Jack Ma situation sends to the entrepreneurs in China is not don’t
1:02:31 be an entrepreneur. It’s more like don’t be too colorful. Don’t be too colorful. And colorful
1:02:38 means you can be colorful about the technical details of your technology, but don’t be colorful
1:02:43 about Xi Jinping and and and politics and just stay out.
1:02:50 Yeah, stay out of politics. But I just want to say that said, Jack Ma was really an emblem
1:02:59 of extreme success for China and the Chinese entrepreneurs look up to him. That’s really
1:03:06 important. It was a signal that unfortunately was misconstrued by the side and by also outside
1:03:11 world. But it’s laid a different path for what these entrepreneurs should be doing.
1:03:15 What do you think happened to him? So he’s now, I think, living in Japan.
1:03:16 That’s by choice.
1:03:17 By choice.
1:03:22 No, he’s he’s an extremely fascinating character, which, you know, and if he were in the U.S.,
1:03:33 he’d thrive. Funny, witty, smart, wise, creative, loves a good life. And I think it’s by choice
1:03:38 that he’s roaming around the world, given that he has more free time.
1:03:39 You think he loves China?
1:03:48 All of them do. All of them do because their lives, their destinies were totally changed because
1:03:52 of China, because of the government, because of Deng Xiaoping, because of everything.
1:03:58 So, you know, I know a lot of people from the former Soviet Union, and there’s a deep resentment
1:04:05 of broken promises, broken dreams. So that is not something you see.
1:04:10 That’s not how I would describe that generation and their feelings towards China. Of course,
1:04:14 you always get exceptions, right? The ones who have moved to the U.S. and who wants a democracy.
1:04:21 But by and large, people are deeply grateful to China, the Chinese government, the Communist Party,
1:04:27 if you want to label it as that, because they’ve seen their lives be totally transformed. I mean,
1:04:32 Jack Ma went from being a schoolteacher to becoming one of the most powerful people in the world. I mean,
1:04:37 if you didn’t have China, how could that have happened, right?
1:04:42 Can you speak to the thing you mentioned a few times, which is the difference in American versus
1:04:50 Chinese, or maybe Western versus Chinese approach to entrepreneurship? Zero to one versus one to N.
1:05:00 Maybe can you explain that? And what will it take for China to become a consistent zero to one
1:05:05 innovator for the individual entrepreneurs to create totally new things versus doing the things you
1:05:13 mentioned about speed and scale? The U.S. will lead for some time on breakthroughs, on disruptive
1:05:22 technologies, the zero to one technologies that ultimately change the world. But innovation is a
1:05:29 process. It goes from invention to production and commercialization and diffusion. Diffusing technology
1:05:34 throughout all parts of the economy. And on those two stages, I think that China has a unique advantage,
1:05:40 even if it still can’t do the zero to one breakthroughs. Because in the end, how much this
1:05:46 technology is adopted by the countries and by the various parts of the economy is fundamentally
1:05:53 crucial to how much productivity will be unleashed. And China’s innovation currently,
1:05:59 deep seek is really one example. And I think it’s really the beginning of the scale based,
1:06:07 leading edge technology, cost cutting driven kind of innovation model could be just as powerful,
1:06:14 maybe even more effective and powerful than the breakthroughs. And it’s a very different approach
1:06:21 to innovation. The Chinese companies focus on solutions, problem solving. Again,
1:06:25 that comes back to the education system, right? You’re giving a problem, I’m going to find the
1:06:31 answer, the Chinese students can do it. You want them to write their own question, they can’t do it,
1:06:34 right? I’m exaggerating a little bit, but it’s a little like that, right? They see a problem,
1:06:38 they’re going to go after it, and they’re going to find the best solution. And that’s really,
1:06:42 really useful, right? Because we don’t need, or developing countries especially,
1:06:45 don’t need these frontier technologies that they can’t use.
1:06:52 And China currently has this AI plus program, which is about pushing AI into every single
1:07:01 plausible sector with the help of the state. So adoption diffusion is very important. Why China
1:07:08 can’t do breakthroughs or can’t do zero to one technologies? I think at the root of it,
1:07:16 and there are some deeper, we talked about the proximate reasons, the short, flat, fast,
1:07:21 for instance, right? You don’t want to spend too much time on investigating something that you don’t
1:07:27 even know if it’s commercially viable. So basic research is still weaker than in the U.S.,
1:07:32 universities, but also this kind of intrinsic motivation. It’s very different, right? In China,
1:07:38 it’s driven by extrinsic motivation. You are rewarded by, you know, compensation, financial
1:07:43 compensation, all these kinds of extrinsic motivation is what drives you. But intrinsic motivation,
1:07:48 pursuit of knowledge for knowledge’s sake, right? That was deep in the Confucius philosophies,
1:07:54 but of course, you know, poverty has changed all that. The profound commitment to scholarship,
1:08:02 research, which we know is very much true in the U.S. universities, that’s, it’s starting. It’s
1:08:08 starting, but it’s not there. So I think these two approaches are actually quite compatible with each
1:08:14 other. I don’t know what all this fuss is about, right? China uses technology very well, can scale up
1:08:21 and reduce costs, and then it can spread it around. And the U.S., you know, has, makes the highest value
1:08:27 added by inventing these technologies. But, you know, again, diffusion matters.
1:08:32 Well, yeah, the things you mentioned, the scale, the manufacturing, the diffusion,
1:08:38 from a sort of economics perspective, you wonder which is the more important skill to have. And it
1:08:48 seems like the cost-cutting, the efficient, large-scale, fast manufacturer, the diffusion is much more
1:08:50 important for the success and the growth of the economy.
1:08:58 I think where it ultimately leads to an impact on the economy, that’s more important. It’s this
1:09:05 persistent question we have, why don’t we see the productivity in the numbers, right? You’re in AI.
1:09:10 AI, we had long periods of investment, right? You just don’t, you haven’t, you hadn’t seen it in the
1:09:15 numbers until maybe even recently, and it’s still very slow. But China’s pushing that in the sectors,
1:09:22 you know, robotics, AI, cloud, industrial internet of things. And even companies like Huawei, I think
1:09:30 it’s gotten a little bit of too bad of a rep in the U.S. But American engineers working for Huawei said
1:09:35 that it’s, you know, they’re so happy working for Huawei. The intent focus on innovation, but also on
1:09:41 solution-driven innovations in Africa, in rural areas, really changes people’s lives. It doesn’t
1:09:43 change the world, but it changes individuals’ lives.
1:09:52 What’s the feeling that Chinese entrepreneurs have about copying technology? Because I think one of the
1:09:58 cultural things in the U.S. is just really not respected if you copy. So like that’s not seen,
1:10:04 that’s seen as a big problem. And is there some degree to where in China it’s not?
1:10:12 No, unfortunately, this is a big cultural difference. Our sense of property rights is
1:10:17 actually quite different from the U.S. I think that will change over time, but absolutely, you’re
1:10:23 right. They are, they have no qualms about copying as long as it leads to success, right? That’s the
1:10:29 difference in values. As we mentioned in the beginning, you asked why the level of competition
1:10:34 is so fierce. Well, they all do the same thing. Once they’ve seen one successful thing, everybody
1:10:40 does the same thing. You’d have no respect for doing that in the U.S., right? But in China, it’s all fine.
1:10:44 But I think that over time, it will change. Just give it a little bit of time.
1:10:46 So do you fundamentally it’s a bad thing?
1:10:53 In the end, if China is all about innovation technology, you cannot not have very strict
1:11:02 IP protection, right? And ultimately, again, we’re still in the short, flat, fast stage, right? When
1:11:07 we graduate from that stage, you’re going to have very different views about these things. You’re
1:11:12 going to try to diversify and do different things. But again, it’s a stage. Chinese people were hungry.
1:11:15 They’re still a little bit hungry. They’re not going to be as hungry in the future.
1:11:20 So can you describe the DeepSeek moment and DeepSeek as it represents what China is thinking
1:11:28 about in the space of AI? And does China have a chance at outrunning U.S. in the AI race?
1:11:35 DeepSeek was a surprise to the world, but I don’t think it was that much of a surprise to
1:11:45 the same degree to the Chinese. And remember that DeepSeek happened in times of crisis, urgency,
1:11:54 not in times of comfort. A lot of these technological breakthroughs and leapfrogging happens in times
1:11:58 of crisis. This is called crisis innovation. And you’ve got to thank the U.S. for that,
1:12:05 right? When the Chinese were comfortably importing chips from the U.S., the whole industry stalled
1:12:10 for 20 years. I mean, why would you plow in billions, tens of billions, and even more when
1:12:15 you can just import the best, right? You don’t want to do your own innovation. It’s because
1:12:20 of these export controls, these sanctions on these companies that Chinese companies in the
1:12:28 Chinese state felt an existential crisis a few years ago by being cut off from these critical
1:12:33 components. And guess what happened? In a short amount of time, the degree of domestic capacity
1:12:42 ramping up and catch up has been nothing short of remarkable. Again, thanks to U.S. truculence on
1:12:50 technology. Now, I’m sure there are many aspects of hyperbole related to DeepSeek, but it just shows
1:12:56 you that the gap is much smaller between China and the U.S. on leading-edge technologies than what was
1:13:02 expected, that these export controls were not effective. They may have even backfired. And it
1:13:11 shows you that China has this relentless focus on taking some of the existing technologies and using
1:13:22 scale and the advantages to cut cost and to diffuse. And this is just the beginning. I think it will happen
1:13:27 in many other industries as well, including in semiconductors. And that’s the Chinese approach.
1:13:38 Now, there’s an interesting dilemma here, which is that this is happening in a time of extreme economic
1:13:49 softness, slowdown, and missed uncertainty, trade wars, a lack of confidence, a slowdown in private
1:13:55 investment and consumption, a withdrawal of foreign investment from China, especially the U.S. venture
1:14:03 funding. Imagine what China would have been like, let’s say, if the economy was doing better,
1:14:09 right? But you could also argue that it’s because people feel threatened that they make more leads.
1:14:15 Now, I wish the world is not, we don’t have to, you know, drive each other to the corners to do
1:14:21 something great. But that is the reality. And I don’t think that there’s an easy say between who
1:14:27 wins, because I think the winning idea is part of the old playbook, right? You’re all kind of part of a
1:14:32 network. Different countries, different players have different choke points on each other. I don’t think
1:14:41 it’s just about the U.S. and China. And what’s more, you use your leverage once, and that leverage has a
1:14:46 half-life. It becomes a lot less effective the second time around because other countries, other
1:14:51 companies are going to try to substitute it away. You know, if China uses the rare earth leverage,
1:14:58 which I think it is now a little bit, there will be alternatives and substitutes. Got to be very,
1:15:05 very careful of what coercion leverage means. Same thing with the U.S., right? So I think this is all
1:15:08 the old thinking of who wins, who dominates. I think we need a new playbook.
1:15:14 So to you, maybe when you refer to Biden and Trump, if you go back to Biden, it would be the CHIPS Act.
1:15:21 So the export controls created unintended, unexpected effect where it had the reverse
1:15:23 geopolitical effect.
1:15:28 I hope it was unintentional. Otherwise, you’d be questioning the level of intelligence of the
1:15:35 U.S. administration, right? But I think that the things they laid out did the opposite of what was
1:15:46 intended. It sped up domestic capacity. It motivated the whole country to do this whole of a nation
1:15:50 program to go after technology. It’s kind of like the way they go after Olympics, right? Olympic gold medals.
1:15:55 They wanted to maximize Olympic gold medals. And they put the whole nation at work and all the
1:16:00 resources. And that’s what China did. Huawei, another example. They were sanctioned. Guess what?
1:16:07 They have come back to life stronger than ever before. And this is not unique to this episode. If we look
1:16:14 throughout history, these blockades don’t work. The continental system actually indirectly led to
1:16:25 industrial revolution in the U.K. when the Spanish kind of blockade the Portuguese. They came up with
1:16:31 a very ferocious, forceful naval power. And you’re talking about China here. They just don’t lie down
1:16:37 and lie flat and say, oh, we give up, right? They’re more motivated than ever before.
1:16:45 So, the lesson is, don’t force people or nations into a corner.
1:16:53 Yeah. You make them have a very comfortable situation and they tend to become complacent and
1:16:55 they stagnate.
1:17:03 All right. So, can you talk through the whole saga of the Trump’s tariffs that’s still going on,
1:17:08 especially tariffs on China, from your perspective as an economist? To what degree was it justified?
1:17:16 To what degree was it effective? To what degree is it bad policy? For U.S., for the West, for the world,
1:17:17 also for China.
1:17:23 You know, China has been preparing for this for the last five years and for the return of Trump
1:17:33 and for Trump’s maniac trade policies. You’d think that Trump also had five years to prepare
1:17:42 for this battle with China. It didn’t show. You can say that the Chinese, at least this time around,
1:17:48 have played their hand pretty well when dealing with Trump’s tariff threats and the trade war.
1:17:54 With a level of calibrated assertiveness, they have really thought through everything very elaborately.
1:18:03 And look, you know, this is not good for either country. Let’s just be clear. It’s bad for U.S. and China
1:18:11 and it’s bad for the world. And every country has a stake in the U.S.-China trade war, because whether
1:18:15 you trade directly or indirectly with China, you’re going to be affected. They are one of the largest
1:18:24 intermediate exporters in the world. And Chinese manufacturing goods anchor global manufacturing
1:18:24 prices.
1:18:31 The cumulative tariff burdens, when you get to Canada, when you get to Mexico, when you get to
1:18:40 any other final destination, these tariffs will affect you, right? So it’s clearly very, very bad
1:18:49 for the world. China’s core principles, and I think that this is not well understood from the rest of the
1:18:56 world towards the U.S. and something that they have kept up is equivalence, reciprocity, and realism.
1:19:03 China’s not going to lower tariffs unless the U.S. does, right? You can kind of stand up to Trump like a man.
1:19:09 That’s the only way, you know, to deal with Trump. That’s its view. The deal has to be realistic.
1:19:16 The phase one deal of the last time wasn’t realistic, and China thinks, look, the U.S. is going to use this
1:19:23 as a leverage, right? That’s not possible. This can’t be seen as political concession. The deal has
1:19:31 to be seen as mutual commerce. So where China can have room to negotiate is opening up things like
1:19:35 services, you know, American banks, American financial institutions have a lot of business
1:19:41 to do in China. They can buy a limited number of more goods. They can discuss about transparency
1:19:48 around rules and regulations on e-commerce, on data. All of that is fine. But don’t confound
1:19:54 economic issues with political issues. Hong Kong-Taiwan is not part of the deal, by the way,
1:20:00 in case anyone was wondering. Trying to change China’s state hybrid private sector model,
1:20:08 don’t go there. Anything that challenges China’s technology, security, that’s not really part of the
1:20:15 discussion. I think that people have to be clear about also what China thinks and wants, and also
1:20:19 the Chinese to be clear about what Trump wants, although I don’t know anybody, even Trump himself,
1:20:26 knows exactly what he wants, in order for these very complex negotiations to actually succeed.
1:20:33 Okay. So China has a few red lines. So don’t mention Hong Kong or Taiwan.
1:20:37 Don’t mix the political issues with the trade deal.
1:20:45 Right. And then is there some degree, maybe you can speak to culturally, where stylistically there’s
1:20:54 red lines, meaning don’t bully China, like language-wise? Or does that not matter? Because there’s a kind
1:21:03 way of speaking in the United States that, you know, I feel like in diplomacy in general, neither side
1:21:13 wants to be humiliated. And in great deals, even when one side on paper wins, you want to make the other
1:21:19 side, especially the side that gets the short end of the stick, feel like they’ve won and show the rest of
1:21:21 the world that they’re the winner.
1:21:22 Well, that’s diplomacy.
1:21:23 That’s diplomacy.
1:21:27 We have an absence of diplomacy. But you’re absolutely right. There needs to be respect.
1:21:35 The Chinese, at least, really care about respect. And I wish there was just a bit more cultural
1:21:41 fluency. And I think a lot of things would be so much easier between the two countries, just
1:21:46 understanding that. Because you can actually push China to do a lot of things, right, all within reason,
1:21:54 that would work in favor of the U.S., but understand that respect is vitally important. Face-saving is
1:21:55 very, very, very important.
1:22:03 To what degree what Xi Jinping says and what they’re putting out there in the world represents the truth?
1:22:10 So he has a whole way of being of like, let’s de-escalate. Let’s all make good deals together.
1:22:16 Let’s almost like, let’s be friends. Like Modi a little bit has a similar way of being. Like, let’s just
1:22:24 And the implied thing is, like, forgive the French, but if you fuck with us, we won’t be nice. But let’s just
1:22:25 all be nice together.
1:22:27 Is he speaking the truth?
1:22:29 The Xi Jinping is not Putin, right?
1:22:30 Sure.
1:22:39 And there is a genuine desire on China’s part to de-escalate. Again, coming back to the level of
1:22:45 pragmatism. Under economic strain in China, you don’t really want to be picking fights.
1:22:57 They don’t agree at all with Trump’s economic views and world vision, let’s just put it simply. So
1:23:05 understanding that a lot of this is also driven by American internal politics, which they are aware of,
1:23:11 helps a bit. But there’s a genuine desire to take the temperature down with the U.S.,
1:23:13 even if the weather doesn’t fundamentally change.
1:23:20 What does a good diplomacy look like here for both sides? What is the best possible?
1:23:27 Just strictly on the economics, on the trade, the tariffs, what’s the best possible outcome
1:23:28 for the world?
1:23:33 I think that Trump can show to the American consumers that he has gotten some sort of a deal,
1:23:38 right? That the Chinese have bought more American goods or promised to buy American goods,
1:23:44 and then American companies can come into China, and then a lot of the previously restricted
1:23:49 investment opportunities are now non-restricted, and the American banks can make money in China.
1:23:56 He can say that. And I think that could be part of a really realistic deal,
1:24:02 that somehow American companies will be better protected through IP protection. And again,
1:24:05 that’s in China’s interest as well. So I don’t see a fundamental conflict here.
1:24:11 And at the same time, they lower the tariffs, right? Not to the rates where they were before,
1:24:18 but lower, and you don’t prohibit trade. And then for China, that would also be a success. So you
1:24:22 can actually have success for both places, but being realistic is part of the game.
1:24:34 Is tariffs, question to you as an economist, is tariffs a useful, effective tool for global trade?
1:24:44 No. I think that there is a real problem in global trading system and globalization in general that
1:24:53 is not going to be resolved by tariffs. We do need to think about more harmony between countries
1:25:07 and you can’t dominate everything, but you just can’t dominate everything. That would not be good
1:25:13 for global harmony. You need to give other countries an opportunity. You need to develop your own internal
1:25:20 economy, right? Rely on your consumers as part of the deal. Tariffs, this kind of highly protectionist
1:25:26 method is very distortionary, and it’s going to be bad for the U.S. I’d actually argue that both China
1:25:38 and the U.S. have totally taken advantage and also enjoyed the global economic realm under the U.S.
1:25:45 liberal order. I think that China quite likes it, actually. You know, U.S. kept at peace,
1:25:49 and during this peaceful times, things were working very well economically, technologically.
1:25:57 They kept the sea lanes open. They did their part to preserve peace to the extent they can,
1:26:02 I guess. But China wants peace, right? Only with peace can they do what they can. And actually,
1:26:08 U.S., despite saying they’ve been victimized, look, they’ve had a very, very good time, right? Never have
1:26:15 quality of life standards of living technology risen as much as the U.S. did under its own liberal order
1:26:21 than it has ever before, and the amount of influence and power. Yes, of course, you can blame the U.S.
1:26:27 for lots of things that happened, but it actually had a really good time, and China as well. So now
1:26:33 they’re going to take this apart. They think that they’re going to be somehow better off, that American
1:26:38 people and Chinese people are going to be better off under a more disorderly, fragmented rule of a jungle
1:26:44 kind of world. That’s an illusion. That’s what politicians tell their people, but that’s not the
1:26:53 truth. So what are, if not tariffs, ways to incentivize countries like the United States to build internally,
1:26:56 so to build semiconductor ships internally, for example?
1:27:02 Well, exactly. Tariffs is a way to punish foreigners, but what you really want to do
1:27:08 is to strengthen your own domestic competitiveness. And I want to draw an analogy to the U.S.-Japan
1:27:15 competition in the 1980s. Japan actually took over in many parts of the semiconductors industry,
1:27:21 even though the microchip was invented in the U.S. But guess what happened? Well, it actually drove more
1:27:28 competition and more mobilization in the U.S. Actually creating this innovation system, changed a few
1:27:34 really critical laws that helped with U.S. innovation, and the consumers benefited. The U.S. took over again
1:27:40 as the leader of the semiconductors industry. There’s no better way than to strengthen yourself to be
1:27:48 competitive, because ultimately tariffs have not done anything to help the U.S. The trade deficits have
1:27:56 have widened since Trump, right? They haven’t closed the imbalance with China and with the rest of the
1:28:04 world, because ultimately the U.S. saves less than NMS, and that’s a macro phenomenon. It’s not a trade
1:28:14 phenomenon. But I fear that the U.S., by kind of dropping off of this global trading network and system,
1:28:21 it will lose more and more of its power. You have power when you’re deeply engaged and embedded with a country.
1:28:26 Once you’ve left it, you actually lose any sort of leverage.
1:28:33 So there’s got to be ways to incentivize industrial policy, building more stuff internally without tariffs, right?
1:28:40 So you just invest from a federal perspective. You’ve invested in companies. Maybe like more carrot than
1:28:44 carrot towards the domestic versus stick versus the foreigner.
1:28:54 All kinds of subsidies that are justified for the green transition, for innovation, R&D, support for the
1:28:59 university system. You know, the U.S. is the world leader in terms of attracting talent. It has everything going
1:29:08 for it. But it was a little bit complacent. And by dropping off of that global network, it’s going to
1:29:09 do itself more disservice.
1:29:13 Yeah, tariffs don’t quite make sense to me. Maybe I’m dumb. It just doesn’t make…
1:29:17 It doesn’t make sense to economists either. And economists are not all dumb.
1:29:27 You did mention immigration a little bit. I think that’s a component of it also. You said
1:29:34 your own experience was that U.S. was much more open to immigration in the past. What do you
1:29:41 think about this on the human side, the protectionism, the closing of the borders that the U.S. is
1:29:46 doing? What are the pros and cons of that from an economics perspective?
1:29:54 On U.S. immigration, you see, I understand both sides of the story, to be very honest. And I also
1:29:59 understand a bit of the protectionist streak, not only coming from the U.S., but also from Europe and
1:30:04 various parts of the world, which is going to be a trend. I understand that before you care about
1:30:10 people in the rural villages in Indonesia, you really care about, you know, the northern Brits in this
1:30:19 country and they have not fared well. I understand that your jobs may be under threat because of this
1:30:29 uncontrolled influx of, you know, illegal immigrants. From a purely economic and rational level, you’d say
1:30:35 immigration is very important because it keeps the prices down, keeps inflation down. It keeps up the
1:30:41 supply, which is very important when you have that much demand. And look, you know, the standards
1:30:48 of living have also improved for many people who can afford it, right? The low-cost workers being able
1:30:56 to sustain the service economy. So I understand both sides of the story. I think that in the end,
1:31:02 it is a balance. And I do believe, even as an economist, that social harmony, and I come back to this word
1:31:10 harmony repeatedly, even though as an economist, this thing doesn’t even exist, is becoming ever
1:31:18 more important. And as a nation, you know, some kinds of skilled immigration is actually what makes
1:31:26 the U.S. the most technologically advanced country in the world. At the same time, you do have to think
1:31:30 about your own citizens, the ones that have had generations and been around, and you have to think
1:31:35 about their livelihoods. Yeah, the puzzle of social harmony is a fascinating one because you spoke to
1:31:40 the long history of China, how they… Yeah, that was Confucius. Yeah, that’s Confucius. And then
1:31:46 there is a kind of social harmony, a very different set of ideologies in the United States and in the
1:31:54 West broadly. And it’s all a puzzle. And you do want to have some cohesion. But in the United States,
1:32:03 one of its beautiful aspects is the diversity of humans. And so the continued influx of diversity
1:32:14 is, you know, feeds the machine that makes America great also. But too much breaks the fabric of that
1:32:20 society. So it’s such an interesting puzzle. And some of it is like, we humans can’t balance. So you go
1:32:27 one extreme, the other, you just oscillate back and forth. And then also politics, especially in the
1:32:35 United States, there’s a red team and a blue team. And when the red team is at the top, the blue team
1:32:40 just pulls all the way to the other direction and vice versa. And we just kind of oscillate back and
1:32:45 forth in this way and hopefully make progress over time. But I want to come back to the point of
1:32:55 choice, right? What makes America so great is that it tolerates instability. It tolerates clashes. It
1:33:00 tolerates volatility. Think about the financial crisis, right? The financial volatility. But again,
1:33:07 the U.S. dollar is where it is because of this deep liquid financial system in the U.S. that no other
1:33:16 country has managed to build. There are clashes everywhere in society. But it is a very diverse
1:33:24 country with all the benefits to that. It is a highly, highly unequal country, economically speaking.
1:33:33 These, the CEO pays, right? The businessmen being able to be in top political positions, you kind of
1:33:44 balk at that level of cronyism, if you will. But, you know, the U.S. is the technological leadership and it
1:33:53 kind of is able to stomach that volatility and clash without breaking apart. And other countries don’t have
1:34:01 the capacity, the institutions, the culture to be able to tolerate and still maintain, to keep the society
1:34:07 together. So I think it is a very interesting, but yeah, it’s a puzzle.
1:34:15 So we talked about the economic side of tariffs. And you mentioned the other red line and the three T’s.
1:34:23 Can we talk about Taiwan? So how important is Taiwan to the Chinese economy and the global economy?
1:34:29 Taiwan has, among other things, TSMC, which is vitally important for the global economy.
1:34:37 It’s also very important for the Chinese leadership and the Chinese people. You don’t want to ask what I
1:34:45 think. Ask the Chinese young generation. They would one day like to see unification. It’s part of the
1:34:54 patriotic, the dream, if you will. So, and it’s, it’s a chip, right, between the U.S. and China.
1:35:00 So everybody is watching Taiwan. But I’d say that this attention is not necessarily good for Taiwan.
1:35:07 Because all this uncertainty, all the political risk has meant that investment there has dramatically been curtailed.
1:35:15 And mainland China is a very, very important economic partner to the Taiwanese economy.
1:35:22 I think that, I don’t have a lot of views about, around this, but I just say this.
1:35:31 I think there’s more political wisdom of the Chinese government side than we assume outside of China.
1:35:39 And that strategic ambiguity, but also strategic patience, especially given China’s economic situation
1:35:47 currently, means that, more likely or not, I think that if China does really well economically,
1:35:56 and Taiwan is not doing as well economically as we’ve seen, that over time, this is still the best strategy,
1:36:04 from China’s point of view, to resolve these differences. I think any military use and action
1:36:10 would be actually quite detrimental to China.
1:36:17 So what’s a way to avoid military conflict here? It seems like a red line, unification is a red line for
1:36:27 the United States. And it just feels like a very tense situation. So is there a path forward here that
1:36:35 avoids any military conflict, where everybody’s happy from an economics perspective, from a semiconductor
1:36:40 manufacturer perspective also? Well, first of all, you have to keep the communication channel open,
1:36:45 right? There was a risk of that being shut off during the Biden administration. That’s highly,
1:36:50 highly dangerous. You’re meaning U.S.-China communication. Yeah. There’s also something that
1:36:58 I think people miss, which is that the soldiers in mainland China, that’s part of the one-child policy
1:37:07 generation, right? There’s only one son. Families have only one son. And I think to assume that the Chinese
1:37:16 people desire and would be able to forsake that generation for unification purposes or be able to
1:37:24 tolerate lost lives for this, I think is also a bit of an exaggeration and stress. And I think Chinese people
1:37:35 also really, they really care about peace and stability. Chaos is just not part of what they
1:37:43 think is good for them. The role that TSMC plays is so critical, given the choke point they have on the
1:37:50 rest of the world. In the semiconductors industry, which we know is one of the most important industries,
1:37:59 sustaining the economy, not to mention things like AI and technologies. Look, you know, the U.S. has been
1:38:11 trying to build another TSMC outside of Taiwan. It’s very, very, very slow, right? There are a lot of
1:38:18 cumulative knowledge, experience, and skills that are involved. It’s not that easy.
1:38:27 The Chinese don’t want to see an eruption of TSMC either, because, again, it’s vitally important for
1:38:36 everybody. Whilst I don’t think that this is really necessarily a bargaining chip, because if you really see
1:38:44 what the Chinese thinks about Taiwan, it goes beyond economics. It goes beyond the logical. It is about, you know,
1:38:54 realizing a dream, which even I, I tended to not place enough importance. But when I talked to the
1:38:58 young people in China, I realized that it’s still their dream.
1:39:04 It’s just unfortunate that this dream is mixed up in the fact that Taiwan with TSMC has been incredibly
1:39:09 good at manufacturing. It’s just like an interesting puzzle of why it’s so difficult,
1:39:18 a low cost at scale to manufacture chips. And it’s just incredible that they were able to do it. And it’s an
1:39:23 interesting puzzle for how China can do it domestically and how U.S. can do it domestically.
1:39:29 And it seems like there’s increasing urgency on that. And I think if we look out in the next hundred years,
1:39:35 the urgency is good, because it’s probably good for each individual country to be manufacturing the
1:39:42 majority of their chips. It’s just, it’s less likely to lead to conflict.
1:39:49 Well, this is the trend that you need to manufacturing things that are important for national security.
1:39:54 It’s not efficient, but it’s so-called strategically safer.
1:39:59 You mentioned one-child policy. So can we speak a little bit more to that? Like what broadly,
1:40:05 what impact has it had on the Chinese society? On culture, you already mentioned some of it,
1:40:12 some of the impact on the economics, on the culture, on the demographics of China.
1:40:18 It’s probably one of the most radical policies that China has enacted in its history.
1:40:29 And the enforcement was very strict. In my class, nobody had a sibling except my friend who was a
1:40:37 Uyghur. 98% of urban households had only one child. The other 2% are twins, which you’re allowed to keep,
1:40:46 thank goodness, if you had the good fortune of giving birth to twins. It had lots of unintended
1:40:55 consequences on the economy and society as well. Maybe on the good side, it’s actually a golden age
1:41:01 for Chinese women. Because the Chinese girls never had as much education investment apportioned to them
1:41:08 as they’ve had after being the only child in the family. And you raised a daughter like a son.
1:41:13 And if we look at all the skill gaps and the education gaps and the returns to education, actually,
1:41:22 girls fared better. Apart from the top, top, top leadership in the Chinese political class,
1:41:31 you look at the CEOs of major companies, in the ministry, civil servants, there are a lot of
1:41:36 Chinese women. And actually, recently, if you look at the surveys, the Chinese families would
1:41:44 prefer to have a daughter than a son, because they’ve seen how much bargaining power you as a
1:41:52 Chinese women. And as a rare bride, or a scarce supply of brides goes, you have raised your bargaining
1:41:59 power and you can command high amounts of dowry. That was an unintended good thing about the one-child
1:42:06 policy. And to the opposite, the recent relaxation of the one-child policy, actually, women are now
1:42:13 encouraged to have as many kids as they possibly can. The flip side of the one-child policy has not
1:42:19 necessarily been good to women in the job market, because they think, oh, well, you’ve only had one
1:42:24 child. Oh, guess what? You can have another child. So that’s not necessarily good for long-term
1:42:31 employability. But on the economic side, I’ve written about this in my academic papers.
1:42:37 It’s been one of the very important causes of high saving rate.
1:42:42 I always tell people, you want to stimulate consumption or have more kids? You know how
1:42:48 much one of those costs, right? Especially in China, the tutorialships, education, you have to
1:42:54 buy a house. You have to buy a house for them so that they can get married eventually. So it’s very,
1:43:00 very expensive to have a child. If you have more children, you spend more. But maybe people don’t
1:43:05 want to have more children because the cost of having a child is so high. And this is driven by the
1:43:10 competition. And why is there so much competition? Because there’s a one-child policy generation,
1:43:17 right? You want your child to be the dragon or the phoenix, and you put everything into that one
1:43:25 child. That makes the child more anxious, makes the whole environment more competitive. And in the end,
1:43:30 these one-child policy children don’t want to have a lot of kids because they don’t want them to see
1:43:35 them suffer what they have suffered, right? So there are all these kind of unexpected consequences,
1:43:40 but also changing the social fabric. I’d like to say that it broke the hierarchy of the family where
1:43:46 the parents had the dominant role. Now the kids are the boss. They boss everybody around. They boss the
1:43:54 grandparents around. It relates to the puzzle, the housing puzzle. How is it possible that the Chinese
1:44:02 youth can afford these really expensive real estate with their meager income? Well, one common saying is
1:44:07 that they have six wallets, right? You and your spouse, together with the parents, and maybe even the
1:44:16 grandparents would chip in. So there’s this kind of intergenerational family dynamics that makes our
1:44:33 models focused on the individual consumption. But the demographic side is the other challenge, which is
1:44:42 they were so strict about the one child policy and they kept it in for too long. So that once they decide
1:44:49 to loosen it and decided that fertility rates were way too low to sustain the Chinese economy and its
1:44:56 future, it was already too late. And now they’re finding all kinds of creative ways to make people
1:45:02 have more kids. This is not something that they can demand and command in ways that they can demand and
1:45:10 command emerging strategic sectors, right? So all these really interesting social anecdotes where they’re
1:45:16 encouraging even single women in a highly conservative society, encouraging single women
1:45:22 to raise children. Nothing to be afraid about that. Lots of support system going there. I mean,
1:45:26 they’re radically changing the whole, you know, thinking around these kind of issues.
1:45:30 Well, it seems like even the West, a lot of the developed countries
1:45:36 have a demographics problem. Seems like a lot of countries not have enough babies.
1:45:43 South Korea, South Korea, very, very, very low fertility rate. It’s just that for China’s
1:45:49 stage of development, it should be having more babies than it is currently having. So the one
1:45:55 child policy accelerated that demographic transition, right? It really squeezed in many,
1:46:07 many decades into two. But my view about the demographic aspects for the economy is not as pessimistic,
1:46:11 as most people. Because meanwhile, we’re talking about aging.
1:46:23 There are also high rates of unemployment, right? When we’re talking about, is there enough people
1:46:30 to do the jobs? We have things like AI, and not enough jobs, and these kind of questions that are
1:46:37 first order. We haven’t even figured out the relationship between labor force, productivity,
1:46:43 you know, what are the factors of production that will be most important for future economy.
1:46:49 And so we shouldn’t be terrified that there’s a looming aging problem, because I think the more
1:46:56 important question is that skill gap, right? What kind of skills do we actually need in the economy?
1:47:03 And what kind of education system should we design in the economy to better suit the country to an
1:47:06 ever-evolving and transformative technological society?
1:47:09 Because if that’s successful, then we’d be able to respond to whatever
1:47:13 puzzle the demographic situation creates.
1:47:19 Yeah. If you look at the most recent evidence on this issue, they found that post-1990,
1:47:28 aging economies became richer. Not the other way around, which was true for the pre-1990 sample.
1:47:34 And the reason is that these aging societies much more rapidly adopted new technologies,
1:47:42 automation, that actually helped the entire economy. So should we be panicking about this now when we’re
1:47:44 actually also panicking about the fact there are not enough jobs around?
1:47:50 There are other issues that are more relevant for the Chinese economy today.
1:47:56 There are constant predictions of China’s economy collapsing. You have pushed against that narrative.
1:48:04 But you’ve also spoken to some of the challenges it’s going through. What’s the GDP going to look like?
1:48:10 Is the Chinese economy going to collapse? Is it going to flourish? What do you think?
1:48:18 Collapse is such a strong word. And the West has been using this word repeatedly. If I remember
1:48:25 correctly, maybe four to five times, maybe even six times since 1980s during the period of China’s
1:48:34 fastest growth. I tend to not think that Chinese economy will collapse. But with a slowdown continue,
1:48:43 will it be able to lift up again? Will it be able to come out of this cycle soon? I think that’s more
1:48:50 relevant. And the Chinese economy has a lot of potential because the fundamentals are still there.
1:48:55 All right. When we talk about the fundamentals, it’s the skills, it’s the human capital, it’s the
1:49:01 physical capital, it’s the macroeconomic stability and political stability. That’s a lot
1:49:08 going for a country if you look around the world right now. And this is why the entrepreneurialism
1:49:12 is still there because the fundamentals are there, even though the economy is weak, consumers are not
1:49:18 confident and private investment is insufficient. The fundamentals are there. Is China where it should
1:49:26 be? Far, far, far from it. Because China’s potential based on the fundamentals is a much higher level of
1:49:31 per capita income than where it is currently. It’s kind of currently in a $10,000 bracket.
1:49:38 And this is also a puzzle because you’re a $10,000 per capita income country that can actually do
1:49:45 leading edge technology and can be neck to neck with U.S. companies on these high tech. That’s the first
1:49:50 time in history. Even the Soviet Union, which was very technologically advanced, did not have the extent
1:49:56 of commercializable civilian technology and the technologies that were pervasive throughout the
1:50:05 economy. But fundamentally, we have to understand how much of this real estate crisis has impinged on the
1:50:09 economy and explains the persistent slowdown.
1:50:11 Can you explain the real estate crisis?
1:50:21 A few years ago, there was a crackdown on the real estate sector. And again, it comes back to a lot of
1:50:26 the social issues we were discussing. You know, why aren’t people having kids? Well, maybe it’s because
1:50:33 housing is too expensive. Maybe it’s because education system is too competitive. The speculative
1:50:38 bubbles in the real estate is making housing unaffordable. And that’s not part of the Chinese social
1:50:47 characteristics, right? And so when they decided that the property investors were going to be reigned in,
1:50:53 that housing was to be lived in, not speculated, it really brought down the whole sector in terms of
1:51:03 investment, in terms of the financing of the sector. But ultimately, it made such a massive impact or such a
1:51:11 massive dent on the economy because it really embodied the two fundamental pillars of the economy.
1:51:17 One is the fiscal system and one is a financial system. So coming back to our local mayor economy,
1:51:23 where did you think the local mayors got their funds? Right? Through real estate. They sold land.
1:51:31 Real estate property developers came in. They can develop the entire local economy because the services
1:51:36 will come in, the jobs will come in. And by the way, you’re an equity owner of the entire city. So you
1:51:38 want these property developers around.
1:51:51 Many countries throughout history all have this property transition, right? You need to wean the economy off of
1:51:59 property. In a good situation, it takes three to five years. In a bad situation, it can take 10 years.
1:52:09 I don’t know where China belongs currently. But the real estate collapse also meant the local
1:52:15 finances, local government finances also shrunk dramatically. Real estate was a really important
1:52:21 part of the financial industry. It brought that down. Together, it really had a major impact on the
1:52:27 economy. But also from the consumer side, their wealth was primarily tied into real estate, not the stock
1:52:33 market, not other kind of investment opportunities. It was real estate. So they felt poor. They consumed less.
1:52:41 So in the spirit of understanding China better, maybe to get a bit of your advice, if I were to visit
1:52:48 China, what’s the right way to visit, to experience it, to see the people, to talk to the people, maybe
1:52:52 outside of the big cities? Is there any advice you can give to somebody going to China?
1:52:55 A checkout speed.
1:53:08 His travels into China, I think they represent a more dynamic reality than just visiting Beijing and
1:53:14 Shanghai and Shenzhen, the big cities. I actually think a lot of the opportunities, especially economic
1:53:20 opportunities, are in the second, third-tier cities now in China. And there’s a return of talent.
1:53:31 You know, these companies, Pop Mart, they’re coming from these second-tier cities that care about the local
1:53:38 economy, about fun, entertainment. That’s what the new generation is about. They don’t want to be lining up
1:53:45 some factory, you know, doing manufacturing jobs. If you think that the Chinese new generation is still all about
1:53:52 that, you know, you should really study them a little bit more. They’re all about making their lives more fun
1:53:58 and more interesting, right? That’s the cycle, right? In the beginning, Chinese people are hungry, they want to
1:54:02 look for jobs, and they find these jobs in the manufacturing, and now they want to work-life balance.
1:54:10 They are a spearheading fashion, right? They spend so much more on entertainment, travel,
1:54:18 clothing, restaurants. They have come out with these amazing coffee chains that have beaten completely
1:54:25 Starbucks within a very short amount of time. This is all the new generation. Where are the opportunities?
1:54:32 It’s in the local areas. It’s all about localism, not globalism, localism. Being rooted in your local
1:54:39 economy, you will actually find so many more opportunities. You go to Chongqing. I actually was
1:54:45 watching a video about Chongqing. I thought we were in Shanghai. I was so surprised. And you go to
1:54:52 Chengdu. It’s fun. You know, people work a little bit less, but it’s really exciting. It’s very fun.
1:54:59 People are really nice. Go to Xinjiang. Take a look for yourself. There’s ski resorts being open there.
1:55:07 You have a very interesting, colorful, dynamic, complex country, and it’s not defined by Beijing and Shanghai.
1:55:13 So, the small cities are flourishing and are developing a personality of their own.
1:55:17 They are flourishing more than the first major tier cities.
1:55:25 Interesting. What’s the most beautiful thing to you about China and its people that you wish more people knew?
1:55:32 Behind all this competition and ambition, you have a very genuine group of people.
1:55:44 They are funny. They are community-based. They are authentic. Actually, it’s not contradictory, right?
1:55:51 You have a society which is heavily controlled, but they find ways to be truly, truly authentic.
1:56:01 And ultimately, they’re just a very social group, right? Again, I keep on coming to this
1:56:07 being lonely aspect of the Western society and increasingly living alone.
1:56:15 That is not China. It’s still a very, very warm country, and they are warm to foreigners,
1:56:17 and they are friendly.
1:56:26 Well, I’m very grateful for you being a voice of balance, a voice of reason in this world,
1:56:30 and for the book you’ve written on China that a lot of people deeply respect,
1:56:33 and for talking today. Kayu, thank you so much. This was an honor.
1:56:35 Great to be with you. It’s a pleasure.
1:56:38 Thanks for listening to this conversation with Kayu Jin.
1:56:42 To support this podcast, please check out our sponsors in the description and consider
1:56:48 subscribing to the channel. And now, let me leave you with some words from Confucius.
1:57:00 Thank you for listening, and hope to see you next time.