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

Keyu Jin: Political centralization, economic decentralization, and the yardstick to measure local mayors' competence through, in the first stage, it was GDP growth. So I am a mayor of the city of Nanjing in Jiangsu Province. I'm going to peek at my neighbor's mayor's city's GDP growth, and I'm going to be very, very competitive. Competition is extremely competitive among the local government officials because you are competing with other mayor for a top job, right? So you need to do better than them. And whether that was efficient structure or not, I cannot comment, but it certainly just fueled this massive and rapid expansion, economic expansion. First it was industrialization. Everybody wanted to do exports. Then they discovered, oh my gosh, we can have so much fiscal revenues coming from land, right? Selling land and real estate. Let's build real estate and let's urbanize. And then the money kept coming into these local governments and that they can spend it on nurturing more companies or supporting real estate or supporting investment and they can do a better job. So then it was geared towards real estate and that's how the property cycle became the big thing. Everything was at double speed because of what the local government's incentives were designed to do. I say now that China's biggest challenge is consumption, right? It's not production. We know that China is very, very competitive in production and supply. China needs to be a consuming country to be a rich country. Why don't you put consumption as part of the yardstick for measuring local governments? ...for the longest period of time, this political economy model was brilliant at scaling up supply, but it was extremely weak at raising personal consumption, because the incentive does not lie in consumption, it lies in production.

Keyu Jin: The Chinese are both the most patient and the most short-termist economic actors I met. The patients I don't need to explain because I think the political continuity means that they can make plans for two decades ahead, even longer. The investment of Chinese parents in their children is a multi-decade long project, and they save. Chinese people love to save because they think that they'll have even more money if they save that money rather than spend it on a ski vacation. So that, I think it's patently obvious to most people around the world. But I think that most of them would not have known that there's a very popular motto in China, which is called short, flat, fast. That's the impatient part of the Chinese culture, especially with respect to the economy. Short, flat, fast was used to describe a winning volleyball strategy that eventually became adapted to describing the society as a whole and economic decision-making. If you're an investor, you only want to invest in things that you can quickly turn around, make a lot of money, and don't need to do much work. It also applies to marriages. So a short courtship, a very flat emotional relationship, and a fast divorce. That is how you see these companies rise, within a very short period of time. ... So that short, flat, fast attitude, which was so popular, especially before the pandemic, that's actually somewhat disappearing. So in some sense, this economic downturn is not that bad for China because it made the Chinese realize that it's not always going to go up. and it made them really look down deeper into what they really should be focused on, that there will be cycles, there will be ups and downs. And so these very short-termist thinking and opportunistic way of driving business will ultimately fail.

Keyu Jin: Deepseek was a surprise to the world, but I don't think it was that much of a surprise to the same degree to the Chinese. And remember that Deepseek happened in times of crisis, urgency, not in times of comfort. A lot of these technological breakthroughs and leapfrogging happens in times of crisis. This is called crisis innovation. And you got to thank the US for that, right? When the Chinese were comfortably importing chips from the US, the whole industry stalled for 20 years. I mean, why would you plow in billions, 10s of billions, and even more when you can just import the best? You don't want to do your own innovation. It's because of these export controls, these sanctions on these companies that Chinese companies in the Chinese state felt an existential crisis a few years ago by being cut off from these critical components. And guess what happened? In a short amount of time, the degree of domestic capacity ramping up and catch up has been nothing short of remarkable. Again, thanks to US truculence on technology. Now, I'm sure there are many aspects of hyperbole related to deep-seek, but it just shows you that the gap is much smaller between China and the US on leading-edge technologies than what was expected, that these export controls were not effective. They may have even backfired. ... Huawei, another example, they were sanctioned. Guess what? They have come back to life stronger than ever before. And this is not unique to this episode. If we look throughout history, these blockades don't work. The continental system actually indirectly led to industrial revolution in the UK. when the Spanish kind of blockade the Portuguese, they came up with a very ferocious, forceful naval power. And you're talking about China here. They just don't lie down and lie flat and say, oh, we give up, right? They're more motivated than ever before.