US export controls and sanctions on Chinese technology companies backfired: they created an existential crisis that motivated China to rapidly build domestic capacity, and the gap on leading-edge technologies is now much smaller than expected.

(00:00:00) The following is a conversation with Ke Yu Jin, an economist at the London School of Economics specializing in China's economy, international macroeconomics, global trade imbalances, and financial policy. (00:00:13) She wrote the highly lauded book on China titled The New China Playbook, Beyond Socialism and Capitalism, that details China's economic transformation since 1978 to today. (00:00:29) And it dispels a lot of misconceptions about China's economy that people in the West have. (00:00:36) And now a quick few second mention of each sponsor. (00:00:39) Check them out in the description or at lexfriedman.com slash sponsors. (00:00:44) It's the best way to support this podcast. (00:00:46) We got a Leo Capital for investment, Uplift Desk for amazing and functional desks, (00:00:53) Hampton for connecting with founders, Lindy for AI agents, and Element for delicious electrolytes. (00:01:01) Choose wisely, my friends. (00:01:03) And now on to the full ad reads. 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(00:07:53) This is a Lex Friedman podcast. (00:07:54) To support it, please check out our sponsors in the description or at lexfriedman.com/sponsors. (00:08:00) and consider subscribing, commenting, and sharing the podcast with folks who might find it interesting. (00:08:07) And now, dear friends, here's KU Jin. (00:08:27) What is the single biggest misconception the West has about China's economy today? (00:08:32) The biggest misunderstanding is somehow that a group of people, or even just one person, runs the entire Chinese economy. (00:08:41) It is far from the reality. (00:08:44) It is a very complex, large economy. (00:08:46) And even if there is an extreme form of political centralization, the economy is totally decentralized. (00:08:53) the role that the local mayors, I call this the mayor economy, plays in reforms, but also driving the technological innovation that we're seeing right now, it is actually not run by just a handful of people. (00:09:07) It's more decentralized than the US is. (00:09:09) And I think more broadly, a big misunderstanding is really the relationship between Chinese people and authority. (00:09:16) Can you elaborate on that? (00:09:18) people think that somehow there's almost blind submission to authority in China. (00:09:22) We have a very nuanced relationship with authority, whether it is between kids and parents or students and their teachers or with your bosses and the Chinese government. (00:09:35) It's kind of the same thing. (00:09:36) There's paternalism. (00:09:38) They think that they're responsible for you. (00:09:41) But deference, a certain amount of deference to authority (00:09:46) is not blind submission. (00:09:47) It's been written implicitly in our contract for thousands of years that in exchange for some deference, we are given stability, security, and peace, and hopefully prosperity. (00:10:00) So there is some element that we have in the West of freedom of the individual, so that a little bit of the rebel is allowed in balance with the deference to authority. (00:10:11) Yeah, absolutely. (00:10:12) Without that, how can you have this radical, dynamic entrepreneurialism you see in China? (00:10:17) If you don't have a sense of self, a sense of the fact that you can find opportunities, you look for opportunities, you drive opportunities, it's all self-motivated. (00:10:30) Is there still a young kid in China that's able to dream to be sort of the stereotypical Steve Jobs in the garage, start a business? (00:10:40) Can change the world by doing so? (00:10:43) There are millions of young kids like that in China. (00:10:46) They might not be thinking about changing the world, and this is where the Chinese approach to innovation is very different from the Silicon Valley one, I'd say, but they see opportunity. (00:10:56) They see a country with a billion consumers. (00:11:00) They see scale, they see speed, they see that with their dreams and the team that you have in China with engineers and the digital transformation, you can do so many things. (00:11:10) And this generation of young people think about transforming their local economy. (00:11:14) I think we're going to get into this, but it's no longer going to just be manufacturing. (00:11:19) The young kids are entrepreneurs. (00:11:22) Well, let's stay in the big picture a bit. (00:11:24) There's a perception that China (00:11:27) is a communist country. (00:11:29) So to what degree is China a capitalist country and to what degree is it a communist country? (00:11:34) I've rarely seen a more capitalist society than China from the pure economic side. (00:11:43) I've rarely seen companies that are as competitive as Chinese companies, people as ambitious and obsessed with making money as Chinese people, kind of ruthless actually. (00:11:57) And look, consumers shop, firms invest. (00:12:02) If you invest well financially, you'll get great returns. (00:12:05) What is not capitalistic about the Chinese economy? (00:12:09) At the same time, the social fabric is highly socialist. (00:12:13) First of all, the state enterprises dominate in many of the sectors. (00:12:17) The state banks control the financial system. (00:12:20) We often talk about common prosperity, about equal opportunity, just and fair society, but even daily stories, a walk in the park behind my parents' apartment, you're going to find at least 50 organized social groups on a daily level, singing, dancing, exercising, doing whatever these fantastic idiosyncratic hobbies they have, getting together every single day. (00:12:46) and free courses for the elderly and retired, right? (00:12:49) That sense of communalism, that sense of belonging, that strive for harmony at the societal level is there. (00:12:58) So just to go back to something you said, there is a value for competition culturally. (00:13:02) So on the business side, on the economic side, there is sort of a cultural value of people competing in a meritocratic way. (00:13:13) Competition is ferocious in China, especially when it comes to Chinese companies, but also in education. (00:13:21) I should be thankful that I'm not born later than I am because I thought China was pretty competitive already, going to the schools and studying for the exams. (00:13:29) It is at a different level today. (00:13:32) Competition is not necessarily in the culture, I'd say. (00:13:35) It's driven really by the changing economic and social circumstances of the day. (00:13:40) The Chinese companies are all hardworking. (00:13:42) They're all going after the market share. (00:13:44) They all kind of want to do the same thing. (00:13:46) You know, it's not quite like in the US where you open a coffee shop. (00:13:50) Well, next door, I'm going to, you know, open a bagel shop, right? (00:13:54) In China, the coffee shop does well. (00:13:55) Everybody wants to open the same coffee shop. (00:13:58) And I think, again, I'm sure we're going to get to this, but there's a lot of that kind of competition, which really drives the world sometimes crazy of replication. (00:14:08) But it's because it's not easy, right? (00:14:10) It's not easy to make money. (00:14:12) In the education system, there are not enough jobs for the young people. (00:14:15) So how do you get ahead? (00:14:17) How, as, let's say, if you're part of a lower stratum society, how are you going to make sure that your children are going to have a better life than you invest in education? (00:14:27) So everything is about competition in a country with 1.3 billion people. (00:14:31) That's somewhat to be expected. (00:14:34) Let's go back to the roots of that. (00:14:36) So you described that China's economy model is rooted in its history. (00:14:41) So can we talk about Confucianism? (00:14:43) Can you explain to what degree those roots run back to Confucianism and in general to other parts of Chinese history? (00:14:50) Yeah, Confucianism is more of a moral philosophy than, let's say, religion or a belief system. (00:14:58) It prioritizes social harmony (00:15:03) above anything else. (00:15:05) It's not about metaphysics, but more about ethics. (00:15:09) And at the individual level, the responsibility, the duties are all meant to preserve that social order. (00:15:17) So it's filial piety. (00:15:20) It is loyalty. (00:15:21) It is how to be a Chinese gentleman. (00:15:25) But things like saving, frugality is part of the moral discipline. (00:15:29) Education is part of (00:15:31) the moral cultivation. (00:15:33) So there's a very strong emphasis that you as a citizen have a responsibility to contribute to society as a whole. (00:15:42) On the education side, a part of Confucianism is a value for meritocracy. (00:15:47) So how does that permeate the education system in China? (00:15:52) You've already spoken to it a little bit, the value of competition and that it's already getting more and more intense, but it would be very interesting to get your understanding of the education system. (00:16:01) It's history and as it stands today. (00:16:03) If China were relatively successful economically, a huge part of the reason is by and large it's been meritocratic. (00:16:12) That is changing somewhat now, but the only way that you have still that many poor people, especially a couple decades back, still be (00:16:24) in harmony with society, seeing all these rich people make tons of money and you're still belonging to that lower stratum, the only reason is that you believe that your children have a future through meritocracy. (00:16:36) And even though it's imperfect, it's highly imperfect, standardized testing, all this competition, all of the hours and the tutorials to studying for standardized exams, well, that is a very realistic (00:16:51) scenario in China because there's that many people. (00:16:53) When I was growing up in school, we had 60 people per class and there were 10 classes in one grade. (00:16:59) Now imagine that many people applying for colleges in the American way. (00:17:06) How many essays would have been written and need to be scrutinized? (00:17:10) But also that gives room for total corruption. (00:17:13) if you know what I mean, just connection-based. (00:17:17) And actually, the standardized exams, as imperfect as it is to select talent, is still by and large fair. (00:17:25) And that's how that whole generation of entrepreneurs, but bureaucrats, government officials were selected. (00:17:32) You look at the Chinese premiers, the presidents of the past, they all went to great schools. (00:17:39) A lot of them were engineers. (00:17:40) And same thing for civil servants. (00:17:43) It has changed somewhat. (00:17:45) the meritocracy, I think, is eroding in China. (00:17:48) I'm worried about that. (00:17:49) Because it is fine that you get into a good university based on your own merit, but finding a job now becomes much less meritocratic. (00:17:57) People with connections get jobs more easily than others. (00:18:02) Of course, this is not just a unique Chinese phenomenon. (00:18:04) It's actually everywhere. (00:18:05) But (00:18:06) I guess what I'm saying is that meritocracy, which was so fundamental to the Chinese, ancient Chinese education system, by the way, civil servants were selected based on standardized exams in the past. (00:18:17) That's always been throughout Chinese history, and that relates to Confucianism. (00:18:23) But now the opportunities, and coming back to the competition point, is that the opportunity is getting slimmer and slimmer. (00:18:29) And again, this is not a unique Chinese phenomenon. (00:18:32) Jobs, where are the jobs going to be? (00:18:35) So meritocracy has become more of a problem. (00:18:38) Do you have any memories of your own experience in terms of competition, the good and the bad of it? (00:18:42) And maybe from that, (00:18:45) can you pull out the thread of the value of that kind of competition? (00:18:49) Basically, I grew up in the Soviet Union, so there's kind of brutality to the competition, but I think it ultimately molds really interesting people. (00:19:02) There is a good and bad part of competition. (00:19:04) I remember when I was going to middle school, every single midterm exam, final exam, (00:19:10) you are ranked from #1 to number 800 in your entire grade and publicly displayed. (00:19:17) Nice. (00:19:18) Very nice. (00:19:20) Imagine, you know, the majority of people and how they feel. (00:19:25) But it does drive ambition, in part, and you don't take anything for granted. (00:19:31) And you work hard. (00:19:33) You (00:19:34) keep, you keep the spirit up. (00:19:37) But, going to the US, I finally realized that Americans are totally competitive. (00:19:41) It's just that they don't display it. (00:19:43) It's not as apparent. (00:19:45) I remember I go, I went to a very competitive high school, but everyone's like, so chill. (00:19:50) Oh, I'm not studying. (00:19:52) Oh, you know, they're studying. (00:19:53) They are secretly studying. (00:19:57) when I was doing my PhD at Harvard, people go, oh, my parents say, don't work so hard. (00:20:01) people say, don't say you worked. (00:20:03) They're working hard, right? (00:20:05) Just, you don't show it. (00:20:07) In China, it's kind of... (00:20:10) a noble thing to show that you're working hard and that you're #1 or that you're top of the class and you want to display it and you want to let everybody know. (00:20:18) But in the US, everybody's like secretly doing it. (00:20:22) Yeah, some of it is the signaling. (00:20:24) The culture emphasizes the signaling of is it better to be kind of, for everything to come easily (00:20:33) thereby showing that you're a genius, it comes naturally, or is it better to show that you worked extremely hard for the thing, but the ultimate result is there's still competition? (00:20:41) But I don't know, when you're visually displaying and explicitly stating that it's good to be #1 and it's bad to be #800, I think that permeates throughout the culture to where you understand, first of all, you understand that hard work is the only way to (00:21:03) improve to succeed in life. (00:21:06) And second of all, you just create this framework of early on understanding what it means to live a good life. (00:21:14) And a part of that is to find the thing you're damn good at and get even better at it, master it, become hopefully the best person in the world at that thing. (00:21:28) I don't know, that's an extremely important lesson for a society to teach. (00:21:32) That's the right, I would say, the right kind of competition or the efficient kind of competition. (00:21:37) I feel that in the Chinese education system, it was not necessarily efficient because it kind of frames you and molds you to be thinking in a certain way what's been taught to you. (00:21:47) don't have the bandwidth or the time or freedom to be more creative and to think outside the box. (00:21:52) There, it's just the box. (00:21:54) You maximize the box and that's it. (00:21:57) You don't actually know what's outside of the box and you never actually go there. (00:22:01) That's the bad part of Chinese competition. (00:22:03) And when I got to the US, the high school teachers were asking us to question authority, to question text. (00:22:10) I'm like, wow, really? (00:22:11) You can do that? (00:22:13) So I started asking why. (00:22:14) All right, so there has been this miracle in the Chinese economy from after Mao under Deng Xiaoping, where the Chinese economy got transformed and grew incredibly. (00:22:27) So (00:22:28) Can you explain what happened, the different transformations that happened, the different reforms that happened under Deng Xiaoping? (00:22:36) Deng Xiaoping was by far our most pragmatic leader, and I think everybody is grateful to Deng Xiaoping. (00:22:43) My father's generation would not have seen that amount of prosperity and peace and opportunity without Deng Xiaoping. (00:22:52) It started in the late 1970s when Deng Xiaoping came out with this Open Up (00:22:57) and reform, mandate. (00:23:00) And it was very tough. (00:23:01) Again, coming back to the big misunderstanding of China, it's not as if one leader decides that that's what we're going to do and then everybody follows order and does that. (00:23:08) No. (00:23:09) There are tons of political barriers, tons of incentive, compatibility problems at the local level. (00:23:16) In the end, you need the local provincial governors, the mayors to do the job. (00:23:22) And (00:23:23) how many prefectures are there in China, right? (00:23:25) A lot. (00:23:26) And they have their own interests, right? (00:23:29) We know this around the world. (00:23:31) Politically, it's the most difficult thing to do. (00:23:34) But somehow, Deng Xiaoping was able to break tradition, break convention, come out with this completely new way of thinking about society, life, and the economy. (00:23:46) And it was so transformative. (00:23:48) I remember people of that generation, (00:23:51) told me one time that, society was going to focus on the economy. (00:23:58) Really? (00:23:59) Why would they do that? (00:24:00) Wasn't it politics? (00:24:02) Wasn't it everything about politics and struggle and ideology? (00:24:05) So for them, that the whole country and the government is going to focus on the economy was just so shocking, even though we take it for granted now, that shows you that breaking that mold was incredibly difficult. (00:24:21) But I think opening up was a really momentous thing that China did. (00:24:28) And it wasn't just joining the debutio. (00:24:29) I mean, they were doing a decade of work in preparation leading up to that. (00:24:34) What's called special economic zone is really to turn Shenzhen from a fishing village to an export platform, now to a Chinese-style Silicon Valley, right? (00:24:45) And there was the agricultural reforms in the 1980s that meant that farmers could decide what they were going to grow and keep the surplus, whereas it was a collective system before. (00:24:55) You know that very well. (00:24:57) And then, of course, the ultimate transformation was when China actually joined the WTO in 2001. (00:25:05) And the rest was history, right? (00:25:06) We're still talking about the aftermath. (00:25:09) But reforms was the single biggest impetus to Chinese growth. (00:25:15) And every time there was a major reform, it was followed by a good decade-long growth. (00:25:21) Every time growth went down, there was a new series of major reforms rolled out. (00:25:26) And then, oops, that led to another wave of good growth. (00:25:32) But I'd say that reform pace has slowed in the last 15 years. (00:25:39) But are there reforms to be done? (00:25:41) Yeah, absolutely. (00:25:42) Has China reached even close to its potential? (00:25:46) Not at all. (00:25:48) But again, it comes back to politics. (00:25:50) Right now, it's less about economics. (00:25:52) It's more about national security. (00:25:53) It's more about politics. (00:25:54) And I think that is probably the single biggest barrier to continued good economic growth. (00:26:00) Maybe can you speak to what it takes in such a large system, in many ways, such a successful economy to do reform? (00:26:07) So you mentioned pragmatism. (00:26:09) Deng Xiaoping famously said that it doesn't matter whether the cat is black or white, as long as it catches mice. (00:26:15) So there's that pragmatism that I think underlies a lot of great reforms. (00:26:20) As a contrast to the Soviet Union, the Chinese economy, as I mentioned, was extremely decentralized. (00:26:27) In the Soviet Union, the ministries were in charge. (00:26:29) It was central bureaucracy. (00:26:32) But a lot of the power were given to these provincial governors, party secretaries, mayors of different sorts. (00:26:38) And they were incentivized. (00:26:40) That's the key, is that these mayors were incentivized to do a good job. (00:26:45) If I were successful on a radical reform, if I were successful, I'd be a national hero. (00:26:51) And then that reform will be rolled out in every single city in the country over time. (00:26:57) And I will be promoted to the higher run of the central government. (00:27:00) And who knows, I might even become vice premier, premier president one day. (00:27:05) That was how the individual was motivated to carry out these really tough reforms. (00:27:12) Now China has changed a bit, right? (00:27:15) It's not about being radical and radically successful. (00:27:18) It's about being safe, right? (00:27:21) So when you shift from basically an entrepreneurial state to a safe state, then the objective function changes and you see it in different economic outcomes. (00:27:34) So maybe can you speak to that? (00:27:36) What are some important things to understand about the structure of the Chinese state? (00:27:40) Well, the central leadership politically is extremely powerful and it's very consolidated, but they hold a very crucial key to the local governments, which is that they decide their fate. (00:27:52) Am I going to promote them? (00:27:53) Am I going to put them in jail? (00:27:54) Am I going to fire them? (00:27:55) Am I going to reward them? (00:27:56) Am I going to punish them? (00:27:58) They hold that crucial key. (00:28:00) And I think what was very surprising for most of the Western audience is that when I mentioned about the mayor economy, there's like, why don't our American mayors in each city do these very radical things and then push for GDP growth and technology and innovation? (00:28:17) It's quite different. (00:28:18) I think this is where China's very unique in the world, is that political centralization, economic decentralization, and the yardstick to measure local mayors' competence. (00:28:30) through, in the first stage, it was GDP growth. (00:28:34) So I am a mayor of the city of Nanjing in Jiangsu Province. (00:28:38) I'm going to peek at my neighbor's mayor's city's GDP growth, and I'm going to be very, very competitive. (00:28:45) By the way, I forgot about that. (00:28:46) Competition is extremely competitive among the local government officials because you are competing with other mayor for a top job, right? (00:28:54) So you need to do better than them. (00:28:56) And whether that was efficient structure or not, I cannot comment, but it certainly just fueled this massive and rapid expansion, economic expansion. (00:29:09) First it was industrialization. (00:29:11) Everybody wanted to do exports. (00:29:13) Then they discovered, oh my gosh, we can have so much fiscal revenues coming from land, right? (00:29:19) Selling land and real estate. (00:29:21) Let's build real estate and let's urbanize. (00:29:23) 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. (00:29:34) So then it was geared towards real estate and that's how the property cycle became the big thing. (00:29:40) Everything was at double speed because of what the local government's incentives (00:29:47) were designed to do. (00:29:48) I say now that China's biggest challenge is consumption, right? (00:29:52) It's not production. (00:29:53) We know that China is very, very competitive in production and supply. (00:29:56) China needs to be a consuming country to be a rich country. (00:30:00) Why don't you put consumption as part of the yardstick for measuring local governments? (00:30:04) You know, for a while it was environmental protection. (00:30:06) Guess what? (00:30:07) Very few of them will really want to do it seriously because it goes against the (00:30:12) incentives of driving growth, right? (00:30:14) They would suffer on GDP growth if they were very serious about environmental protection. (00:30:19) So for a couple years, nothing happened in China on that front. (00:30:22) And then the central government got really kind of concerned and even angry and frustrated. (00:30:28) So they decided to put that as a penalizing factor. (00:30:32) And then guess what happened? (00:30:33) Well, actually, environmental protection (00:30:36) sped up and in the matter of short few years, I see blue skies every day in Beijing. (00:30:42) That's how it works. (00:30:43) So GDP is a measure of success in production. (00:30:47) What's the measure or what does it mean to be successful on the consumer side? (00:30:52) You said it's important to improve that. (00:30:54) What does it mean to be a successful consumer nation? (00:30:58) The metrics shouldn't be geared just towards growth alone, GDP growth alone. (00:31:02) It was just singular GDP growth, and you can borrow heavily and just spend on infrastructure. (00:31:09) That's not a productive way to drive the economy, and that's what the local governments were doing for a long period of time. (00:31:15) You know, in the last few years, innovation, unicorns, have kind of been an implicit yardstick for local governments. (00:31:22) That's kind of how we've seen (00:31:24) these great EV companies, 80 cities doing EVs. (00:31:27) I mean, do we really need 80 cities to do their own EVs, right? (00:31:31) Solar panels, now DeepSeek has become a star. (00:31:36) Semiconductor companies, each local government wants to have their own national champion. (00:31:41) So implicitly, technology was part of the yardstick competition as well. (00:31:47) But if you can more accurately have a metric for consumption measures really focus on making sure that it's coming from consumption, this GDP growth, rather than from investment or infrastructure, then I think that it might focus the government's objective a bit more on thinking about how to make people feel more secure so that they want to save more. (00:32:10) For instance, creating more jobs, for instance, more on social security spending, on healthcare, (00:32:15) on elderly care, because 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. (00:32:31) So you shift the objectives a little bit, and maybe local government will do more to stimulate consumption. (00:32:37) Okay, you mentioned the mayor economy. (00:32:39) That seems like an incredibly powerful idea. (00:32:42) And you also mentioned that perhaps (00:32:44) You're not sure exactly how perfectly efficient it is and what efficiency there means. (00:32:49) How good are you at quickly figuring out the best ideas? (00:32:54) That's what an efficient market does. (00:32:56) There's a kind of component to what you're saying where you're a little bit critical of, do you really need AD EV companies? (00:33:03) But maybe you do. (00:33:04) It seems like an incredible thing to do, right? (00:33:07) So what are the pros and cons of this? (00:33:08) Maybe you can speak to it a little bit more. (00:33:10) I think it depends on the timing. (00:33:13) If you're starting something, starting a new emerging strategic sector like EVs or batteries or solar panels, you need the local governments to be involved, to mobilize, right? (00:33:24) The big push to coordinate the supply chains. (00:33:28) If you wait for the markets to develop over time, it's going to take a long time. (00:33:30) Maybe they don't even want to do it, right? (00:33:32) Look at the US. (00:33:33) The US is very, very behind on some of the new strategic sectors. (00:33:37) But once you've reached a certain level of market competition, (00:33:43) I think the state needs to withdraw or to retreat, because ultimately the state is not the best at allocating resources, picking winners. (00:33:54) You want the private actors, whether it's the venture funds or the, through market competition, to ultimately decide who gets the most resources. (00:34:03) But in the beginning, that big push is not really in any of the canonical models that I've studied in economics in the Western school of thought, state push, state mobilization, state initiation, that's not there. (00:34:15) But I think if you look at EVs, solar panels, even just thinking about the idea of reforms in the 1st place, that initial state push was vitally important. (00:34:27) The other (00:34:29) negative, although I think by and large positive aspect is I don't think that we need 80 cities to do their own EV brands, but to get started, maybe that's what it would have taken to drive that incentive. (00:34:45) And then ultimately it's up to the market to decide who are the last five remaining EV companies, right, through market mechanisms. (00:34:51) That's Chinese style industrial policy. (00:34:54) Industrial policy was heavily criticized. (00:34:56) And again, if I talk to my (00:34:58) Harvard professors, they will be very, very, very skeptical about the role of the state, especially in such a major way. (00:35:07) But if you look at the Chinese experience, the evidence for success is all there. (00:35:11) The cities that have pushed the most on supporting that particular sector ultimately did the best in terms of production, but also in terms of innovation, measured by patents. (00:35:21) It's all in the data. (00:35:24) But the downside is that a lot of the capital is wasted. (00:35:28) and this is what I also discussed in my book, is that it is inefficient, although maybe it's necessary. (00:35:34) The amount of waste of investments plowed into these companies that will ultimately just go under, but also the misallocation of resources because it's led by the state, are some of the downsides. (00:35:48) But I guess on balance, it's been positive because look at China's internal combustion engine effort, nothing, right? (00:35:56) Semiconductors. (00:35:58) Thanks to Biden, thanks to Trump, it's improved dramatically. (00:36:01) But all these things that they've tried to do before, they couldn't do. (00:36:05) But when it's a new thing, like something that there's no incumbent, no particular advantage in any country, actually China's really spearheading these sectors. (00:36:15) Can we link a little bit more in this mayor economy? (00:36:17) It just seems like such a powerful thing where one mayor looks over to the next and looks even just a trivially simple number like the GDP. (00:36:27) Why don't we do that in the United States or in the West more? (00:36:30) Just compete (00:36:31) on GDP. (00:36:32) Well, you need to be elected and re-elected, right? (00:36:36) Is that what your electoral base cares about, right? (00:36:40) In China, it's what the central government, your boss, cares about. (00:36:44) If you ask the consumers, they'd rather you spend on social spending, right? (00:36:47) The things we talked about that stimulates consumption, on education, on healthcare, things that stimulate demand. (00:36:54) So that's the political, it's a difference of political system. (00:36:59) So maybe can you speak to the difference? (00:37:01) Another difference is the long-term multi-generational thinking that permeates Chinese culture. (00:37:07) So how does that differ from the West, sort of the Western style capitalism of quarterly focused thinking? (00:37:15) The Chinese are both the most patient and the most short-termist economic actors I met. (00:37:25) The patients I don't need to explain because I think (00:37:29) The political continuity means that they can make plans for two decades ahead, even longer. (00:37:36) The investment of Chinese parents in their children is a multi-decade long project, and they save. (00:37:45) Chinese people love to save because they think that they'll have even more money (00:37:51) if they save that money rather than spend it on a ski vacation. (00:37:54) So that, I think it's patently obvious to most people around the world. (00:38:00) 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. (00:38:09) That's the impatient part of the Chinese culture, especially with respect to the economy. (00:38:15) 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. (00:38:26) 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. (00:38:34) It also applies to marriages. (00:38:36) So a short courtship, a very flat emotional relationship, and a fast divorce. (00:38:43) That is how (00:38:44) You see these companies rise, within a very short period of time. (00:38:50) Of course, investors are only interested in those companies that can turn around and exit in a very short period of time, making many, many multiples. (00:38:58) And so in that sense, people are very, very impatient, right? (00:39:04) I sit on some boards of these long-standing companies, and the values are just so different. (00:39:12) Even though a lot of these public companies are constrained by the quarterly results and so forth, but the values are about sustaining something, a company for a long time, thinking about organic growth, thinking about investments for the future, sustainability. (00:39:28) Maybe it's that competition, maybe it's the speed that we're used to in China. (00:39:33) People think about short. (00:39:35) So, you know, this dichotomy is very, very interesting. (00:39:39) That's surprising to me. (00:39:41) It's a surprising idea, right? (00:39:42) So that there is a kind of, in the West, conception of Chinese culture, Chinese economy, that everything is usually 50, 100, 200 years out, you have this long vision. (00:39:54) But you're basically saying that there's a deep, in the business sector, impatience about everything. (00:40:01) That's A transitory phenomenon, I'd say. But if you look at the cheaper stuff, poor quality, that's a reflection of the copping. It's the same kind of mentality, just get ahead quickly. But again, that is all shifting. That is all shifting because China is now in a different stage of development. If you ask the younger generation, they really care about quality. They care about values. (00:40:25) And these companies, these very successful companies, successful in five years, 10 years, found themselves in a very difficult position after a longer 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. (00:40:49) 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. It's bad for China that we're having a sustained economic softness, sustained economic softness, but (00:41:16) I think it's also a very, very important lesson for the Chinese people to go through. Let's go, if we can, a bit to the personal. So you grew up in China. What are some moments from childhood that were maybe defining to your understanding of Chinese culture and Chinese economy? You know, we look back at those moments when everybody in China was very poor with a bit of nostalgia. (00:41:42) I remember no doors were locked. I was in Beijing, and I remember every day in the summer, everybody just went downstairs and chatted with everybody else. It was very social. It was very community-based. The neighbors helped each other. We had very, very little small apartments, very limited access to certain goods. When I was born, there were (00:42:08) Even in Beijing, there were these vouchers for how many eggs you can buy. And even Beijing, there were three or four blackouts per week, typically. There was a sense of community. There was a very strong bond between people and within the family because they were going after a common goal, making your life better, right? Struggling, striving to make your life better. And I remember being on the back of my father's bike (00:42:35) getting up, 6 A.m. every day and going to nursery. And, that's the typical day. Not a lot of material goods, but people had a sense of purpose. And that's radically a different, it's completely different now in China. 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 nostalgia like any other? Is there some aspect (00:43:04) of an intense, competitive, vibrant economy that loses some element. Absolutely. Of everybody being poor together. Well, everybody having a common goal and a sense of community, right? That is what's missing in these extremely individual-based capitalist societies. And I think what the Chinese government is striving to do with Chinese socialistic characteristics is to somehow try to preserve a bit of that socialist character while still (00:43:34) relying on markets, market-based incentives. But if you're an extremely individual-based society, I think you do lose a lot of that. And I think some of the backlash that we're seeing from society is a reflection of that, right? People being alone more and more, the death of despair in the US. (00:43:55) the addiction, that they're lonely, right? And competition means that you kind of have to be somewhat badass. And you sometimes put down values and you forsake harmony in order to get ahead. That's certainly the Chinese society now. That was not the case before. You think that's a natural consequence of capitalism, almost always, that you become more individualized, you become lonelier, you feel (00:44:25) lesser if you're not winning and thereby somehow that breaks down society, community more and more? I think it's a spectrum, right? And Europe is somewhere in between, I'd say. But Europe also is not as technologically innovative as the US. (00:44:47) But on a social level, there is more social protection for the people. There is a stronger sense of community, I'd argue. It's not perfect. Ultimately, it is a choice. And this is what I think that China has to decide, right? Do you want technological supremacy and radical breakthroughs? Well, yes, if you do, then you have to tolerate that there are going to be some people who are going to be just going to be uncomfortably rich, right, like in the United States. (00:45:15) You can't say that you detest the financial system for its greed, but then not accept the fact that it is what fuels innovation, right? Risky capital fuels uncertain investments, which allows for countries like the United States to be making these breakthroughs. That's what China wants. But at the same time, China can't tolerate these extremely rich people around and the power that is accrue to them. (00:45:44) They want to be a leader in technology, but then the financial system is not liberalized. It's highly regulated, but there's also intervention. Even if we look back at the French civil law versus the English common law, well, the former protects creditors, and the latter is more friendly towards debtors, which gives them more breathing space (00:46:12) to innovate, but also to fail and to innovate again. And that makes a big difference. So it's all about a spectrum, right? But you can't have it both ways. We don't often enough have that nationwide conversation about what we want to be as a country. There's just a group of people yelling, we don't want billionaires, and another group saying, we don't want communists or whatever. It's a very trivialized kind of chanting. (00:46:39) But there is a balance, there is a spectrum, and you get to decide. Do you like the nice things, the nice toys? And the power that the US has. And the power, the geopolitical power, the military power, cultural power, influence on the rest of the world. Yeah, you get to choose which do you want. So the first time you went to US, what was that like? You mentioned Harvard. How did that change your understanding of the world? (00:47:08) it's funny that we're talking about this now because I was able to go to the U.S. on a scholarship to an American high school because the U.S. at that time was open arms, all open arms towards international students. They kind of wanted to be the country that was going to educate the future leaders of the world and their elitist institutions (00:47:31) like Harvard was really going to be, they're the center of the world. So they welcomed students like me and many, many others to be exchange students and study in the US. And we thought, wow, we've never seen a more generous country. And I was able to go to high school, an American high school, and live with an American family, which was (00:47:55) wow, can I say a big change from China, not only because I was plucked from the Communist Youth League party and then straight to supporting their democratic campaign because the host family was running for state attorney general in New York. So I was kind of going to these conventions and handing out flyers and trying to get votes and I don't know, in China to Chinatown or something. But it was so interesting to see that's how the system worked. (00:48:25) But in the course of doing that, I realized that people had a very simplistic understanding about China. And that's probably, even when I was 14, I decided that one thing I wanted to do was to dispel some of these deep myths about China, because the China that they knew, and again, it was all the three Ts back in the late 1990s, Taiwan, Tibet, and Tiananmen Square. That's (00:48:55) they thought about China, they thought about these three things. And I was like, that's strange because that's not how I'm feeling in China with all this, bidding for the Olympics before 2000 and all these buildings going up and down, all this excitement about, you know, joining the WTO on these radical reforms that are taking place and then all this effervescence that you feel in the air. It's not GDP growth as numbers, you actually see it. (00:49:24) I said, this is really, and they're describing China as if it was a place shredded with white terror. And so I thought, that's interesting. There's a big gap, big gap of understanding. And even today, that many years later, people know China a little bit more, but the sentiment hasn't profoundly changed. It's still the three T's, I feel like. Some variation of that. (00:49:51) So what about the level of misunderstanding of Chinese people of the West? Is there a similar level of misunderstanding the other direction as well? I don't think to the same extent, because there's Hollywood. You can see daily American life, although it might not be totally realistic. There was a huge amount of admiration of US technology innovation, but also the American dream. (00:50:21) I think our newspapers, even though there's bias everywhere, is not focused only on reporting the really bad stuff and portraying a negative side. I think these few years have been a little bit different, but so many students went to the US, right? So many people traveled to the US. And this is an interesting thing. I've rarely met an American who has been to China (00:50:48) and who still goes on about how bad China is. I think that going to China makes all the difference. I feel that's like one of the big gaps of my life that I need to alleviate is to travel in a real way for a long time to really experience the people and the cultures. And China's a big place. So go dig deep and don't just go to Beijing and Shanghai. Let's go back to the economics. So can you just (00:51:18) dig a little deeper on the relationship in China between the government and the companies in the private sector. So how much freedom do companies have? Another big misunderstanding and a fundamental one is that people somehow think that the state suppresses the private sector. It's not at all as simple as that. (00:51:40) For the most part, if we look at the local government's incentive system, they want to help the best private companies, which are the most promising, because it makes them look good. It adds to their GDP. It adds to the jobs, investment. They are so helpful to these private companies. Actually, I know many of these local government officials working tirelessly day and night, especially in bad times. (00:52:05) to coordinate between debtors and creditors and to kind of smooth out and to find relationships with banks. They want to help these private companies because, again, their incentives are aligned. Deepseek is a private company, by the way. So it has done the country proud. And why would the state want to go and suppress these private companies, which ultimately is kind of a beacon, represents a beacon success for China? (00:52:33) Now on how much freedom they have, it's really ranged from too much freedom, that's part of the problem, where you have defense companies buying art auction houses, real estate companies like Evergrande buying soccer clubs, doing EVs, companies investing in real estate that has nothing to do with their core business. That's how much latitude were given to private companies. And there were consequences. (00:53:01) they were not reigned in. And then you go to the other extreme where they're scolded, they're reprimanded, they're reigned in, and they're kind of folded into submission. So that is the whole spectrum. You have the whole range. But I guess what we're really getting at is it is a country that is moving from a no rule of law or very little rule of law, very immature markets to something that is being gradually (00:53:31) established bankruptcy laws, corruption laws, rules and regulations on what's possible. One interesting point is that in China, you ask the companies to innovate 1st and then you regulate after. (00:53:49) right? So that has led to things like P2P platforms. it's led to lots of kind of financial innovations, some of which has actually been very helpful and good, some of which had been disastrous. But the intention to regulate after the fact is to really not slow down or hinder the innovation. This is a very different approach from Europe. You regulate first and then, you know, companies have to work around that. (00:54:16) So this is why Chinese economy is so complex. You cannot reduce it to simply a statement saying the state is unhelpful for the private or something like that. (00:54:27) There are certain sectors where the SOEs dominate, right, when it comes to national security in terms of energy. But let's not focus on these few sectors. By and large, most of the economy, if you actually admit to the fact that China's highly innovative, highly entrepreneurial, means that it must be the private sector that is driving the show. Innovate first, regulate after, really interesting. I also, in my mind, (00:54:54) and contrasting it with the way the Soviet Union and Russia since operated. That doesn't sound at all like this model. And it's interesting that countries that, at least on the surface, had a similar cultural communist problems, you know, the bureaucracies that form inside the communist state. It just seems that China broke away from that somehow, that don't understand exactly what happened. In the West, they grouped these (00:55:21) economies together as if they're the same thing. No, it's not the same at all. There's so many differences, so much more flexibility. You can have dynamic entrepreneurialism at the same time have socialist characteristics. And I think this is what China has been able to shape and mold, a unique model that balances between government and industry, between state coordination and market mechanisms, and between individualism and communalism. It's not necessarily black and white. You can have all these things (00:55:51) at the same time. So what are the pros and cons of being an entrepreneur in China versus the West? Like if you get a choice, you have a dream, you want to build epic things, and you get to choose where to start that business, what are the pros and cons of each path? In China, the speed is just awe-inspiring. You have a good idea, you implement it, you realize your dream very fast, because there's also the support system, right? The infrastructure there, the digital infrastructure there, the engineers are there, the talent is there, and they're cheap. (00:56:20) and the market competition is theirs to keep you going. The consumers give you a very, very fast feedback. Look at Xiaomi who was making phones and now it makes one of the world's best EVs. 270,000 cars sold in one day a few days ago with a new model. They were phone makers. So there's an advantage to that, okay? But I would not feel safe. (00:56:48) not because of danger of expropriation or nothing like that, but the bankruptcy laws are not there, right? It's not necessarily always fair competition. Things don't happen necessarily in an orderly manner. If you have a competitor, you can have a very evil competitor and evil competitors are there everywhere in China. They would, you know, call the police on you, put you in jail, spread false rumors about you. Maybe that happens also in the US, but there's a different level in China. (00:57:18) And also, the mold that you can have to protect yourself, the IP protection, right? That's much weaker in China because the legal system is not very effective. (00:57:28) You have a good idea, you'd be copied. And there's a lot of work. You have to dine and wine with the local governments. I mean, that's not allowed anymore, by the way, but you dine and wine, figuratively speaking, you have to have a very good relationship with them. That's a different kind of work. The wine and dine and the evil competitors is an interesting challenge. That, in some maybe distant ways, akin to the problems of the Soviet Union. I think, I guess in the United States, there's less (00:57:56) of that. And I don't even know if that's based on laws, because there's a lot of lawyers in the US that could do the same kind of evil competitor stuff technically. That's true. The potential negative ramifications are there. But I think personal protection is a big difference. If you make a mistake, if your company's not run well, you know, you go to jail. I think that the US is much, much more tolerant on entrepreneurship, entrepreneurs on failure. (00:58:25) Since we're talking about it, there was a lot of controversy around Jack Ma disappearing, quote unquote, and reappearing a bit later. And there's been sort of rumors of some tense relationships that he has with the Chinese government. What is important to understand about the whole situation? Like to what degree is it reflective of the issues entrepreneurs face in China? In the US? (00:58:53) Capital controls politics, one could argue. In China, it has to be the other way around. Capital must be reined in by politics. As part of the capitalist class, do not have the ambition to exceed the powers of the political class. It's really at the core of it, I'd say, the biggest difference between US and China. There are important details that I think the West has (00:59:23) not fully provided to the public, for instance, and financial, as innovative as it was, doing banking jobs without being regulated like a bank, right? So that obviously poses a host of financial stability questions and rules and regulations and so forth. So the fact that IPO was halted (00:59:51) You could say that there were strong economic regulatory grounds for that. But I think more broadly speaking, if you're an entrepreneur, part of the capitalist class, keep your head down and make money and that's fine, right? Do some philanthropy. There are also many, many other billionaires that are just fine, that are actually very much in favor of the political leadership. (01:00:20) And they do their thing. (01:00:22) Now, I'm not saying what's right, what's wrong. (01:00:24) It's just a very, very different culture and different country. (01:00:27) In the US, it's great to be colorful. (01:00:30) I mean, you have a very, very colorful president. (01:00:33) He would never have been able to make it in China. (01:00:37) You have the likes of Elon Musk. (01:00:39) It's great to be different. (01:00:40) It's great to stand out. (01:00:42) You do not want to stand out in China. (01:00:45) So the moral of the story is that the top leadership understands that it needs these top entrepreneurs, the likes of Jack Ma. (01:00:54) And they have done so many great things for the country, even for the world. (01:01:00) But in China, garnering too much influence and power, even through social media, doesn't (01:01:09) make you look that great. (01:01:11) It's not a good thing for you personally. (01:01:12) And there's a saying in China that you just don't want to be the tallest tree, right? (01:01:17) The tallest tree gets the most wind. (01:01:20) So I don't agree at all with the Western conclusion that this anecdote, this story has meant that entrepreneurs don't want to be entrepreneurs anymore. (01:01:30) The young kids don't aspire to be people like Jack Ma. (01:01:32) That's not true at all. (01:01:33) The incentives are still there. (01:01:35) It's a different kind of rich elite class in China. (01:01:39) So on what dimensions do you think that the height of the tree is measured? (01:01:48) Is it more about just mouthing off in public? (01:01:52) So can you still be the richest person in China and actually not clash with the state? (01:01:59) Absolutely. (01:02:00) Don't be too outspoken. (01:02:02) Don't try to get too much attention and too much influence. (01:02:05) And just, again, it's a cultural thing, but just keep your head down, be humble, contribute to society, do philanthropy, work, collaborate with the government, and you're kind of okay. (01:02:19) So the signal the Jack Ma situation sends to the entrepreneurs in China is not (01:02:26) don't be an entrepreneur. (01:02:27) It's more like, don't be too colorful. (01:02:30) Don't be too colorful. (01:02:31) And colorful means you can be colorful about the technical details of your technology, but don't be colorful about Xi Jinping and politics and just stay out. (01:02:44) Yeah, stay out of politics. (01:02:46) But I just want to say, that said, Jack Ma was really an emblem of (01:02:54) extreme success, right, for China. (01:02:56) And the Chinese entrepreneurs look up to him. (01:02:59) That's really important. (01:03:00) It was a signal that unfortunately was misconstrued by the society and by also outside world. (01:03:08) But it's laid a different path for what these entrepreneurs should be doing. (01:03:12) What do you think happened to him? (01:03:14) So he's now, I think, living in Japan. (01:03:16) That's by choice. (01:03:17) By choice. (01:03:18) No, he's an extremely fascinating character, which, and if he were in the US, he'd thrive. (01:03:25) Funny, witty, smart, wise, creative, loves a good life. (01:03:32) And I think it's by choice that he's roaming around the world, given that he has more free time. (01:03:39) You think he loves China? (01:03:41) All of them do. (01:03:43) All of them do because their lives (01:03:46) Their destinies were totally changed because of China, because of the government, because of Deng Xiaoping, because of everything. (01:03:54) So, I know a lot of people from the former Soviet Union, and there's a deep resentment of broken promises, broken dreams. (01:04:03) So that is not something you see. (01:04:05) That's not how I would describe that generation and their feelings towards China. (01:04:10) Of course, you always get exceptions, right? (01:04:11) The ones who have moved to the U.S. (01:04:12) and who wants a democracy, but by and large... (01:04:17) People are deeply grateful to China, the Chinese government, the Communist Party, if you want to label it as that, because they've seen their lives be totally transformed. (01:04:28) I mean, Jack Ma went from being a school teacher to becoming one of the most powerful people in the world. (01:04:32) I mean, if you didn't have China, how could that have happened, right? (01:04:38) Can you speak to the thing you mentioned a few times, which is the difference in American versus Chinese or maybe Western versus Chinese? (01:04:47) approach to entrepreneurship, zero to 1 versus 1 to N. (01:04:53) Maybe can you explain that and what will it take for China to become a consistent zero to 1 innovator for the individual entrepreneurs to create totally new things versus doing the things you mentioned about speed and scale? (01:05:08) The US will lead for some time on breakthroughs, on disruptive technologies, the zero to 1 technologies, (01:05:17) that ultimately changed the world. (01:05:19) But innovation is a process. (01:05:23) It goes from invention to production and commercialization and diffusion. (01:05:28) Diffusing technology throughout all parts of the economy. (01:05:31) And on those two stages, I think that China has a unique advantage, even if it still can't do the zero to 1 breakthroughs. (01:05:38) Because in the end, how much this technology is adopted by the countries and by the various parts of the economy is fundamentally crucial to how much productivity will be unleashed. (01:05:50) And China's innovation currently, the deepseek is really one example, and I think it's really the beginning of the scale-based, leading-edge technology, cost-cutting driven kind of innovation model, could be just as powerful (01:06:08) maybe even more effective and powerful than the breakthroughs. (01:06:13) And it's a very different approach to innovation. (01:06:16) The Chinese companies focus on solutions, problem solving. (01:06:21) Again, that comes back to the education system, right? (01:06:23) You're giving a problem, I'm going to find the answer, the Chinese students can do it. (01:06:27) You want them to write their own question, they can't do it, right? (01:06:31) I'm exaggerating a little bit, but it's a little like that, right? (01:06:34) They see a problem, they're going to go after it, and they're going to find the best solution. (01:06:38) And that's really, really useful, right? (01:06:40) Because we don't need, or developing countries especially, don't need these frontier technologies that they can't use. (01:06:47) And China currently has this AI Plus program, which is about pushing AI into every single plausible sector with the help of the state. (01:06:57) So adoption, diffusion is very important. (01:07:00) Why China can't do breakthroughs or can't do 0 to 1 technologies? (01:07:07) I think at the root of it, and there are some deeper, we talked about the proximate reasons, the short, flat, fast, for instance, right? (01:07:18) You don't want to spend too much time on investigating something that you don't even know if it's commercially viable. (01:07:24) So basic research is still weaker than in the US, universities, but also this kind of intrinsic motivation. (01:07:31) It's very different, right? (01:07:32) In China, it's driven by extrinsic motivation. (01:07:35) You are rewarded. (01:07:36) by, compensation, financial compensation, all these kind of extrinsic motivation is what drives you. (01:07:42) But intrinsic motivation, pursuit of knowledge for knowledge's sake, right? (01:07:47) That was deep in the Confucius philosophies, but of course, you know, poverty has changed all that. (01:07:52) The profound commitment to scholarship, to research, which we know is very much true in the US universities, that's, it's starting, it's starting, but it's not there. (01:08:05) So I think these two approaches are actually quite compatible with each other. (01:08:08) I don't know what all this fuss is about, right? (01:08:12) China uses technology very well. (01:08:13) It can scale up and reduce costs, and then it can spread it around. (01:08:18) And the US, you know, makes the highest value added by inventing these technologies. (01:08:25) But, you know, again, diffusion matters. (01:08:28) Well, yeah, the things you mentioned, the scale, the manufacturing, the diffusion, (01:08:34) from a sort of economics perspective, you wonder which is the more important skill to have. (01:08:38) And it seems like the cost cutting, the efficient, large-scale, fast manufacture, the diffusion is much more important for the success and the growth of the economy. (01:08:51) I think where it ultimately leads to an impact on the economy that's more important. (01:08:57) It's this persistent question we have, (01:09:01) why don't we see the productivity in the numbers, right? (01:09:04) You're in AI. (01:09:05) AI, we had long periods of investment, right? (01:09:08) You just don't, you haven't, you hadn't seen it in the numbers until maybe even recently, and it's still very slow. (01:09:13) But China's pushing that in the sectors, you know, robotics, AI, cloud, industrial internet of things, and even companies like Huawei, I think it's gotten a little bit of (01:09:25) too bad of a rep in the US, but American engineers working for Huawei said that it's, you know, they're so happy working for Huawei. (01:09:33) The intent focus on innovation, but also on solution-driven innovations in Africa, in rural areas, really changes people's lives. (01:09:41) It doesn't change the world, but it changes individuals' lives. (01:09:44) What's the feeling that Chinese entrepreneurs have about copying technology? (01:09:51) Because I think one of the cultural things in the US (01:09:55) It's just really not respected if you copy. (01:09:57) So like that's not seen, that's seen as a big problem. (01:10:01) And is there some degree to worry in China that's not? (01:10:05) No, unfortunately, this is a big cultural difference. (01:10:10) Our sense of property rights is actually quite different from the US. (01:10:14) I think that will change over time, but absolutely you're right. (01:10:19) They are, they have no qualms about copying as long as it leads to success, right? (01:10:23) That's the difference in values. (01:10:26) As we mentioned in the beginning, you asked why the level of competition is so fierce. (01:10:31) Well, they all do the same thing. (01:10:33) Once they've seen one successful thing, everybody does the same thing. (01:10:36) You'd have no respect for doing that in the US, right? (01:10:39) But in China, it's all fine. (01:10:41) But I think that over time, it will change. (01:10:43) Just give it a little bit of time. (01:10:44) So do you fundamentally, it's a bad thing? (01:10:47) In the end, if China's all about innovation technology, (01:10:51) You cannot not have very strict IP protection. (01:10:56) And ultimately, again, we're still in the short, flat, past stage, right? (01:11:02) When we graduate from that stage, you're going to have very different views about these things. (01:11:07) You're going to try to diversify and do different things. (01:11:10) But again, it's a stage. (01:11:11) Chinese people were hungry. (01:11:12) They're still a little bit hungry. (01:11:13) They're not going to be as hungry in the future. (01:11:16) So can you describe the Deepseek moment and Deepseek as it represents what China's thinking about in the space of AI? (01:11:22) And does China have a chance at outrunning US in the AI race? (01:11:30) 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. (01:11:40) And remember that Deepseek happened in times of (01:11:45) crisis, urgency, not in times of comfort. (01:11:49) A lot of these technological breakthroughs and leapfrogging happens in times of crisis. (01:11:55) This is called crisis innovation. (01:11:57) And you got to thank the US for that, right? (01:12:00) When the Chinese were comfortably importing chips from the US, the whole industry stalled for 20 years. (01:12:07) I mean, why would you plow in billions, 10s of billions, and even more when you can just import the best? (01:12:12) You don't want to do your own innovation. (01:12:14) 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. (01:12:29) And guess what happened? (01:12:30) In a short amount of time, the degree of domestic capacity ramping up and catch up has been nothing short of remarkable. (01:12:38) Again, thanks to US truculence on technology. (01:12:44) 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. (01:13:00) They may have even backfired. (01:13:02) And it shows you that China has this relentless focus on taking some of the existing technologies and using scale (01:13:13) and the advantages to cut cost and to diffuse. (01:13:19) And this is just the beginning. (01:13:21) I think it will happen in many other industries as well, including in semiconductors. (01:13:26) And that's the Chinese approach. (01:13:28) Now, there's an interesting dilemma here, which is that this is happening in a time of extreme economic softness, slow down. (01:13:42) and missed uncertainty, trade wars, a lack of confidence, a slowdown in private investment and consumption, a withdrawal of foreign investment from China, especially the U.S. (01:13:55) venture funding. (01:13:59) Imagine what China would have been like, let's say, if the economy was doing better, right? (01:14:05) But you could also argue that it's because people feel threatened that they make more leaps. (01:14:10) Now, I wish the world is not, we don't have to drive each other to the corners to do something great, but that is the reality. (01:14:18) And I don't think that there's an easy say between who wins, because I think the winning idea is part of the old playbook, right? (01:14:26) You're all kind of part of a network. (01:14:29) Different countries, different players have different choke points on each other. (01:14:32) I don't think it's just about the US and China. (01:14:35) And what's more, you use your leverage once and that leverage has a half-life. (01:14:42) It becomes a lot less effective the second time around because other countries, other companies are going to try to substitute it away. (01:14:48) You know, if China uses the rare earth leverage, which I think it is now a little bit, there will be alternatives and substitutes. (01:14:58) Got to be very, very careful of what coercion leverage means. (01:15:02) Same thing with the US, right? (01:15:04) So I think this is all the old thinking of who wins, who dominates. (01:15:07) I think we need a new playbook. (01:15:09) So to you, maybe when you refer to Biden and Trump, if you go back to Biden, it would be the CHIPS Act. (01:15:15) So the export controls created unintended, unexpected effect where it had the reverse (01:15:23) I hope it was unintentional. (01:15:25) Otherwise, you'd be questioning the level of intelligence of the U.S. (01:15:28) administration, right? (01:15:31) But I think that the things they laid out did the opposite of what was intended. (01:15:37) It sped up domestic capacity. (01:15:42) It motivated the whole country to do this whole Venation program to go after technology. (01:15:48) It's kind of like the way they go after Olympics. (01:15:50) right? (01:15:50) Olympic gold medals. (01:15:51) They wanted to maximize Olympic gold medals and they put the whole nation at work and all the resources. (01:15:56) And that's what China did. (01:15:57) Huawei, another example, they were sanctioned. (01:16:00) Guess what? (01:16:01) They have come back to life stronger than ever before. (01:16:05) And this is not unique to this episode. (01:16:07) If we look throughout history, these blockades don't work. (01:16:10) The continental system actually indirectly led to industrial revolution in the UK. (01:16:19) when the Spanish kind of blockade the Portuguese, they came up with a very ferocious, forceful naval power. (01:16:29) And you're talking about China here. (01:16:30) They just don't lie down and lie flat and say, oh, we give up, right? (01:16:35) They're more motivated than ever before. (01:16:39) So the lesson is don't force people or nations into a corner. (01:16:47) Yeah, you. (01:16:48) make them have a very comfortable situation and they tend to become complacent and they stagnate. (01:16:57) All right, so can you talk through the whole saga of the Trump's tariffs that's still going on, especially tariffs on China? (01:17:06) From your perspective as an economist, to what degree was it justified, to what degree was it effective, to what degree is it bad policy? (01:17:13) For US, for the West, for the world, (01:17:17) Also for China. (01:17:19) China has been preparing for this for the last five years and for the return of Trump and for Trump's maniac trade policies. (01:17:30) You'd think that Trump also had five years to prepare for this battle with China. (01:17:35) It didn't show. (01:17:38) You can say that the Chinese, at least this time around, have played their hand pretty well when dealing with (01:17:46) Trump's tariff threats and the trade war. (01:17:50) With a level of calibrated assertiveness, they have really thought through everything very elaborately. (01:17:56) And look, you know, this is not good for either country. (01:18:00) Let's just be clear. (01:18:00) It's bad for US and China, and it's bad for the world. (01:18:05) And every country has a stake in the US-China trade war, because whether you trade directly or indirectly with China, you're going to be affected. (01:18:15) They are one of the largest intermediate exporters in the world. (01:18:19) And Chinese manufacturing goods anchor global manufacturing prices. (01:18:27) The cumulative tariff burdens when you get to Canada, when you get to Mexico, when you get to any other final destination, these tariffs will affect you. (01:18:38) So it's clearly very, very bad for the world. (01:18:43) China's (01:18:45) core principles, and I think that this is not well understood from the rest of the world towards the US, and something that they have kept up is equivalence, reciprocity, and realism. (01:18:58) China's not going to lower tariffs unless the US does, right? (01:19:01) You can kind of stand up to Trump like a man. (01:19:03) That's the only way to deal with Trump. (01:19:05) That's its view. (01:19:08) The deal has to be realistic. (01:19:10) The phase one deal of the last time wasn't realistic, and China thinks, look, (01:19:15) the US is going to use this as a leverage, right? (01:19:18) That's not possible. (01:19:20) This can't be seen as political concession. (01:19:23) The deal has to be seen as mutual commerce. (01:19:26) So where China can have room to negotiate is opening up things like services, you know, American banks, American financial institutions have a lot of business to do in China. (01:19:37) They can buy a limited number of more goods. (01:19:40) They can discuss about transparency around rules and regulations on e-commerce, on data. (01:19:45) All that is fine. (01:19:47) But don't confound economic issues with political issues. (01:19:51) Hong Kong, Taiwan is not part of the deal, by the way, in case anyone was wondering. (01:19:57) Trying to change China's state hybrid private