Below is a complete transcript of the Sinica Podcast with Keyu Jin.
Kaiser Kuo: Welcome to the Sinica Podcast, a weekly discussion of current affairs in China, produced in partnership with The China Project. Subscribe to Access from The China Project to get, well, access. Access to not only our great daily newsletter but to all of the original writing on our website at thechinaproject.com. We’ve got reported stories, essays and editorials, great explainers and trackers, regular columns, and, of course, a growing library of podcasts. We cover everything from China’s fraught foreign relations to its ingenious entrepreneurs, from the ongoing repression of Uyghurs and other Muslim peoples in China’s Xinjiang region to Beijing’s ambitious plans to shift the Chinese economy onto a post-carbon footing. It’s a feast of business, political, and cultural news about a nation that is reshaping the world. We cover China with neither fear nor favor.
I’m Kaiser Kuo, coming to you from Chapel Hill, North Carolina.
I am thrilled that my guest this week is Jīn Kèyǔ 金刻羽, Keyu Jin, an associate professor of economics at the London School of Economics and Political Science, LSE. Keyu, who has had the pleasure of hearing speak at various conferences, has a new book out. It’s called The New China Playbook: Beyond Socialism and Capitalism. It’s a book that is very ambitious in its scope, full of big, big ideas that are presented very forcefully and very clearly. It tries to tackle some of the biggest and really thorniest issues in the Chinese economy, but because of its very holistic approach, which recognizes how intertwined the Chinese economy is, not only with its political system, but also with China’s culture. The book ends up having to take on issues that go beyond what people traditionally think of as just strictly economics.
It’s also a very timely book. It looks at the Chinese economy at a moment of profound transformation when Beijing is trying to implement substantial changes from a focus on quantity to a focus on quality, from fossil energies to renewables, from export-dependent to more consumption-led growth, among many other things. It’s also very timely because it arrives at such a pivotal moment in the troubled bilateral relationship between China and the United States. It takes on so many of these issues that are generating the friction and the heat. Today, we are going to talk all about the book. Keyu Jin, welcome to Sinica, and congratulations on the success of the book.
Keyu Jin: Thank you so much, Kaiser. It’s really a great pleasure to be with you and on your podcast.
Kaiser: Well, I’m very, very happy that you could make the time. I know that a lot of listeners know who you are, but since this is your first time on the program, maybe you could tell us a little bit about your own story, which, after all, forms a big part of the way you frame the book, right? Give us maybe the short version of your life, and then I want to ask you about your motivations in writing this particular book.
Keyu: Yeah, I think my formative ages were important for this project. I grew up in China, but I became the first exchange student to a prestigious New York high school. I had no idea that I was going to end up in the Bronx and at Horace Mann, but I think the visionary headmaster saw China’s potential in 1997. When I went to the New York high school, whenever I told anybody I was from China, they only had three things in their mind, which was Tiananmen Square, human rights and Tibet. Meanwhile we were doing all these amazing things in China, on the ground — taking down buildings, building up buildings, and then bidding for the Olympics, and then joining the WTO. It just seemed like there was a huge disconnect with what the West thought about China and what’s actually happening there.
400 million people moving from the state sector to the private sector. These kinds of huge transformations were happening. China was changing every year. And then by the time I graduated from college in the U.S., people, my friends, my American friends wanted to move to China; some of them wanted to learn Chinese. All of that happened within a span of a few years from China not being well known to being the destination place for new opportunities. But then I look at the questions that are posed to me now compared to what was posed to me in 1997 and when I was only 14, they’re pretty much the same on the broad strokes. I think this is one of the reasons we might be getting China more wrong than we get it right if we keep on focusing on only a set of issues.
I’m not saying they’re not important issues, but a narrow set of issues while losing sight of this mega country of complexity and their own way of doing things. I think outside of China, especially in the West, I can’t say for the whole of the world, because I think apart from the West, there are lots of countries that understand that there’s more than one model, one economic, political economy model that could work, and especially work for development. But I think in the West, we have one lens, one model, and we make judgments based on that perspective. That’s why we keep getting China wrong. I think now it’s the time where we need to get it more right than wrong and reduce the miscommunication because it’s becoming one of the most important geopolitical macro factors in the world today.
Kaiser: I said that the book is really well timed. It certainly is, but it’s also extremely accessible. I think that any reasonably bright undergraduate could read this and really fully grasp the ideas that you’re conveying there. That was very refreshing. I’m wondering who the audience was that you had in mind as you wrote it. Did you hope that the book would reach policymakers or just at myrtle in Peoria or the undergraduate that I’m imagining?
Keyu: That’s a great question, Kaiser. I wanted it to be a more general public book. However, I had a challenge because there’s been a wealth of scholarly works that have been remarkable on the Chinese economy. I wanted to integrate that into the book and give it more substance in depth because I think what we’re lacking in some of these discussions is the data, the evidence. The systematic evidence, not just anecdotes. But of course, it can’t be just data. It has to be complemented by stories and narratives. This is why I think the cultural and historical perspective, even though they only take up a very small portion of the book, they do play a role in helping us understand this very complex and rich country with a whole long history.
I wanted the combination of having academic rigor and something that appeals to the general public in ways they can understand my description of the one-child policy generation, of the young generation, new generation creating the Singles Day. That forms a large part of why China’s saving behavior has changed and informs us of the future. I thought a way to weave this complexity, but also very interesting scholarly work is to have elements of both. And really, like you said, to have it readily accessible, but not really just for the general public. I think policymakers, even my academic economic colleagues have found interest because, like I said, there has been this wealth of discovery of the Chinese economy based on really rigorous economic mechanisms.
Kaiser: Like the firm-level survey stuff that you have in there, this firm-level analysis, which is enormous in its scale. It was just pretty mind-blowing. So, absolutely. There is research in there that you cite that sent me skirting to the footnotes and looking up stuff which is just amazing. Besides that, I think that people who are in the business could really benefit just from having a resource like this to give to that curious undergraduate. People often ask me, “What book would you recommend for somebody who just really doesn’t know much, hasn’t had an economics class since econ101,” my freshman year of college. I think this is maybe the right book for that.
Keyu: Thank you. Kaiser, I wanted to just say, while you’re speaking about this, I think there are some fascinating paradoxes and quirky features of the Chinese economy, which I think would interest undergrads, but also policymakers. A very basic question is — why has China enjoyed the best economic performance in one of the worst stock market performances? And are these ghost towns really for real? I think in the West, especially, a lot of these things are seemingly irreconcilable paradoxes. What I try to do in this book is to show that no, actually, they can coexist. Maybe they’re paradoxical to the Western eye. But in China, it’s always about fine-tuning, balancing, being agile, finding your way either as an entrepreneur or as an only child with highly authoritarian parents, finding your way around and finding your ways to exert your independent free will, at the same time, having a certain amount of deference to authorities. These kinds of complexities can be grappled with. That’s what I try to do in the book.
Kaiser: And I think you very much succeed. I have to admit upfront that it’s hard for me to be entirely objective because just very early into the book, I felt kind of a sense of camaraderie with you. What I mean by that is that as somebody who’s spent most of my adult life living and working in China with one foot in each world, like you have, trying my level best to explain those contradictions, those paradoxes that you talk about, the complexities of China to English-speaking audiences, always trying to get people to step into Chinese shoes and sort of see the world the way that policymakers in Beijing might. I think you emphasize so many of the same exact things that I would in trying to explain China, like the sheer scale and rapidity of China’s development, just how that whole experience was so compressed into such a short amount of time into one lifetime as you said, one working lifetime, really.
And China’s unique political economy, and how that is not always easily intelligible with… It doesn’t work with the textbook, sort of, one-size-fits-all macroeconomic approach a lot of Western economists use. We’ll get into all these things, but there is another sense in which I feel a camaraderie with you, and that is that while; occasionally, I get attacked for being too pro-Western or too critical of Beijing, I’d say that, probably like you, most of the time I get criticized from the other side — I’m too empathetic, or indeed, I’m an apologist. This, despite the fact, I mean, especially in your case, you do not hold back when you point out the problems and the failings of the Chinese system which makes it even more bizarre the way that you get labeled.
People who hear you speak or read your writing have taken your courses. Some of them still come away thinking that you’re sort of too pro-Beijing. I think, inevitably, especially for people who know your parentage, they’ll bring up your father, Jīn Lìqún 金立群. What do you say to people like that?
Keyu: It’s really interesting, Kaiser, probably like you, I get labeled on both sides. In China, I get labeled as too pro-West. And sometimes in the West, I get labeled as pro-China. I’m not really pro anything. I like to use, at least to the extent I can, data, but also what’s really happening on the ground to inform the readers and have them make their own judgment. I think that the tendency for people to think that I have many pro-China pro-Beijing comments is that, look, in the West, I think the lens is too narrow. The kind of things that they tend to report on are too selective. It’s a selective few and it doesn’t encompass the whole of China. If you want to criticize China, criticize it in the right way, in the relevant ways. In the ways in which China can improve and add value to the world.
I think there are lots of areas that have failed. I pointed them out in the book, and I find them to be the most relevant ones. What I also try to do in the West, in Western media at least, is to overcorrect a little bit of that bias or try to bring back a more neutral standpoint. I tend to focus on issues where the West has gotten it wrong. That would maybe depict me as more probing, but in reality, it’s not about that. In the book, there’s more room and more time, and more space to cover the whole. And again, maybe there is more of a focus on the things that have gone right.
Because frankly, I find it quite puzzling that if the U.S. has so many things to criticize about China, and if the China system is really that bad, then what are they worried about? What are they worried about Chinese competition and Chinese success? Well, clearly, there must have been something that had gone right. So, yes, in the book, I talk about a system, a very unique system of political centralization, economic decentralization that had been especially powerful, maybe in early stages of development. I argue that that kind of model of mobilization and state capacity is less effective in a new age of innovation and sustainability-driven. But still, that economic decentralization where local officials are enabling entrepreneurs, again, iterating, each model with a different iteration, being smarter every time, maybe there’s something to learn about.
Imagine American local officials being able to help their companies overcome a lot of barriers instead of putting in more barriers or throwing more rocks into the road or not allowing them to really realize their full potential. Maybe there’s something to learn from. And I think that will continue. To answer your question, yes, I’m taking a particular viewpoint that tries to give a fuller picture of China, and I don’t really see that as being pro-China or pro-West.
Kaiser: Yeah. At the foundation of your book is a challenge to the idea that all economics follows a universal ironclad set of laws. You see this idea as fundamentally Western, and I think I agree; that China is different, and I agree. You have long made the argument and it’s really the same way that I do it. I separate economists that I’ve worked with or that I read into those who get it right from those who habitually get it wrong. The one thing that the ones who get it wrong have in common is they think that there’s this machine into which you feed numbers, you pull a lever and outcomes this result, and it’s devoid of any kind of connection to political economy or to culture. You bring culture into this. I think that is somewhere where you’re going to get some pushback within the field, although I think this is changing, but what is the state of the discipline right now? As to the question of whether culture matters, whether the political system matters, aren’t we winning this? I mean, shouldn’t we be winning this debate?
Keyu: Yeah. In the economic discipline, there have been papers about culture and economics that have gained some traction. Obviously, political economy is a field, but political economy more in the model of the West of political budget cycles, I think many of them understand the importance of that because of its relevance to countries like the U.S. But when it comes to the political economy model of China, that has not gained any kind of traction in these disciplines. If we think about it, just in a more nuanced way, look, economic mechanisms work, right? They work very, very well in China. It’s the prime example that showcases how incentives really matter. You give them incentives and people work hard and they create stuff, and consumers shop, firms innovate, and markets work. That’s a universal principle, and I’m not arguing against that at all.
I’m actually saying that it’s worked very well in China. China has some alternative mechanisms to complement it, but they work. However, the culture element actually also matters hugely to China. If we think about households, the Western discipline treats individuals, household as individuals, and everyone maximizes their individual utility. But in China, there’s a clear intergenerational, inter-household dynamism and dynamics, and this is how, I talk about in the book, how we can real reconcile the high real estate prices or the consumer behavior that has to do with how many children they have, the huge amount of education resources parents spend on their children.
Kaiser: The savings rate.
Keyu: Yeah, the savings rate. We’re seeing all of that in real economic terms. Think about the sheer number of highly educated young people without jobs. Urban families spend up to 30% of their income on educating one child. You cannot possibly write down an economic model that can explain this phenomenon without introducing some cultural aspects to it. And it could still be in the discipline of economics. You can just incorporate these elements. And also household preferences. The preference for state intervention is so hugely different between the East and the West. And this is not just China. I think in many Eastern societies, the government’s intervention and participation is not only expected, they are desirable, whereas it could be totally intolerable to other countries. This would be a difference in preferences. We tend, in economics, to assume exogenous preferences.
Now it’s slightly digressing, but AI can actually manipulate our preferences. All of that should be taken into account of these models. Then, if you talk about firms, yes, firms maximize their profits, but they all have to balance the relationship with local officials and they have to deal with all these macro environmental factors that are not incorporated in the model. And that can become very prominent in the Chinese economy, even if they’re not in the U.S. To answer your question about the discipline, the Western economic discipline still has three models, let’s say, in macro, and it’s really hard to reinvent something or come up with new features that become mainstream. But we’re doing our part. Many of our research papers, my research papers have to do with China and the world, but again, using their mainstream models, incorporate something new, and I think it does a pretty okay job. So, I think the discipline is open to understanding China better because it is a very unique phenomenon. But again, our hands are very tied. This is why I joined the book because I can be a little bit looser and be more creative in the process.
Kaiser: Keyu, I can easily imagine somebody just who would accept these claims that you make about households and firms and culture — that culture is a major factor in economic decision-making and economic behavior, but then that same person not being willing to follow you further into claims about culture and politics. Because you do say that China’s national conditions, its culture make it better suited to its particular system of government. I’m sure you’re going to get pushback, or if you haven’t already, on that claim. I mean, you doubtless recall that in the 1990s during the ascendancy of the five tigers, there was this whole discourse, you were very little at the time, but I remember this, around Singapore’s Lee Kuan Yew and other people about “Asian values.” I think it’s fair to say that at least in the Anglosphere in Western discourse, the critics of that idea won out and Asian values became something of a punchline, right? This isn’t surprising given the kind of end of history triumphalism that was in the air at that time in the ’90s, but is it time for us to renew that debate? Do you think there might be maybe more receptivity to this idea now that we have this example of China and maybe if it were presented in a way that was just less reductionist, less Chinese centralist than the sweeping claims that we saw in the ’90s?
Keyu: Kaiser, I think this kind of pushback is the right pushback to have. Honestly, I’m not an anthropologist, and I haven’t studied this in any level of detail to give me any kind of authority on this issue between culture and economics. I think this could be a very interesting interdisciplinary field that we should do more work on. But just from my casual observations, our values do change as well, and they might be slow-moving. One of the key points I make in the book is actually culture doesn’t necessarily explain some major economic factor. Like the saving rate, people always thought it was because Asians save more. Well, I go into careful detail as to why that was not the primary fundamental factor explaining the Chinese saving rate because it’s very slow-moving.
Cultural values don’t change that much, whereas economic conditions do. And we tend to exploit that as economists to identify some causal relationships. I think values can change over time. If we’re talking about a 30, 40-year horizon and new generational shifts, I think they do. If you look at the Chinese new generation, again, a theme in the book, their values have changed. They borrow and they like to consume and they like a lifestyle so utterly incomprehensible to their parents. I can tell you, as an example, myself. The parents’ generation went through the Cultural Evolution and the Great Famine and the vicissitudes that China has gone over, and a huge amount of turmoil. They’re inevitably risk-averse, very pragmatic. The new generation are inventing their own new local life, even though they’re facing their own challenges with unemployment, etc., but still, their outlook on the world, on their own future are very different.
As surveys show, their values converge more with the new generations in other parts of the world than the older generation. WTO has not made China want to have an electoral democracy, but the new generation care about social issues like inequality to animal rights in Africa and they care about diversity. They’re seeking ways to exert their individualism and embrace identities in their communities. This is not at all what the previous generation were interested in doing.
Kaiser: That’s right.
Keyu: I think there could be a convergence of universal values, and I do fundamentally believe that there are universal values. I guess my point about the cultural aspect is I think the most dominant economic, macroeconomic phenomenon are not so much explained by culture per se, but I think there are the kind of quirky aspects of the Chinese economy, the things that we don’t understand or were easy to brush aside and have a reductionist view, could have a cultural element to that. We should watch for more convergence and really take advantage of that positive force of the new generation where they think about collaboration and they think about the environment and all these things. I think it’s a good bridge between China and the rest of the world.
Kaiser: Absolutely. Yeah, and I do want to emphasize to the listeners that this whole theme of generational change is one of the light motifs that runs through the entire book. It’s a really, really interesting one. That generation that you came up in, I’m from the, the 六零后 (liù líng hòu), the Gen X of China or the late Boomers of China. The millennials and then the Gen Z, they’re very different creatures. They didn’t know the privation and the hardship. They saw it, but they didn’t experience it at close quarters. They have known all that meteoric growth. One friend of mine once described them as equal parts entitlement and empowerment, which I thought sounded right to me.
Keyu: Exactly.
Kaiser: Anyone who reads this book, I think, will get a good idea of what to expect in the next decade as people who came up in your generation now kind of take over.
Keyu: Yeah. Kaiser, if I can add also, I mentioned some of the economic trends of the new generation that any company that wants to do business in China needs to understand thoroughly. But it would be really interesting to see what the political outlook is. Again, to your point, I’m happy to receive pushback on this cultural-historical element. I don’t take any of these things as hard set or unchangeable. I think there is some very important globalization force, even though I think there’s a lot of superficial globalization convergence in terms of what we wear, what we like to eat, and in terms of travel, but I still believe that these kinds of values can be challenged. Smart, young, bright Chinese generation will start to question the status quo. And question — is this the right system? Is this centered around the right kind of mission? Do they subscribe to that? I think they will start to question, but I still have to say, it’s not obvious that they will look at the West and look at democracies transposed on other soil and find that as paragons of success or inspiration, right?
Kaiser: Right.
Keyu: It hasn’t really served them as paragons of inspiration. I’m not saying that this kind of political system or political economy system, although lots to improve, are the ones that will and most likely stay. I’m not arguing for that. But, first of all, how much appetite do they have for radical overhauls and turmoil? I think the current generation Chinese certainly do not have much appetite for turmoil, instability.
Kaiser: No, indeed. Yeah.
Keyu: Maybe the new generation has a different way of thinking about that, but a radical overhaul to become what. It’s not like they can look around the world and say, “Okay, that’s an obvious alternative.”
Kaiser: Right. No, absolutely. I think the part of the problem with the way that the argument, the cultural argument used to be framed, the Asian values framing of it was they kind of posited these eternal, unchanging Asian values, which is just nonsense. It’s part nonsense, of course, that deserves to be. I think in terms of gravity or inertia, right? Culture, history, it limits the rate of change possible in an amount of time, but it doesn’t make change either impossible or not desirable. And like you, I do believe that there is a set of values toward which we should all be moving and toward which every Chinese person I know wants eventually to move. Of course, everyone wants a society that is more deliberative and participatory and responsive and plural.
Keyu: Right. Yeah, all that.
Kaiser: Anyway, let’s get to the heart of the book, which I think maybe is the key to understanding the Chinese political economy and how it functions. That is what you call the mayor economy. This is not your coinage, I don’t think, but actually I couldn’t find — who first started calling it the mayor economy?
Keyu: I’ve just been hearing it in China, and who knows where it came from originally.
Kaiser: 市长经济 (Shì zhǎng jīngjì)
Keyu: Exactly, 市长经济.
Kaiser: I guess it was coined in Chinese first and then translated into English.
Keyu: Yeah. Well, always. All the creative coinage is always in China first. So, don’t say that Chinese people are not creative or inventive. They are. They really are.
Kaiser: Exactly. Exactly. It’s a big topic, of course, but it’s really so central to your argument that maybe it’s worth explaining at some length. How would you explain what the mayor economy is, and what are its pros and cons?
Keyu: Well, people tend to think about China as having a very centralized approach with a very dominant state. I’d say that that would be true for political centralization. Whereas the economic model is highly decentralized. There’s actually a lot of autonomy passed down to the local officials. We call them mayors, but they could be provincial governors or party secretaries or village chiefs, if you will. These local caters, actually from the very beginning, 40 years ago, started the reforms from breaking rules. It was very interesting that where one region had a success as a pilot case, it would be rolled out around the country. That was a very smart way of doing things. If there was a failure, then it wouldn’t be spread out. But if there was a success, it could be modeled on. I think that has been critical in contributing to this remarkable economic rise.
We have to remember, China was an immature economy with lots of institutional deficiencies. So, how do you get over this rule of law problem, lack of markets, no supply chains? Well, the local government was an essential force enacting that, enacting it quickly. If we look at today, it’s the same kind of principle where the decentralized economic mechanisms, the local officials will help enable companies and entrepreneurs to overcome barriers, remove red tape, maybe help them get loans from banks if they’re a promising company. Give them cheap land, help them attract talent, and coordinate supply chains. Really, they call themselves the one-stop shop when it comes to attracting good, promising entrepreneurs.
One phenomenon that we observe in China is that, first of all, China has the second-largest number of unicorns in the world, second to the U.S., but they’re scattered all around China. Not just concentrated in Beijing, Shanghai, and Shenzhen, for example, but in second-tier cities like Wuhan, Chengdu, Hefei, lots of cities that many people had never heard of. These very, very entrepreneurial local officials will create things like global quantum avenues in Hefei or support these top EV companies or autonomous vehicle companies, really the whole lot.
Kaiser: Let me ask you to use that example because you’ve used it before to a very good effect. You’ve mentioned that city twice, the provincial capital of Anhui, Hefei, how it courted one of China’s major EV makers NIO, and then went on to build Hefei into, basically, a center for EV production. The whole sort of ecosystem converged there. Maybe that’s a great example to look at.
Keyu: NIO is one of the top three EV companies in China, and it was on the verge of bankruptcy after it was listed on NASDAQ. But the Hefei government said, “Move your headquarters to Hefei,” and by the way, there’s something called the headquarters economy now. Move your headquarters to maybe the second-tier city or wherever it is. They helped them coordinate supply chains and got them loans from six state banks, taking a 25% stake. Within a year, NIO’s production grew at 81%. Its market cap went from $4 to $100 billion at its peak, and the local government of Hefei cashed out within a year and made a killing. But more importantly, it really helped build this mini Silicon Valley, coordinated these manufacturers and battery makers and control systems. The same government did the same thing for quantum companies.
Now there’s a global quantum avenue. They said, well, look, these companies, there were no private investors who were willing to invest in these companies because they simply thought they were not commercially viable. And look at what happened. The same government supported, actually decided not to invest in the domestic subway system. I’m not sure that was the right thing to do, but instead used the funds to stake a LCD display company that now has taken over Samsung as the world’s best, all in a local little government of 5 million people in China. You can imagine how many mayors there are running around doing that all over China. I heard once from an investor friend of mine that Suzhou, which is a beautiful city known for traditional gardens, has thousands of autonomous vehicle-related companies.
They are building these high-tech parks. I think that this is a very vibrant, dynamic, very interesting, but also complex interplay between government officials and entrepreneurs. Some people would ask, “Okay, so what’s in it for the local officials? Why are they doing this? Why are they helping the companies?” And this comes back to the unique political economy condition of China. These local officials all want to be promoted and they want to be promoted to the higher run and potentially the central government in China. Mind you that all our last leaders in the past have all been provincial heads before they’ve taken on leadership roles. That’s the promotion. But how do you get promoted? Well, one way, and I’m not saying it’s the only way, but a very, very important way is showing your capabilities through the economic performance that you make in the city.
By helping local companies, you build an entire industry, but also a retail and service sector, right? Even the real estate that these local officials own are worth more because of these agglomeration effects and multiplier effects. Their incentives are all aligned. Often people ask, “Oh, but why don’t these officials just help SOEs?” Well, the answer to that is they want to help the most promising companies, not the companies that just have connections or give them some small kickbacks. That’s nothing compared to the fact that they can build a major city like Hefei and then all these jobs. Of course, they want to pick the right ones. Actually, in this sense, there are a lot of the right kind of incentives aligned. A very important one to prevent corruption, to prevent a kind of these corrosive linkages between business and government is local competition.
Governments compete with each other, local officials compete with each other. Because look, if I exploit my firms in this region, well, the good firms will simply flock to my neighboring region and score points for them. At the same time, there’s rotation of the local officials. Right now, it’s on average two to three years. It seems pretty short to me, but this prevents these local officials from being completely embedded in this local network and all these problems. You asked what are the downsides of this model. I think there are a few pretty prominent ones. One is there’s a lot of waste, inefficient investments. I mean, come on, what do local officials know about picking companies? Right?
Kaiser: Right.
Keyu: So, that has been the case in the past where they’re throwing money at companies that simply failed. But again, this is an evolving concept and model. The newer iterations, as the local officials are working with fund managers who know better to pick the right companies, and they basically are used as a lever to raise funds, social capital, to invest in these promising companies, they are stepping back in terms of their role in these companies. Now, there are limits to how much subsidies, not subsidies, but how much financial support you can give, limits to the equity amount that local officials can have. These are iterations. Lastly, I think a very big one that we’ve seen on the macro level is local protectionism, right? I want to protect my companies and I don’t want any other companies from other regions who are successful to come into my region and steal their market share, and that’s a really big problem that suppresses competition.
The government has identified that as a very big problem, the political economy model, and have come out to encourage more collaboration or build these mega areas, Tianjin, Hubei, whatever, these big agglomeration regions to collaborate. There’s also the local official debts problem. So, I think there are plenty, but we have to ask the question, on the whole, was it positive for China, in that particular developmental stage? And I’d say absolutely. Because otherwise, things wouldn’t have happened so quickly like you mentioned. But in the new era, is this still so necessary when institutions become more mature and the markets work better? I think they need to step back.
Kaiser: Electric vehicles, they’re an excellent example, as we talked about them, NIO in Hefei, but they’re also an example of another major argument in your book that the power of the state in combination with the power of private enterprise can really drive China’s success by allowing system-wide changes to be implemented very quickly. We saw that EVs went overnight from… China is now not only the biggest consumer but also the biggest producer of EVs. That wouldn’t have happened but for very forceful government intervention. Can you talk a little bit about that, about where you see China’s ability to wield the heft of state power to affect changes in the macroeconomy?
Keyu: China’s state power is quite unique. I would say the state power or the state capacity lies in its ability to mobilize national resources very quickly, its ability to allocate resources, but also I’d put there allocate losses as well. It’s not all pretty, right?
Kaiser: Oh, no.
Keyu: Whoever has to lose has to lose. That’s just the end of it. You can say that’s effective and expedient, and I think it does achieve that purpose, but it’s also potentially unfair. In the resources that it controls, the land and the licenses and the keys, to pretty much everything. So, it is pretty unique. But the EV is a good example because the Chinese state rolled out 4 million EV chargers around the country. In the U.S. there are 140,000. That makes a huge difference to wanting to spur a new greenfield technology. If you look at China’s technological success, it’s primarily in greenfield technologies, not the ones where the Western countries have a latent advantage of three years of accumulation. But how did that happen? Well, I think the state has played a primary role, whether it’s allocation of finances, to coordinating these supply chains to make this all a productive network. That’s China’s state capacity. But then there has also been downsides of, remember the semiconductor big funds corruption scandals and these inefficient investments. People think, oh, this model doesn’t work because what does the government know in terms of supporting industries, picking winners? The government has never been great at picking winners anywhere around the world, right?
Kaiser: Oh, right.
Keyu: But they have been effective in providing the infrastructure and complimentary factors in nurturing these successes, and they will continue to do so. If we look at the Western economies, we can say that, well, the government hasn’t done enough, so that it has produced 50 years of stagnating wages in the U.S., potholes on the streets, and not enough support for the companies. If you look at the U.K., there’s absolutely enormous talent, but there’s no infrastructure and industrial capacity to turn these great ideas into multi-billion dollar companies. One could argue that there’s a lack of state capacity in the majority part of the world. China doesn’t suffer from that, but it suffers from other problems of too much state capacity.
Kaiser: Yeah.
Keyu: I think that going forward, and this is not something that the leadership is not aware of, the fact that markets should be playing a bigger role and that market mechanisms will ultimately be better for the economy. If you look at the innovation ecosystem, right? Innovation is an ecosystem. It’s not just a bunch of trailblazing stars where we attribute to whom we attribute these great inventions, but it’s the national labs and industries, connection with the university. A very interesting historical episode that we often forget is that between Japan and the U.S., the technology competition during the 1980s. Actually, the U.S. was inspired by the Japanese innovation model that connected the industries and national labs, and they passed their own two legislations that allowed professors to patent their intellectual property and to take the old kind of ideas off the shelves and national labs and make them into commercial success. That led to the boom of the internet and to other technology in the 1990s. So, that’s when the state actually did something really positive. And they should continue to play that role, but hands-off in terms of picking the winners and trying to make strategic financial decisions on behalf of the companies. But I don’t really think they’re doing that anymore.
Kaiser: Keyu, let’s talk about state-owned enterprises. In my time in China, beginning in the late ’80s, I think I was like a lot of other people who’d grown in the States and lived in China as expats or as returnees. I got in the habit of reflexively taking whichever side seemed to be more supportive of market liberalization. That was kind of at odds with my political instincts in an American context maybe, but there I was, in Beijing, always rooting for the private sector, always accepting this, frankly, a kind of cartoon version of state-owned enterprises, where I assumed they were like those state-owned restaurants that I had to eat in — the surly waitresses, and you’d ask them if they had something, and they’d always go “没有，自己拿” (méiyǒu, zìjǐ ná). But your book paints a much more nuanced picture of SOEs and helps to undo that caricature. What did we get wrong? How should we be thinking about what the modern state-owned enterprise is these days?
Keyu: First of all, there’s evolution, constant evolution. This is one thing I would tell the leaders to always watch out for China. It’s constantly adapting. Because of competition, things are changing all the time. SOEs were outcompeted by private enterprises during their rise in the 1990s, and that’s what forced them to change, along with, by the way, joining the WTO, which actually, unlike popular perception, forced China to change thousands of laws, including disciplining SOEs and making them more modern corporations. Look, the productivity convergence of the SOEs from the private sectors was quite astounding in the intervening years after the reforms. But again, never going to be quite where the private sector or private companies are because the goal is not solely to maximize economic performance and profits.
They have other, let’s say, responsibilities and missions, including carrying out the national projects, whether it’s infrastructure or the Olympics, or supporting the financial system, or supporting companies, other companies when they’re needed to, or building stuff, or undertaking innovation. I think it’s pretty clear to the government that they’re not great innovators and the private sector is doing most of the heavy lifting when it comes to innovation, but they have other responsibilities. So, I think the way to look at SOE is they’re going to dominate in the strategic industries, where the government has restrictions on competition, but only in a few sectors. There’s going to be continued reforms, so prevention of state-owned monopolies taking over, but we’re always going to see them around.
As part of the political economy model, the government needs to be able to turn to some institutions and to be able to rely on them to carry out these momentous projects, including, look at the Belt & Road, right? If you want, based on the market mechanisms, private participation, they’re limited in how much they want to participate. So, they’ll be around, but I just don’t think that they should cloud the whole landscape, the economic landscape, which is primarily driven by the private sector. 70% of the wealth belongs to the private sector. They provide 80% of the jobs, 70% of industrial output, and 80% of the innovation. That’s going to actually increase over time. I think it’s also misleading to think that private enterprises don’t have a bright future in China. I think it’s very, very clear to the government that they are needed, and especially when the economy is in such a deplorable situation, they are going to have to do all the work. But it’s a matter of the assets that will be controlled by the state and being able to call on team China when it’s needed.
Kaiser: Part of what SOEs need to do in dire economic times, is they have a responsibility, kind of social welfare and job preservation. I’ve heard it argued that when Beijing props up these SOEs, we shouldn’t just think of it as throwing good money after bad, creating gigantic NPL problems. We should imagine this as a sort of state-directed lending by state-owned banks to state-owned enterprises to ensure social stability. To prevent massive unemployment and to keep these families alive.
Keyu: Exactly. There’s also been a lot of consolidation, right? There’ve been lots of market consolidation, driving out the smaller, poor-performing SOEs, and reducing some of this unnecessary competition or monopoly power. It’s all evolving and changing, but they’re not going to disappear.
Kaiser: I mentioned, just now, bank lending. Let’s talk about China’s financial system. I would point to anyone who suspects you of being too rosy about China to definitely read that chapter as a corrective. There are a few topics that you address in that chapter, and I want to highlight just a couple of these things. First of all, you mentioned early on in our conversation about the disparity between China’s quite robust, overall GDP growth, and its awful stock market. I think you said somewhere in the book that if you had invested a dollar in the stock market like 20 years ago, you’d have a dollar today.
Keyu: Yeah, a dollar back. Nothing.
Kaiser: Which feels a little lumped in my portfolio sometimes, but anyway. Let’s talk about what the reason is for that. I know, for example, that it’s just totally dominated by retail investors. That’s why the betas are so large, why you have these gigantic swings, why you have to have these circuit breaker mechanisms. Because if you didn’t, the swings would be even crazier, right?
Keyu: Yeah.
Kaiser: That’s 80%.
Keyu: Well, the majority is retail investors, like you said. I think the government and the people both have their own challenges. This is why we have this really whimsical financial market. The stock market performance per se, there’s a selection issue. Companies have to register and be approved by the governmental authorities. They often do not choose what’s good for them long-term strategically and rather make short-term decisions so that they can be listed. Once they’re listed, the returns on investing that stock drops by half. Compared to other Chinese companies that list abroad in Hong Kong or the U.S., they actually do very well. There’s a problem with the selection mechanism, but also what do they do after they’re listed.
Chinese corporations, and I’m not saying that’s not changing, but over the period we’re talking about, they were doing crazy investments, right? Pharmaceutical companies were buying golf courses and buying EV cars. I don’t know. They’re just using that to either lend to their friends or partners or lavishly spending on things that are not related to their core business. There’s a real corporate governance issue also, which is making these returns look very poor. But also coming back to the household and the government side, I think there is a paradox. The government wants to protect the retail households. By protecting them, they tried to control the stock market. I mean, how do you control the stock market? It’s like pushing on a spring. The more you try to push on it, the more it bounces around. That kind of volatility is often created by the very goal to suppress volatility, like the circuit mechanisms that you mentioned, or trying to stop the stock market from overheating or cooling, asking team China to buy up these stocks.
What it does is that it doesn’t really help the retail investors. They never learn. And they need to learn about long-termism. They need to be punished financially for these speculative investments. And because the Chinese government doesn’t want them to suffer in the short term, they implement these interventions that make things a lot worse. It’s kind of a big paradox. I think the financial system is where all the chaos is really. If you think about the shadow banking system and all this lending, the thing is for every action, there’s a reaction. So, the government puts in a policy, there’s always going to be somebody else trying to make money out of that restriction or try to get around it. Some of these specific mechanisms that are aimed to protect the market, lots of arbitrageurs are making money, to the point that it’s so ridiculous that some people actually go between Hong Kong and Shenzhen, carrying actual cash, every day, that they can make money. There are lots of these quirks that are explained by the government interventions in the financial system.
Kaiser: I want to get into shadow banking in just a bit, but I want to talk first, about real estate. I think anyone who is even glancingly familiar with China’s economy knows how utterly dependent local governments are on local land sales and how, in general, incredibly dependent China’s overall economy is on the real estate sector. We are all aware that this can be, and in the past, has certainly been a source of potential danger. Help us to right size this and help us to understand what’s going on with the real estate market. On the one hand, you have just so many resemblances to the 2000s in the United States or when we had this crazy asset bubble just out of the global national crisis and the Great Recession. But you cite a lot of reasons why you don’t think the bubble will pop or it hasn’t popped so far. Help us to understand, I know that’s a huge question.
Keyu: I’ll try to answer it briefly, but just look at the data and try to figure out, do we really have a massive bubble like the one we had in the U.S., like the one we had in Japan that led to the lost decade? The bursting bubble. This is a serious question, a serious issue, right? Very important. But the data doesn’t suggest China has a massive bubble in the sense if you look at, outside of the top four cities, income growth and property sector growth, property prices were basically aligned. It is now true that in Beijing, Shanghai, Shenzhen, these cities, the housing price outgrew the income growth, but housing price is an asset price that is forward-looking. So, if you actually think maybe one day Beijing and Shanghai would become the global metropolises in the world, and their prices aren’t going to be a certain level, that price is going to show up in today’s prices. That’s one thing to keep in mind. It’s a forward-looking element too.
Kaiser: Also, these cities are national markets too. No matter who you are anywhere in the country, if you’re somebody with money, you’ll want to own property in them.
Keyu: Just like London. I mean, we had Brexit in London and prices are still that high, right? So, whatever the reason, it’s forward-looking. You can say that maybe these purchasers were too optimistic about their outlook, but there is no evidence of a massive bubble, and certainly no evidence of a massive bubble popping. Even if we look at the recent events in the property sector, yes, volumes have contracted, investments have contracted, prices haven’t really come down to the degree of 30% to 50% as we’ve seen in other real estate crises. And you have to ask fundamentally why that is. I think one thing is, if you look at the demand, there’s still pent-up demand. First of all, urbanization is a little more than halfway done, and everybody wants to have an apartment in the city. That’s just how Chinese people are.
That’s one big push. And also owning a property boosts your eligibility as a bachelor or a bachelorette, can go in either direction these days, but it’s a sign of status. The renting kind of principles hasn’t really still taken hold all over the nation. But you can also say that there are some trends that suggest that this pent-up demand is no longer going to hold. Look at the number of marriages that happened in the last year, 7.6 million only out of, I don’t know, 300 million millennials, new marriages — suggesting people want to delay marriages or not get married at all and not have children. That’s a negative trend on pent-up demand. This is where the cultural elements also matter. It’s an intergenerational kind of decision-making when it comes to purchasing a house.
It’s not just the young generation putting in their mortgages. Everybody’s helping, right? Your parents, maybe your grandparents, your couples, your spouse’s parents are all putting that money. So, affordability is also there if we think about this generational thing. I think there are these complex mechanisms. I just want to say the bottom line is there’s no huge bubble in the making and there’s no huge bubble collapsing. I’m a little bit pessimistic about the real estate sector because it counted, broadly speaking, for 30% of GDP, and there’s now a political intent to rein in the property sector because well, has caused anxiety for the middle class, caused anxiety for the new generation, and who knows, maybe even explains why they’re not wanting to have children, right?
All of this suggests that the future of real estate looks pretty different from what it was in the past. But I don’t see China as becoming the Japan of the 1990s. Again, not because there’s a huge bursting of overpriced real estate, which is not really the case all around the country. But there needs to be a path adjustment to a new equilibrium where demand equalizes to supply and prices readjust. Hopefully, that will be smooth, that transition, so as to not cause too much chaos in the economy. There will be a transition, but again, not a huge bursting.
Kaiser: Also, there were not all these sophisticated bundlings of mortgage, mortgage-backed securities and credit default swaps and all these financial products that caused the Bear Stearns and then Lehman to collapse. You point out in your book that even were there some analogous event, if Lehman, or if some bank in China were distressed like that and it were a load-bearing wall, it looked like its collapse might take down other walls or the whole structure, that Beijing wouldn’t allow that to happen, right?
Keyu: This is what’s different between China and Western Capital Society. Because the financial crisis, ultimately, to some, is a crisis of confidence. And that can be backstopped by the Chinese government because the Chinese government can simply order the state banks to come out with a plan and to not have these state banks default and bail out whoever needs to be bailed out and assure the society that there’s no confidence panic so that people don’t go and start to withdraw from their banks. That kind of level coordination is simply not among the possibilities and options for the U.S. As you mentioned, as I described in the book, there are not that many linkages, financial linkages and financial networks between a hedge fund and Goldman Sachs with another counterparty bank that makes this highly transmissible. If you look at the household leverage, it’s true that household leverage and mortgage borrowing have increased quite substantially in the last 10 years or so. They’re still pretty low compared to other countries. I don’t think it’s a financial crisis kind of problem when we think about real estate.
Kaiser: This eagerness to prop up failing banks or failing companies, this willingness to do so, what prevents that from being a textbook moral hazard problem, though?
Keyu: Well, there are moral, real moral hazard problems in China, but they think there are other ways to punish them. They’ll get rid of the CEO or the chairman and some might even go to jail, and there’ll be huge reputational loss. Again, they’re not being held up at the highest level of accountability as the moral hazard issues in the U.S., but they also believe these are real punitive measures. I think they make the decision on the whole — it’s more important to save the entire economy in the financial system rather than to make an example out of a bank so that people avoid making the same kind of mistakes. They make that overall judgment.
Kaiser: Why then do they allow Evergrande to default on its bond debts and to get into such incredibly bad shape? Why couldn’t they have, as you suggest they would do in other cases where moral hazard raises its ugly head, just put Xǔ Jiāyìn 许家印 in jail and then make his creditors and all the home buyers haul?
Keyu: That’s a great question. Well, one is everybody understands very clearly what is going to be a systemic crisis and what’s not going to be a systemic crisis. I’m not sure that these officials know what is going to cause a systemic crisis. I think the degree of how much Evergrande mattered and how much it spread, that shock, was also underestimated. That’s number one. Number two is Evergrande is a private enterprise. This also came at a moment where private enterprises in various sectors were coming under attack for all these supposedly less than rational and reasonable behaviors they’ve been conducting. Maybe it was thought to be made of an example, just like DiDi and other companies. Again, they’re backtracking, but there has to be a very strong signal that the policy intent is there.
I don’t think that they believe that there were systemic triggers, as you rightly pointed out, but they could be. There are different departments in China. That’s the thing that we have to understand. The security department is not the same as the economics department and the financial department overlooking the capital markets, which is not the same department as the foreign ministry. And they all go about doing their own thing until it clashes. Then it clashes really, really big, then the leaders come in and coordinate and say, “Okay, what are we going to prioritize?” But before that happens, they’re all going to move in these parallel somewhat headquarters, conflicting manners. So, the way we ought to see the real estate, the Evergrande, these could also be different department men making decisions.
Kaiser: You know what you speak because I know you’ve done a lot of work with CBIRC. Yeah, absolutely. There’s a great section in your financial chapter about the shadow banking system, which we mentioned just a little bit ago. Again, I think you just do a great job of complicating it, of clarifying what you call the dark doppelganger to the banking system. Give our listeners a sense of, first of all, what all counts, in your mind, as part of the shadow banking system. I think most people don’t necessarily think of wealth management products that are issued by banks as being part of shadow banking, and they instead think of things like P2P lending and pawn shops and that sort of thing. Again, pros and cons of the growth of the shadow banking sector in China.
Keyu: China’s shadow banking also looks a bit different from the shadow banking in the U.S. that led to the global financial crisis. Shadow banking is also much broader in China because the formal financial system is so dominated by the state banks that it, first of all, left little room for other players to participate. If we look at China, a very economically well-performing economy with not many financial institutions of all sorts like asset management companies, insurance companies, and rating agencies, all of which make a really important financial ecosystem. That’s lacking. So, when you have these state banks dominating the financial system, by the way, one number that is still surprising is that 10% of aggregate social credit comes from direct financing for firms. That means capital markets. Only 10%. That’s a very small number compared to the U.S., and that’s because the state banks dominate.
You had lots of other players wanting to play a bigger role, and credit was a very important driving force for the economy after 2009. You got a lot of these, let’s say other players, let’s say small and medium and sized banks, the regional banks wanting to compete with the big banks. How do they do that? How do they attract more depositors? Were they going to issue these wealth management products with a supposed implicit guarantee of a certain rate? That’s much better than the very, very low interest rate you get as stashing your cash in the bank. And then how is that wealth management product invested? Well, it went into areas that were prohibited by the government, meaning real estate or certain kinds of infrastructure projects or sectors that were discouraged. You had all kinds of players. That’s just funding coming from the regional banks.
Then you had these trust companies that wanted to make more financial returns, and then they were able to garner the depositor’s money and then went into high-return, but highly risky sectors. And then you had the depositors also to blame, right? They did not do their careful due diligence, and they went to buy products that they thought were safe and a lot of that went into property. You have lots of players in this game, trying to overcome or trying to skirt these regulations. That’s what happens in China. The more regulations you have, the more skirting there is. This is directly triggered by a particular regulation on how much banks can actually lend out. These kinds of restrictions led to this great blossoming of financing off the balance sheet. And that grew to this unbelievable, exploded, really, to this unbelievable level. Look at the local governments, they are also an important player, right? Local governments had their own objectives. They wanted to undertake these grand infrastructure programs and then invest in their companies. And they did it off the balance sheet.
They did it through these local government financing corporations, which were actually, supposedly corporations, but really they were injected land assets as collateral so that the local governments can borrow more to skirt the central regulation that they can’t borrow. You have all these players participating in this hugely, as you can imagine, complicated, convoluted, very exciting financial system. Even companies that were not supposed to make certain kinds of investments were investing in real estate that had nothing to do with their core business. The point here is everybody’s in the game together. Everybody’s in it together. Don’t blame just the government.
There are the entrepreneurs, the companies, households with their own respective motives. I think it just goes to show that the formal financial system is kind of a mess. It’s still antiquated. It’s not efficient. It doesn’t channel credit to the real economy where it’s needed the most, like small, medium-size companies, they really need the money. Even today, the cost of capital is enormously high for them. How are they able to borrow when the state banks only want to lend to the state companies? This created this shadow banking explosion, which, in the last few years, had been curtailed and contained because of these regulations on that sector. But at some point, it was a landmine filled with risks.
Kaiser: Yeah, absolutely. Let’s step back and look at China in the global economy, which is yet another thing that you’re very ambitious about, and I think this is a really interesting chapter. The system that you describe in China, domestically, works, as you say, because of this deep integration of the Party-State into the functioning of the economy. That’s all well and good. But China is also a nation with deep economic ties to nearly every other country on earth. I think the overwhelming majority of countries on earth have China as their top trading partner. The problems arise because other national economies see China’s state participation as an unfair advantage. You make it clear that you perfectly understand the resentment that this breeds — overstate subsidies, overcapacity, creating gluts of steel in other commodities of industrial policy, preferential treatment of Chinese national champions, China’s use or abuse of its designation, in some forums, is still a developing country. It gets to have its cake and eat it too. A lot of resentment.
Nobody expects that you are going to be able to offer one turnkey solution to this long-standing intractable problem. But you do make some really good suggestions about what China should do. And to be clear, you place a lot of the onus very much on China. What should China do to realize the problems that it’s causing for other countries in the global trading system?
Keyu: Look, the China shock is over. It’s a one-time shock, and it’s pretty much done, but it seems that the world is still hung up about that one-time shock that nobody can change and find it pointless to be arguing about what are things that were prominent in the old playbook. Now, my book is called the China Playbook to distinguish it from that and to show that there’s evolution. The industrial subsidies have subsided for the large part, almost also because there’s not much money after COVID to do all these things. They have also understood the impact of oversupply and these glut and the problems with these subsidies. So, these are really no longer all that relevant. Actually, if you look at the U.S. now, there are industrial subsidies coming out.
Kaiser: The Inflation Reduction Act. Yeah,
Keyu: Exactly. Or the CHIPS Act. And maybe they’re saying, okay, maybe this thing actually does work to some degree. But I think that’s very much part of the old playbook. And also, in the data, you see that foreign companies, on average, systematically speaking, get more subsidies than domestic private companies. That’s also very interesting because, on the whole, even though we hear about anecdotes about foreign companies being discriminated, and there are, for sure, examples of that, I think on the whole, local governments really wanted foreign companies to be present because of the overall positive energy and spillovers to the rest of the economy. They were actually encouraged.
But also this manipulation of exchange rates, or trade surplus intellectual property transfers of technology, all of that, I would argue is stuff that happened in the past, but they’re not that relevant. If we keep on focusing on that, we’re going to miss out on China again. What I mean by that is intellectual property protection is absolutely important. This is one of the suggestions I make. This is not only good in terms of protecting foreign companies, but this is actually really much needed in the domestic economy. Because right now, the stealing or misappropriation is also happening among domestic companies.
How do you get China to become an innovative nation? You need to have very strong intellectual property protection. Right now, there’s a comprehensive layout of the legal superstructure. But when it comes to implementation, that’s another issue. I want to say that yes, there are these grandiose designs, but how it is implemented at the local level is very important, and sometimes there’s a disconnect between the two. The second is, I think China has to recognize that yes, the developing nation status, how much can you argue for that? It’s no longer this developing country like other developing nations because it does have some of the leading edge technologies. Yes, it does still have 600 million people who are not middle income, but still, you have Beijing, Shanghai as rich as Seoul and other parts of the rich nations club.
You can’t use Gansu as an example that China is a developing country because there’s a huge amount of heterogeneity. The leading edge technologies are now in China. I think it’s no longer needed, this trying to win every battlefield, trying to gain every advantage that China did, that’s no longer necessary. You can lose some. It’s not a bad thing to have slower but higher-quality growth, go up the value chain and then pass some of the other parts of production onto other countries. Well, I have to say that if you look at China’s record on changing behavior after it was brought to the WTO courts and lost, it was pretty effective.
I think this is the way to go about it. Take the Chinese to court. By the way, the cases that the U.S. violated in the WTO over that period was twice as high as China. It’s not as if China’s the only disputed trading partner here, but take it up multilaterally. But also look forward, what is China doing right now? It’s using its huge, ferocious domestic market competition to further its innovation. Yes, the government is important. There are certain kinds of government support and subsidies in high-tech, but that’s also what China and the U.S. is doing. That’s not really in the contentious areas, but make yourself stronger. The bottom line is China needs to change, but everybody has to make themselves stronger. If I look at the U.S., all the internal problems, a lot of the majority of them don’t have anything to do with China, by the way.
These jobs that were displaced by the Chinese, they would’ve been displaced by the Vietnamese or the Mexicans and others. It’s just that China came too fast, too rapidly without any preparation. And by the way, different governments reacted very differently. European governments did not at all suffer from the China shock to the degree that the U.S. did, simply because their government did more to help their workers transition.
Kaiser: That’s right. You make that part very clearly in the book. You’ve talked about how China doesn’t need to win every single area. I mean, they can afford to lose some of these, but there are some areas that it refuses to lose. We’re talking about specific areas of high-tech where they have suffered from export restrictions that are very key, that are the pillars of the future economy that China really wants to win. Your book talks a lot about how the Chinese government, through carrots, through sticks, through signaling, where the风口 (fēngkǒu) are, where the government is going to be providing really good, strong tailwinds, they’ve been able, in a very short time, to reprioritize entrepreneurs away from consumer internet, away from ecommerce, fintech, and, of course, edgy tech, which is gone, and toward hard tech, and especially semiconductors.
We talked about some of the problems with the big fund and things like that. I’m not sure when you submitted your manuscripts, but I’m guessing that things have probably gotten a little worse on the export controls front since you did, especially when it comes to semiconductors managing to bring the Dutch fully on board and the South Koreans and the Japanese. Presumably, a few months later, things have changed. What is your assessment now of how China is faring in certain areas of very critical, strategically critical high technology like domestic semiconductor manufacturing?
Keyu: I think the latest development is that as time goes by, China’s just simply taking this as the new normal. Meaning, nothing’s going to really surprise all that much when it comes to technology restrictions. Therefore, they’re also prepared to do what they need to do, and there’s going to be a response, and there has been a response. I think, in the short term, of course, many companies will suffer. I think a lot of it is also psychological because of the reduced expectations of the future. But I would also not underestimate how important this domestic all-encompassing innovation ecosystem, plus industrial supply chain matters. What I mean by that, when it comes to, particularly semiconductors, is that if you look at the Japanese example in the 1980s, one argument for the rise of semiconductors was the rise of the Japanese electronic industry.
It was the downstream clients that demanded these chips. And that very proximity and very quick feedback was very important for the rise of the semiconductors. If you look at these downstream players in China today, we’re talking about the EV car companies, autonomous vehicles, the AI companies. This is a landscape of thousands and tens of thousands blossoming companies that, again, that proximity to a chip factory or a chip company, as opposed to having semiconductors company all the way headquartered in the U.S. or in Europe, I think is also an advantage. In the longer term, this demand, this huge redirection of demand, away from American companies back to Chinese chip companies, is a huge boost to these semiconductor companies. They say China imports more in terms of just chips’ value than oil, right? All of that is now redirected to domestic suppliers.
The second thing is, how much do these restrictions actually matter? I’m not an industry expert, but the people I’ve talked to have said that China can produce these mature chips, 14 or 28 nanometers, and they are potentially sufficient for the kind of consumer products like cars, maybe not cell phones, but cars. Then when it comes to the military, that’s a whole different issue. It’s spurring this huge incentive to support the industry, but also coming up with alternative design features to circumvent these rules in terms of new technologies to leapfrog. That’s what many companies are also working on. So, I think it’s unclear what’s going to happen. I certainly don’t know the answer to this. I think don’t underestimate these unexpected events that will evolve and don’t also overestimate the power of these restrictions.
They’re actually not all-encompassing. From what I hear, there are lots of loopholes. It’s also very restricted to a certain set of companies. Let’s hope that the U.S. does not do more, because if it does, then it’s going to affect many of its other companies as well. It’s always very painful on both sides. But it’s not as restrictive as one might think. One interesting view, from the Chinese side, that should be emphasized is, look, if the American companies want to drop the Chinese market, it’s their loss. Honestly, it’s the second-largest economy in the world, and really, in terms of growth, it is the bright spot, given all things into consideration. If they want to forego this market, well, it’s actually a huge loss for American companies.
Kaiser: Keyu Jin, thank you so much for taking so much time out of your day to speak with me. I have so many more questions I would love to ask you, but I want to be mindful of your time. Let me just remind everyone once again that the book is called The New China Playbook: Beyond Socialism and Capitalism. If you want to find out what this new China Playbook contains because it’s becoming clearer and clearer, that’s just… I won’t spoil too much here — leave something for you to read. But it’s available wherever fine books are sold. I highly, highly recommend it. Speaking of recommendations, let us move on to recommendations. But first, a very quick reminder that the Sinica Podcast is powered by The China Project. If you like Sinica, if you want us to keep bringing you great guests like Keyu Jin, then support us by becoming an Access subscriber. Besides the fabulous Daily Dispatch newsletter, which is already a one-stop shop for China-related news, you also get access to all of our paywalled content on The China Projects website, along with, of course, access to this podcast early on Monday afternoons on the east coast of the U.S. instead of having to wait till Thursday. Show your support, become an access subscriber. All right, let’s move on to recommendations. Keyu, what do you have for us?
Keyu: I love this book by Tony Judt, a historian, called When the Facts Change. So that itself should draw the readers. This book really is so prescient in talking about these core issues and core challenges that are present today, including inequality, the return of socialist incentives, the inequality issues, what’s the optimal degree of government regulation and restrictions, and the impact of technology. I love Tony Judt as a historian, as one of the most acute, profound thinkers of the past century. And I love this book starting from the title.
Kaiser: Yeah, he’s great. I’ve read his other collection, one of his other many collections of essays called Postwar.
Keyu: Mm-hmm, my favorite. Yeah. One of my favorites.
Kaiser: I have not read When the Facts Change. This looks really good. I’m going to pick it up right away. I love him too. I didn’t know you were a big history buff.
Keyu: Well, we have to look into these to understand China economics, China and the world. History really matters.
Kaiser: It was a real great loss when he passed.
Keyu: Yeah. One incredible person.
Kaiser: Totally. I don’t know, you had a chance to meet him, I imagine.
Keyu: No. No, no, no, I have not. But his Postwar is one of my favorite history books. I mean, he’s such a profound and visionary, really.
Kaiser: Absolutely. My recommendation isn’t quite as weighty. I want to recommend this Broadway national touring production of one of my favorite musicals ever since I was a kid, 1776, which I just caught Sunday in Durham. This was something I watched again and again on VHS with my little brother when we were kids. I flew my little brother down from New York, he’s a Broadway musical producer. I just wanted to treat him. I stay with him all the time. We went and watched it together. Both of us were just crying the whole time. It was so great.
Keyu: I have to go see it.
Kaiser: Yeah. You should definitely see it. It’s kind of “wokified” in that the cast is mostly BIPOC and Black and it’s almost all female or non-binary. But it’s great. I mean, it has total fidelity to the original book in libretto. And I loved it. I cried like a baby.
Keyu: Looking forward to that. Yeah. I love these too.
Kaiser: Oh, it’s so great. It’s so great. And just watch the original movie sometime. Every song is a masterpiece and the story is great. It really holds up super well today. I mean, you look at it today and so many of the issues that they were wrestling with, the indelible scars that the founding fathers left on our society are very much there and talked about in this production. So, check it out.
Keyu: Absolutely. Thank you for that. I’ve been waiting to find a new musical production to entertain myself. So, I look forward to that.
Kaiser: Yeah. Watch it for July 4.
Keyu: Yeah.
Kaiser: Thank you. Thank you once again, Key.
Keyu: Thank you.
Kaiser: What a delight it has been to talk to you.
Keyu: Thank you so much. It’s been great fun on my part. Thank you for giving me so much time and giving my book such great prominence. I really appreciate that. And it’s great to have your platform to talk about it.
Kaiser: Thank you.
Keyu: Okay.
Kaiser: The Sinica Podcast is powered by The China Project and is a proud part of the Sinica Network. Our show is produced and edited by me, Kaiser Kuo. We would be delighted if you would drop us an email at sinica@thechinaproject.com or just give us a rating and a review on Apple Podcasts as this really does help people discover the show. Meanwhile, follow us on Twitter or on Facebook at @thechinaproj, and be sure to check out all of the shows on the Sinica Network. Thanks for listening, and we will see you next week. Take care.
