Victor Shih

I think for a while, China was quite decentralized.

So this is kind of from the mid-1970s all the way until the mid-1990s.

China was very decentralized where local governments generated a lot of revenue, but they also spent a lot of money.

And it incentivized them to do kind of

basically good things such as trying to attract as much FDI as possible, trying to attract as much local investment as possible, give tax breaks and so on and so forth.

So I think, you know, China had a very good period of mainly sort of private sector driven growth.

because of this fiscal decentralization.

And that's the understanding of, I think, most economists.

But then there was a tax centralization in 1994, basically, where the central government basically said, okay, this is ridiculous.

We don't want to end up like the Soviet Union and fall into different pieces.

We need to control fiscal income.

So then they grab the most lucrative source of taxation at that time.

And it continues to be the case, which is the value-added tax.

And so the collection of value-added taxes – and then also in subsequent decades, pretty much all other tax categories are now collected by the central government.

Then they reimburse part of the money to the provinces.

And then supposedly they say, okay, now you can spend the money as you wish.

But in reality, that's not the case.

So in reality, it's kind of like, well, if you do this thing, then I'll give you a little bit of money.

But you have to do the thing that I want you to do to get this money, to get this grant basically.

So then the fiscal autonomy, I would say, has been falling since 1994.

I mean, there are different periods.

Sometimes, you know, there's a little bit more autonomy.

So, you know, sort of from 2000 to – until recently, until 2020 –

The localities gain more autonomy vis-a-vis land sales.

So that's when the real estate market was going very well.

Even though they couldn't control the tax revenue, they could control the land revenue.

But then the central government basically killed the land market in 2022.

And now I think localities in China are highly dependent on the central government.

Yeah, Marxist thoughts.

So the former premier of China, Li Keqiang, his undergraduate degree, I think, was economics.

And he studied under one of the best economists in China.

So I think he understood economics.

So I would say in the Politburo today, there is this wing of the Politburo who are military industrialists who were trained as engineers.

And they indeed were trained in the best programs in China.

So Ma Xingrui, the party secretary of Xinjiang, for example –

in the Politburo, you know, graduated from Tsinghua University.

Zhang Guoqing also, who worked in the military industry for years, I don't know if it's Tsinghua, one of the other top science programs in China.

So they know a lot about science, but does that mean that they know a lot about governing?

I mean, I think it's a somewhat different question.

But then you also have other cases like Ding Xuesheng, right?

So we can talk about him because he's in charge of cybersecurity in China.

He has a technical background.

But in metallurgical forging, graduating at – I wouldn't say – it's not the MIT of China, maybe closer to the IIT of China.

You know, just kind of like the second tier science background.

Institute founded by one of the Soviet experts who wanted to teach China how to do metallurgy.

But does that kind of very specialized technical knowledge make you a better leader?

I think it depends on the person.

And I think what happens in the Chinese Communist Party is that as people rise up, there's certainly – you have to have political acumen.

If you don't have political acumen, you're not going to make it.

And some people on top of their technical expertise, it turns out that they have some political acumen.

But it's not something that you sort of know ex ante except for the princelings, right?

So the princelings, the reason why they're special is not just because of their –

genes, you know, they're children of high-level officials, is that they grew up honing this political acumen because their parents could teach them about it.

So then some people turn out to have political acumen.

They're pretty smart.

They don't necessarily have the best degree, you know, degrees from the best universities in China.

And they end up being very successful.

So it's not necessarily, oh, you know, all the Peking and Tsinghua University graduates, you know, they all get to the very top.

There are certainly disproportionate amount of people like that in the Politburo, but they don't dominate because at the end of the day, it is somewhat random.

So there's a lot of expertise at sort of the lower level that can feed to the higher level.

And there's some channels for doing that.

I would say a lot of channels for doing that.

So they're not so dysfunctional on that score.

But what time and again leads to suboptimal policy is the parties –

you know, sort of instinct to preserve itself.

But then in a way worse than that, to preserve its power.

Right.

So it's not like, oh, well, you know, we do this kind of thing.

You lead to a better sort of outcome, public health outcome.

And we get to survive, you know, politically.

But if they see it's like, OK, even if we do survive politically, but it leads to a diminution of our power in one respect.

You know, we have less control of the banks or like the scientists become more independent or something like that.

Then they would say, let's not do that.

You know, because it's like, what's the cost?

You know, some people die, you know, whatever.

We have slower growth for a couple of years, but we get to preserve this power.

We will go ahead and preserve power.

Well, so there's a traditional reason and then there's today's reason, which is on top of the traditional reason.

The traditional reason is that, you know, education in China, you get tracked into science as STEM or you get into social science or humanities.

If you get tracked into STEM, you may never learn anything about supply and demand.

It's just not required.

You just learn a bunch of math.

You learn a lot of engineering if you want to be an engineer.

And then there are some art classes for you to select.

You can select the art classes or, you know, maybe one econ class.

For a while, you know, learning economics was popular.

So in the 1990s, all the engineering students would have taken an econ class.

But people who were trained before that, they were not.

The one class that is still required for everybody is government ideology.

So, in fact, the requirement for government ideology has been ratcheted up in recent years so that now – because I look at all the applications of students from China and I look at what classes they've taken.

Now, once a year, they have to take a class called Situation and Policy, which is basically just the Chinese government's perspective on all kinds of different issues.

But that's not economics.

It's not accounting.

It's not some basic skill.

It's just telling people what the government prefers in a given topic.

So that's a traditional reason.

So you can have some very high-level officials.

Even if they have a PhD in nuclear engineering, they may not know very much about how the market works, how society works, so on and so forth.

The new reason is that we have one very, very powerful figure in the Chinese Communist Party.

such that even if you're a Politburo member, which used to give you some autonomy in the domain that you govern over, that is no longer the case.

You know, if Xi Jinping expresses a preference over a policy direction, that is a direction you have to go toward no matter what.

Because if he observes that you're dragging your feet or that you're pursuing a slightly different agenda, you will be perched.

And we've seen cases of that.

Yeah.

So if you look at what he does day to day, he spends a lot of time in meetings.

Yeah.

And it's astonishing.

I mean there's no – this is one thing.

It's like there's the Chinese leadership.

They're not going to play golf three days out of a week.

I mean Xi Jinping and his colleagues are having meetings about policies.

almost every, you know, like 270 days out of the year.

So I've talked to some people who have lectured, you know, to the Politburo.

I think they're somewhat real because they don't know exactly what questions will be asked.

Like I'm talking about the speakers, right?

So I think the, you know, Xi Jinping and other leaders, they know what the speaker would say in the main remarks.

But then there's a Q&A portion of it, which actually is real.

Like it's not staged.

So that's pretty scary.

You know, if you're some professor, Xi Jinping asks you to come in and ask you a bunch of random questions.

It's very scary.

So I think they are substantive.

And then, well, but the thing is also Xi Jinping will make remarks after such a lecture.

And those remarks become policy.

So you asked about the leading small group.

So this is where this ranking is very important, right?

So the head of the leading small group always has to be the senior most ranked person.

And of course, the good thing about having Xi Jinping as the head of a leading small group is that his authority is not going to be challenged by anyone else because everyone agrees he's the most powerful and most senior ranked person in all of China.

But the problem is all the other members of the leading small group are low-ranked than him.

So then – so whereas before – well, not all.

But like whereas before when decisions were made in the Politburo Standing Committee, notionally the party and also even the bureaucratic ranks of all the Politburo Standing Committee members are equivalent to each other.

So there was debates.

There were debates.

And then, you know, even sometimes overturning of the position of the party secretary general, sort of historically, you have seen cases like that.

But when most of the decision was pushed into all these different leading small group, usually there's one other person who's similarly ranked as Xi Jinping, you know, the premier of China or

or one of the other people, but everyone else would be these vice premier, ministers, or provincial governors who are definitely ranked lower than Xi Jinping.

And in no scenario will they debate a particular policy with Xi Jinping.

So at most, maybe there's one person with sort of equal standing officially with Xi Jinping who could

voice some kind of disagreement.

But of course, because Xi is so powerful informally, no one would actually dare to do that.

And so basically, the whole thing, once all the decisions got pushed into leading small groups, basically became Xi Jinping.

And it's very hard on him because basically,

Before all these meetings, there's a briefing.

You know, someone gets out a briefing book and say, OK, this is what we're going to talk about.

Here are the policy options.

Which one do you want?

He has to make up his mind.

I mean, sometimes I'm sure he consults with other people and so on and so forth.

So then he has to be really engaged with a large number of policy area on a day-to-day basis because the decisions that he make becomes the law, basically.

But if you have read thousands of these things, sometimes it's quite revealing actually.

Yeah.

It is general.

Yeah, that is difficult.

So I would say because of his upbringing as a princeling for internal party matters, how to control the party, how to control the military from the speeches, you know, some of these, they're not secret speeches, but they're like sort of

more geared toward other members of the Chinese Communist Party.

So some of these speeches, like if you go to China, you can read some of these speeches, which I have.

He has a really good political nose.

Like he knows what it takes to control the party apparatus, control the military.

On especially economic issues, yeah, it seems like some advisor gives him some talking points.

He talks through it.

There's some sense of that.

On technology issues, I think he cares a lot about it, but only from the perspective that –

Competition with the United States is a very important objective.

The Chinese Communist Party is for him personally a very important objective.

So he wants to win.

But precisely the extent to which he understands all the intricacies, it's unclear to me.

I don't think he necessarily – I don't think he does.

But then compare it.

Comparing him to American leaders, especially today, I think he's probably better prepared.

Just because in China, the experts, they talk to the top leadership all the time.

Yeah, these are all very good questions.

So I think in addition to the Science and Technology Commission that you mentioned, another very important position that he holds is that he's the head of the Office of the Central Commission on Cybersecurity.

The head of the Central Commission on Cybersecurity is Xi Jinping himself.

But the head of the administrative office, which runs the day-to-day operation of that commission, which is basically a leading group, is Ding Xuesheng.

And he took that position back in 2022.

So he's been steeped in cybersecurity for a couple of years.

I think by now he knows all the major players.

and some of the key policy issues.

His relationship with Xi Jinping is a very interesting one.

So he only directly worked under Xi Jinping for one year.

When Xi was in Shanghai, he was basically the very senior level secretary who would support whoever the party secretary of Shanghai was.

And he worked under three different party secretaries of Shanghai,

supported Xi Jinping for one year.

For some reason, Xi Jinping just trusted him absolutely after that.

And it's a mystery.

And, you know, I've looked at all the open literature.

I've asked people in Shanghai.

Nobody knows why that's the case.

I mean, almost certainly, I think one reason is that he was gathering a lot of information about the other leaders of Shanghai and sending all that information to Xi Jinping.

to basically let him know, because at that time, as you know, the previous leader of China, Jiang Zemin, had a very big stronghold in Shanghai.

So basically, Xi Jinping had to sort of break that apart before he could assert control over Shanghai.

Ding Xuesheng likely was one of the people who sent all this necessary information to Xi Jinping in order for him to do that.

But beyond that, I mean, lots of people do that for Xi Jinping, truth be told.

So beyond that, what else has he done for the big boss to earn his trust, I think is a big mystery.

But the manifested outcome is that Xi trusts him a great deal.

Because in 2013, he was promoted to Beijing to be the second-in-command in his personal office, handling all the flows of data in and out of the desk of Xi Jinping.

So that's a very important position.

He became the first-in-command a couple years later.

He took control over the entire apparatus.

that govern Xi Jinping's day-to-day life back in 2017.

Now he's a vice premier in charge of cybersecurity.

So clearly this guy is trusted.

You know, his preference for AI, AGI, so I tweeted this Davos speech, which you also looked at.

I think it's very revealing, right?

So you look at it, you're like, wow, what's... So what he said was, we need to invest in AI.

But we need to do it – we can't go all out in investing in it without knowing what the breaks are.

We have to develop the breaks also at the same time.

I think that's extremely revealing.

So, basically, it's very different from the American approach because in America, it's all driven by private sector.

And, of course, all these – except for one or two companies, everyone just –

invest, invest, invest, and try to reach AGI as soon as possible.

For the Chinese government, they're very afraid that some actor outside, but even inside the party is going to use it as a tool to usurp the power of the party.

So they want to know that they have a way of stopping everything if it comes to it.

So for them, developing the brakes is just as important as developing AI itself.

Thus far, it seems like it's under cybersecurity leading group.

So Ding Xiuqiang would be in charge of it.

There won't be a new group.

I don't think so.

Because for the party, it's a security aspect of it that's the most important.

Yeah.

I mean there's one aspect where it's like, yeah, it would be great to automate all industrial production.

China is doing a good job doing that already.

I don't think they need additional infrastructure, sort of governing infrastructure to allow them to do that.

But on sort of applying AGI or AI to governance –

to even service sector generating video content for people doing even like travel agency stuff, the party is very, very paranoid that some hostile actor outside of China, certainly they believe that very strongly, or inside of China is going to do something

And the AGI is going to take off and it's going to undermine the party's authority.

So I think basically what we're going to see in terms of institutional development is not at the top end but on the lower end.

So they will want to designate human beings in all the government agencies, in all the commercial entities that are using AI or AGI to put their foot on the brake if it comes to it.

No, no, no.

I mean, they want to develop it, of course.

They'll pour a lot of money.

They'll try to give DeepSeek as much help as possible, you know, sourcing GPUs, you know, whatever, all this kind of stuff.

But I am all but certain that there is one or maybe a team of people in the headquarters of DeepSeek who can pull the plug.

Interesting.

If necessary.

Because there is such a team of people in every major internet company in China.

Yeah.

What would cause them to pull the plug?

If subversive, yeah, so if AGI started generating, you know, Falun Gong related content and it proliferates very quickly beyond the capacity of the sensor to control it, then they'll have to stop

You know, the algorithm from generating new images and new videos and so on and so forth.

Yeah, it could be.

Yeah, so that's interesting.

So the physical investment will have to share power with some other leading group.

Yeah, so I guess that would be a justification for AGI leading group of some sort because building power center that falls under NDRC, it could be under Li Qiang or He Lifeng, especially He Lifeng, which is in charge of investment and financing.

But if Xi Jinping doesn't want He Lifeng to share that power, then we'll have to give it all to Ding Xuesheng.

and then give him a lot of power.

I mean, he can just do it by fiat or create a separate organization to make it happen.

At this point, as you know, data centers are being built in China in a very fast clip, and I think they're just using existing command structure.

There is potentially a foreign aspect of this, right?

So it's like you build up all this cloud computing capacity in the Gulf states.

Who's going to be the customer?

You know, who's willing to pay billions of dollars to use it?

China, right?

So then the foreign policy apparatus will have to coordinate that and so on and so forth.

I think it does matter.

Yeah, so you have some decision makers who have shown to be not very good, and even politically not very good, but nonetheless, for some reason, they're trusted.

I mean, maybe precisely because they're not very good.

They're very dependent on Xi Jinping that they get promoted.

The chief negotiator with the United States, He Lifeng, vice premier in charge of finance,

He is well-known for starting and perpetuating the largest real estate bubble the world has ever seen in Tianjin.

I don't know if you went to Tianjin.

There are just empty buildings everywhere.

So there's the new Manhattan, literally the size of Manhattan, filled with empty office buildings.

He made that happen.

Actually, it's cool to visit.

But it's like, wow, this is great.

What are you going to do with the buildings?

I don't think so, yeah.

Yeah.

So then there – it really depends like who's in charge of Asia.

Yeah.

So Ding Xuesheng really is a mystery.

I think he has great political acumen.

He must, you know, in order to gain Xi Jinping's trust.

He has some technical background but it's metallurgical forging.

Yeah.

But he's worked in Shanghai for decades.

So he knows how private corporations run.

He knows a lot about international trade, FDI.

So I think, you know, if you look at the sort of people in the Politburo, Politburo Standing Committee, I would say he's definitely in the top quartile of people that you would want to be in charge of AI, if not the top, you know, two or three people.

Interesting.

I mean, one thing that I would say about AI is that content creation is going to be a big roadblock for China because China is so paranoid about the content that flows on the internet that they put human beings all over the place to slow things down, slow the transmission down.

And now if you have AI creating tons of content, there will still be human beings, algorithms and human being double, triple checking the content because they're just so afraid of some subversive content getting out.

But even if that were the case, even if you train something that you think is pretty good, they will still want a human being checking everything.

Yeah, no, I've been using AI quite a bit.

I mean, both to sort of code data, you know, it used to be like text, hand code stuff, and now a lot of it can be automated.

But in terms of finding out what the Chinese government is doing,

I think some of the American models are okay, like ROC is okay, but the most helpful has been DeepSeek.

So to me, it's quite clear that DeepSeek, which of course was first developed by a hedge fund to trade in the Chinese market, part of what they really trained the model for was to detect important policy documents and meetings within the Chinese government.

Because

When you enter, you know, the right or even not even like especially sophisticated prompts, you know, just like, you know, what is Chinese government doing when it comes to AI?

It comes out with a bunch of very high quality links, which is very useful for my research.

So then, you know, immediately you get a sense of like, what are the latest policies?

What are the latest statements by high level officials?

It seems that DeepSeek puts some, you know, higher weighting, let's say, on this kind of content.

So I don't dare to install it on my phone, but I certainly have collaborators who have downloaded the open source model and installed it into a hard drive, and I use the web interface for some of my research.

So I've used, you know, sort of Baidu's thing.

And so I think the typical Chinese language models are more trained on social media content, which will, you know, come back with hits that are like more social media.

It's like, oh, you know, if you ask about AI, we'll talk about like how AI gets used in different things instead of this kind of policy documents and meetings and so on and so forth.

So it seems, you know, just from an inductive observation that DeepSeek, you know, is trained on this kind of content.

So that high flyer can make trades.

Yes.

So the high flyer can – I mean obviously China being China, government policies have a huge impact on how different stocks do.

Right.

And that's often where you would find the alpha.

In the old days, people used to call up their friends who worked for this and that ministry to get insider information.

But I think what high flyer –

has discovered would also generate alpha is to really use our rhythm to look closely at these policy documents.

Yeah.

So the Cultural Revolution generation, I think, you know, a lot of people suffered horrendously, including Xi Jinping himself.

But then basically you have two types of lessons that people drew from it.

So the first lesson is like, oh, you know, the party is too dictatorial.

You know, China needs to liberalize and so on and so forth.

So you have a lot of people from that generation who feel that way.

Many of them now live in the United States.

Basically, they try to leave China as soon as possible in the 1980s and succeed it.

But for someone apparently, for Xi Jinping himself and others like him, the lesson was just don't be on the losing side.

In any political struggle, make sure you're on the winning side because if you are on the winning side, then you can do terrible things to your enemies.

So that apparently is the lesson that he learned.

And he basically honed his skills and built his coalitions for the time that he would take over high-level positions in the party for decades as it turns out.

So if you look at the data, when he was in Fujian province,

He spent an enormous amount of time hanging out with military officers in Fujian back in the 1980s, you know, late 1980s, early 1990s.

And then you're like, well, why did he bother to do that?

You know, most local officials, they don't do that.

I mean, you know, the military is there.

You need to be nice to them and all this stuff.

But like he built a dormitory for them.

He even joined a unit of anti-aircraft regiment.

He tried as much as possible to do as much as possible with the military because he knew he needed the support of somebody in the military when the time comes.

And guess what?

Sort of 30 years later when he was about to –

be elevated to be secretary general of the Chinese Communist Party, many of the people that he knew back in Fujian are now generals.

They're in charge of important military units.

And once he came to power, then he really promoted some of these people.

But then lately, of course, he's purging some of these people, which is really interesting.

Yeah, yeah.

Yeah, he had a strategic vision about his own career trajectory, and he pursued that in a very determined fashion, I would say.

Yeah, I would say early in their career, they're very similar.

So outwardly, they're very low-key.

Stalin was the bureaucrat, very low-key, not flamboyant, not making loud speeches like Trotsky did.

But low-key, getting things done, seen as a very reliable person.

This was a reason why Stalin was chosen.

As far as I know, I don't know that much about Stalin.

Same thing with Xi Jinping.

So-

His father belonged to actually the liberal faction in the Chinese Communist Party.

His father never offended that many people within the party.

I mean everyone at a high level will have sort of screwed over somebody along the way.

But his father was in the better category, let's say.

And he himself was very low-key.

While the other princelings were fighting for very good jobs in the capital city of Beijing or in Shanghai, Xi Jinping said, oh, no, it's OK.

I'll go down to the villages.

I'll work in Hebei in the rural area.

Then Fujian, which was kind of a peripheral area.

And then Zhejiang was slightly better but still not Beijing or Shanghai.

So he got out of the way of this political infighting.

I think similar – in a similar way that Stalin did.

Like he – early on, he did not confront people too much.

But once he came to power, he knew – they both knew what it took to control the party which they govern over.

Basically, you form a whole series of coalitions.

to get rid of your most threatening enemy at a given time.

So for Xi Jinping, it was like, oh, well, you know, this guy, Zhou Yongkang, who controlled the police forces and also the Ministry of State Security at the time, doing all this irregular things, being fabulously corrupt, he's a threat to the whole party.

So he convinced Hu Jintao to join with him to purge Zhou Yongkang, which was successful.

Stalin did the same thing to Trotsky.

And then after the most threatening person is gone, you form another coalition to purge the next person and so on and so forth.

So they both basically did that until they achieved absolute power within the party.

Yeah, yeah.

Yeah, Bo Xilai.

Bo Xilai, okay.

But because he was so high profile that he never had a chance to be the top leader of China.

And then, of course, Xi Jinping made sure that he would fall.

Right.

And now he's in prison.

And now he's in prison.

He's alive.

His son is in Canada, actually.

He's on Twitter now, on X. I should reach out, honestly.

He'd be an interesting person to talk to.

Yeah, it just keeps growing in absolute size because basically China is trying to tell the world that they don't have a high debt level, which at the central level, that is sort of the case.

You know, it's still 60, 70 percent of GDP.

But the reason why that is the case is because there are a lot of things the Chinese government would like to do.

They push it down to the local level.

But the authorization of local debt issuance is authorized by the central government.

So at the end of the day, it's really the central government telling local governments like, OK, you need to do this thing.

I'm not going to give you money, but I will give you the authorization to issue even more debt.

So the debt level keeps going higher and higher.

The one thing that has alleviated the cash flow pressure late last year was –

the central government authorized again the issuance of close to 10 trillion renminbi in special local debt to repay some of the higher interest-bearing

debt of local governments.

But that's an accounting exercise.

It doesn't literally decrease local debt.

It just changes from higher yielding to lower yielding.

Meanwhile, the overall size of local government debt in China, I would estimate to be 120% of GDP to 140% of GDP.

Whoa.

The central government.

So total governmental debt is, yeah, it's pushing 200.

Yeah, they build all the high-speed rail, all the infrastructure, the beautiful infrastructure that you do see in China, and then more recently, industrial policies.

For example, if there's a new science park for AI, let's say, the land that they acquire, the infrastructure that's built is all built with borrowed money.

Then there are these startups, and the startups are partially financed by some of these central level investment funds that you read about, industrial policies.

But then actually the local government also have their own CEDAR funds, which uses borrowed money to finance some of these venture deals.

So a lot of it depends on like your social network and your connections.

So if you're a startup at Tsinghua University, you have access to private sector funds, but also some of the central government CEDAR funds.

If it falls in the right category, you know, semiconductors, AI, et cetera, et cetera.

But if you're – Liang Wenfeng, I don't know.

So Liang Wenfeng, because it started out as a financial institution, so it was mainly sort of private sector money from financial investors.

But there are other AI, especially sort of more hardware-driven initiatives in the provinces, which are seeded by local government funds.

Right.

And the point about financial repression is that without financial repression, an investor in China can invest in Silicon Valley.

They can go to Sequoia and invest money.

But because of capital control, they cannot legally move more than $20,000 a year out of China.

They have to find domestic investment.

So as a result, many of them choose to invest in Chinese high tech or they choose to put their money in the bank.

So actually a lot of people just choose to put their money in the bank and then the state banking system is then financed to – they have the deposits with which to lend to local government CEDAR funds for industrial policies.

Inflation rate is very low in China, right?

Well, so at the deepest level, I would say there is a deep fundamental difference between capitalism and socialism.

And it sounds very philosophical, but I think this might help sort of your Gen Z listeners think about this.

Because for socialism, they only care about output.

It's like, okay, whatever capacity we're thinking about, whether it's grain production or metal production or these days robotics, we just want more of it, right?

So then the state can use the state banking system, which they control, to allocate a huge amount of capital to maximize the output of all these different things that they care about.

But when you maximize the output, you don't necessarily make money doing that.

Whereas capitalism wants to maximize profit, which is, as you know, the difference between the cost of production and the amount that you can earn from selling the output.

For socialism, they don't care about that.

Well, no, but because the financial system is socialist, they're forced into socialist-like behavior.

You know, you can't go into a bank and say, look, I make robotics.

This robot that I'm going to make is going to be highly profitable, you know, down the road.

But I can only make like 10 of them.

And then the bank would be like, well, this is BS.

I know a lot of startups don't make any money.

But at some point, notionally, you have to start making money.

Whereas the socialist banking system basically says, you know, even if you never make any money or hardly any money, that's okay.

As long as the Chinese government tells us that this is a strategic sector, as long as you can prove to us you can actually produce the thing that we want you to produce.

If you never, ever make money doing that, that's perfectly fine.

Well, so this is where the bureaucracy steps in.

So it's like, well, how would a bank tell what's a good company and what's not a good company?

Yeah.

So then there's a complicated system where the Ministry of – so let's say for robotics or for semiconductors, there is a sort of expert group in the Ministry of Industry and Information Technology that will assess all these different projects.

So the banks will literally send them and say, okay, this company wants to borrow $10 million.

Do they have real technology?

Is this a good prospect?

And some bureaucrat supposedly with no financial stake in the company, completely neutral supposedly.

I say supposedly because in reality we've seen many cases of corruption in conjunction with an expert panel who, again, with no any relationship with the company or with the bank.

will sign off on these projects or reject these projects, get sent back to the bank, and the bank says, okay, these bureaucrats say that your project is good.

You're good to go.

Here's $100 million.

But it seems to work.

Yeah, yeah.

Central planning isn't supposed to work, right?

No, no, no.

So there's selection bias.

We see and pay attention to the cases that work.

And there have been some fabulous success case, which, by the way, does not include Xiaomi or BYD because those were mainly privately funded at the beginning.

So the success cases actually are not that.

I mean, but there are, you know, I'm sure that I don't know the cases, but like there are, well, Huawei.

So I would say like Huawei, it is there was a lot of state funding along the way and so on and so forth.

So you have success cases, but there are so many failed cases and billions and billions of dollars just thrown down a hole basically for the failed cases.

In fact, for a semiconductor, things got so bad that they had to arrest a whole bunch, dozens of people in the ministry of information technology.

or industry and information technology who were in charge of approving these semiconductor deals, they all went to jail because they were in a deal where, you know, some companies submit a bogus project, they approved it, they got a part of the money, and so on and so forth.

So it doesn't work very well.

I mean, of course, you have fraudulent cases in the U.S.

also, you know, all that kind of stuff.

But the scale in China, the waste in China is a much larger scale phenomenon.

Yeah.

Oh, yeah.

No, I mean, you definitely see it.

Like, you know, for an economy that's been growing five plus percent for decades, you by this time, you would expect, you know, pretty much the vast majority of the population in China, having all the basic necessities, shelters, medical care, etc, etc.

You don't see that.

You know, a lot of migrant workers, they're barely getting by.

The homelessness is increasingly a problem in China, especially with the labor market being so fickle these days.

Elderly care is pretty abysmal, you know, very basic level, let's say, for a lot of people.

Not for everyone.

So some people get very good elderly care if they worked for the government or SOE previously.

So you see a lot of problems that the Chinese government has overlooked.

So this is why I'm saying they have a goal of making all Chinese people very happy and fulfilled.

One part of it is being fulfilled, the technology part, but the other part of truly making people living a good life.

They're not making as much progress as they should, I would say.

No, so the private sector stuff works a lot better.

You have occasional successes from the state finance system.

So I wouldn't say that there are no success cases.

But I would say that for every success case you see,

There are just maybe even over a dozen failed cases, which, of course, you have failed cases everywhere in VC.

But the amount of money being wasted in the state financial system would be much larger.

Yeah, so we can talk about that.

I'm a bit skeptical about that for the case of China.

But yes, indeed, as you said, some places like Shanghai and Guangdong, they're still in relatively okay fiscal positions.

But then there are other sort of wealthier provinces with a lot of debt also.

So Zhejiang province,

which is where DeepSeek is located actually, and also Alibaba and all these tech companies, they have a high debt load.

But because they start from a pretty wealthy place, they can still service the debt without too much difficulty.

But actually a trade war is going to make it worse for Zhejiang province because a lot of the manufacturing export firms are also in Zhejiang province.

But nonetheless, the case of China is that basically the financial system is geared toward fulfilling the priorities of the party, i.e.

the priorities of Xi Jinping.

So even if they can't do anything else, they will do the things that Xi Jinping wants them to do.

And AI apparently is one of the higher priorities for Xi Jinping because he's held multiple study sessions.

He's had different Politburo meetings and so on and so forth.

And Ding Xuesheng, who's one of his most trusted lieutenants, is in charge of it, et cetera.

So I do expect a fair amount of resources being devoted to it regardless of the situation and local debt.

I mean, in fact, at the local level, things are so bad, but they just don't care, right?

So there are civil servants, teachers who are not paid.

four or five months out of the year.

And then you can say, well, how can you run a government like that?

Wouldn't it just collapse?

But then you have to look at the outside options.

You know, for your teacher, for your very low-level bureaucrat, what option do you have?

I mean, do you want to go back to delivering food, you know, to people?

Or would you rather at least take six, seven months of civil service salary?

At least you have healthcare.

At least you can get your free lunch at your workplace cafeteria every day.

people still choose to work for the Chinese government, even if that were the case.

But a lot of the previously very generous fringe benefits and so on and so forth, that has all been cut down because of the local debt issue.

But they're still pouring a lot of resources into national defense and AI and technology.

Well, so it was very productive.

I mean I think you noted in this Art Kroeber book review that you did in the 1980s and 1990s because China lacked a lot of infrastructure.

But once you build the first high-speed rail between Beijing and Shanghai, you build the second one, you build the third one, there's very rapidly diminishing return.

Yeah.

Also, as you know, the population is basically shrinking in China and especially in a lot of cities in northeastern China and also in southwestern China.

So you really don't need high-speed rails connecting those cities to other places in China because nobody lives there anymore.

So when you invest in a large infrastructure project, a lot of money changes hands.

And that is – so, well, so this is a big debate in my field also.

You know, some people are like, well, look, you know, like the more you invest, the more likely you're to get promoted.

My argument is that it's not the actual investment.

It's the rent seeking that comes along with the investment, right?

So, you know, you have to get a contractor for cement.

You have the contractor for this and that.

You get a big envelope under the table as a kickback.

Then that allows you to pay your superiors because you – let's say you did a billion-dollar investment to build light rail or something like that in a city.

You got $100 million payout from all the contractors.

You can give your superior $50 million to thank that person and to up your chance of getting a promotion.

Interesting.

And so I would say that's more the realistic mechanism for linking investment and promotion than like, oh, good job.

You generated investment and GDP in this city.

We're going to reward you with a promotion.

In fact, there's really good work by James Kong showing this.

It's like basically – also like when you do a real estate deal.

You can sell land cheaply to politically connected princelings, and then they will lobby on your behalf for your promotion.

And statistically, there is an effect.

So if you sell land cheaply to princelings, your chance of promotion goes up.

Yeah, it is.

So basically all the regulations in the U.S., environmental, this and that, builds its own sort of stakeholders and lobbying group.

And then it's in the interest of these lobbying groups to prolong the process so that they can absorb a higher share of the rent.

Whereas in China, because they have this command structure headed by the Chinese Communist Party,

the secretary of the city or province can cut through all the red tape because he's the boss of all the regulators at the local – most of the regulators, let's say, at the local level.

So if he wants to do something, he can cut through all of it as long as he can benefit somehow himself.

Yeah.

So I think that would be – I would say that's the difference.

Interesting.

Because if it's 100% of GDP, it's like tough.

And then use the savings to bolster domestic demand with welfare policies and to gradually decrease overall amount of local government debt.

That I think is economically sound because it's like China already has the largest navy in the world.

Why does it need a navy that's even bigger than the largest navy in the world?

It doesn't need that.

I mean it has more than enough for national defense.

It has some of the best jet fighters in the world already, some of the best missile systems.

Like no one is going to invade China or come close to it.

So they actually don't need it.

I mean the tech –

I mean I do – I'm somewhat sympathetic to China because now that there's US policies preventing Chinese companies from buying all the chips and AI.

So it wants its own capacity.

It's spending a lot of money on it.

So that part I'm somewhat sympathetic.

But other aspects of industrial policies, you know, for some of the battery stuff or solar power, et cetera, it can certainly reduce a lot of subsidies.

It can increase taxes actually on many export-oriented firms, which is one of the reasons why there's a big trade surplus in China and trade imbalance between the U.S.

and China.

Right.

get more revenue that way to finance domestic demand and to pay down local government debt over time.

The Chinese government, of course, will never do that because it has a very high – places a very high priority over competition with the US across many different front and to get dominance over multiple supply chains.

But, you know, in a world of global trade, why do you need that?

I mean, the same thing goes for U.S.

The U.S.

doesn't need, you know, dominance over every single supply chain.

Why not get rid of the regressive taxes rather than – Because, yeah, if you just get rid of financial repression, it will only benefit the savers, which is 10 percent of households, net savers, 10, 20 percent of households.

If you look at median households, they have very little savings actually besides the home in which they live.

Yeah.

So there's this misconception.

It's like, oh, China has like the largest savings deposit in the world.

And that's true.

But if you look at the distribution of the savings deposits, it's highly concentrated in the hands of 10%.

So even if you say, oh, okay, deposit interest rate suddenly goes up to 4%, it's only going to benefit the people with large amount of savings.

Most people, they're not going to benefit from it.

Most people, if they don't have better welfare services, they're going to save like crazy in anticipation of getting sick.

So you do need better certainly medical care insurance in China.

I mean that's something frankly I worry about the US.

If you cut back on Medicaid, it's going to encourage precautionary savings, which you can say, well, but that's a good thing.

Americans save too little maybe, but then your short-term consumption is going to come down.

Right.

So first of all, I think we do know something about Xi Jinping's preference mapping when it comes to this issue.

He has said a number of times that obviously China should be united.

So I do believe that's sincere.

But clearly his desire to achieve that is not so strong that he would take a very risky gamble achieving it because if that were the case, he would have done it already.

He's been in power for 12 years.

You know, he hasn't done very much.

I mean, you know, certainly the amount of pressure on Taiwan has ratcheted up.

And also from his other policymaking, we know that he's not a reckless policymaker.

Well, do you think that was reckless?

Well, so that was actually conservative, right?

So he preserved the lockdown longer than was necessary.

If he wants it so badly that he would just do whatever it takes to get it, he would have done it already, right?

Right.

So, yeah.

So then we've seen the Chinese government engage in all this behavior, stockpiling, you know, this and that, like oil, grain, and so on and so forth.

Enlarging its navy, you know, building all this landing capabilities and so on and so forth.

So then one argument is like, well, so there's a threshold.

Once he feels that he reaches that threshold, then he'll go for it.

But then for me, it's like, I don't think that threshold is fixed.

It's really conditional on a lot of different things.

And there are some exogenous factors that will increase the threshold.

Other exogenous factors will lower the threshold.

So I would say more recently, one factor that might have increased the threshold for him acting

is what happened in Ukraine.

So Ukraine, you have a case where Putin was very confident about taking over all of Ukraine within a short period of time.

Turns out he was wrong.

He was getting all this bad intelligence, so on and so forth.

I think for Xi Jinping, he cannot discount that possibility.

And that very likely increased the threshold.

But then there could be other factors that lower the threshold.

Yeah, so this goes to a question of the role of expertise in the Chinese government.

I think that's a very interesting question.

I mean, frankly, I'm trying to use some kind of data to try to assess that.

But my intuition is this.

The top leadership always listens to experts, right?

So unlike some cases in the U.S., the experts are respected.

They're listened to.

But there are sort of interest groups that are close to leadership.

They also know that.

So they will present different kinds of experts to tell him different sorts of expert opinions.

So sometimes you would get these conflicting advice from different experts, and he will have to make some kind of gut call.

Other times, for political reasons, they will just ignore the experts.

So they will never say, you know, fake news, we don't believe in science, and so on and so forth.

Sometimes, even though they know for sure the experts are right, because of other political reasons, they'll say, okay, you're right, but we're not going to do what you want us to do for now for a bunch of political reasons.

Yeah, so I think the timing of it, also the decision not to buy Paxlovid on a very large scale, that might have been some kind of political decision.

We have a paper, actually, I should have sent it to you, showing that basically the experts told them the U.S.

vaccines were better, mRNA vaccines were better.

But the Chinese government said, okay, we believe you, but still we want to help our domestic pharmaceutical industry, so we're going to only sell the domestic stuff.

in China.

So that's very clear.

If you look at the propaganda, they began to denigrate the Western vaccines and highlight the Chinese vaccines and so on and so forth.

But I think they do meet with experts a lot.

Sometimes the experts are manipulated into saying certain things.

Other times the experts are sincere.

They listen to them, but they still choose to not implement what the experts recommend.

Well, so they're technocrats or people who know a lot.

But I guess, yeah, generally speaking, protecting the party, protecting the state apparatus and all the important tools of the Chinese government will almost always be a higher priority to any kind of technical considerations in a given decision making.

So it's like, well, why protect all these pharmaceutical companies?

Because they're state-owned enterprises.

They need to survive the ordeal.

They need to have a national brand name.

And also, of course, pharmaceutical and what they call new biology is in one of these industrial plans in order to finance some of these future research in advanced biology.

These companies need cash flows.

There are no plans right now.

There are no plans.

Okay.

Yeah, I think that would be an issue.

Yeah, if he were to drop dead tomorrow.

What would this power struggle look like?

The biggest impact is this, right?

So right now, financial repression works because – so let's say you're a billionaire.

You try to get your money out of China.

You make up some fake paperwork.

I'm importing a million Rolex watches from Singapore.

I need to pay an invoice for a billion dollars.

That order will go from your bank to the state administration of foreign exchange in Shenzhen or in Shanghai.

And some bureaucrat will have to okay it, right?

Large denomination outflows.

Right now, that bureaucrat is like, if I approve this, someone in Beijing is going to notice it, and I'm going to be in jail within a week.