Keyu Jin

I remember people of that generation told me one time that society was going to focus on the economy. Really? Why would they do that? Wasn’t it politics? Wasn’t it everything about politics and struggle and ideology? So for them that the whole country and the government is going to focus on the economy was just so shocking. Even though we take it for granted now. That shows you that breaking that mold was incredibly difficult. But I think opening up was a really momentous thing that China did. And it wasn’t just joining the WTO, they were doing a decade of work in preparation leading up to that. What’s called Special Economic Zone is really to turn Shenzhen from a fishing village to an export platform, now to a Chinese-style Silicon Valley. And there was the agricultural reforms in the 1980s that meant that farmers could decide what they were going to grow and keep the surplus. Whereas it was a collective system before. You know that very well.

And then of course, the ultimate transformation was when China actually joined the WTO in 2001. And the rest of it is history. We’re still talking about the aftermath. But reforms was the single biggest impetus to Chinese growth. And every time there was a major reform, it was followed by a good decade-long growth. Every time growth went down, there was a new series of major reforms rolled out and then, oops, that led to another wave of good growth. But I’d say that reform pace has slowed in the last 15 years, but are there reforms to be done? Yeah, absolutely. Has China reached even close to its potential? Not at all. But again, it comes back to politics. Now it’s less about economics, it’s more about national security, it’s more about politics. And I think that is probably the single biggest barrier to continued good economic growth.

Maybe can you speak to what it takes in such a large system, in many ways such a successful economy, to do reform? So you mentioned pragmatism. Deng Xiaoping famously said that, “It doesn’t matter whether the cat is black or white, as long as it catches mice.” So there’s that pragmatism that I think underlies a lot of great reforms

As a contrast to Soviet Union, the Chinese economy, as I mentioned, was extremely decentralized. In Soviet Union, the ministries were in charge of essential bureaucracy. But a lot of the power were given to these provincial governors, party secretaries, mayors of different sorts, and they were incentivized. That’s the key is that these mayors were incentivized to do a good job. If I were successful on a radical reform, if I were successful, I’d be a national hero and then that reform will be rolled out in every single city in the country over time. And I’ll be promoted to the higher run of the central government. And who knows, I might even become vice premier, premier president one day. That was how the individual was motivated to carry out these really tough reforms. Now China has changed a bit. It’s not about being radical and radically successful. It’s about being safe. So when you shift from basically an entrepreneurial state to a safe state, then the objective function changes and you see it in different economic outcomes. Mayor economy and GDP growth race

So maybe can you speak to that? What are some important things to understand about the structure of the Chinese state?

Well, the central leadership politically is extremely powerful and it’s very consolidated. But they hold a very crucial key to the local governments, which is that they decide their fate. Am I going to promote them? Am I going to put them in jail? Am I going to fire them? Am I going to reward them? Am I going to punish them? They hold that crucial key. And I think what was very surprising for most of the Western audience is that when I mentioned about the mayor economy, they say, “Why don’t our American mayors in each city do these very radical things and then push for GDP growth and technology innovation?” It’s quite different. I think this is where China’s very unique in the world, is that political centralization, economic decentralization, and the yardstick to measure local mayors’ competence through, in the first stage, it was GDP growth.

So I am a mayor of the city of Nanjing in Jiangsu province. I’m going to peak at my neighbor mayor’s city’s GDP growth and I’m going to be very, very competitive. By the way, I forgot about that. Competition is extremely competitive among the local government officials because you are competing with other mayor for a top job. So you need to do better than them. And whether that was an efficient structure or not, I cannot comment. But it certainly just fueled this massive and rapid economic expansion. First it was industrialization. Everybody wanted to do exports. Then they discovered, oh my gosh, we can have so much fiscal revenues coming from land, selling land and real estate. Let’s build real estate and let’s urbanize. And then the money kept coming into these local governments and that they can spend it on nurturing more companies or supporting real estate or supporting investment and they can do a better job.

So then it was geared towards real estate. And that’s how the property cycle became the big thing. Everything was at double speed because of what the local government’s incentives were designed to do. I say now that China’s biggest challenge is consumption, it’s not production. We know that China’s very, very competitive in production and supply. China needs to be a consuming country to be a rich country. Why don’t you put consumption as part of the yardstick for measuring local governments? For a while it was environmental protection. Guess what? Very few of them really want to do it seriously because it goes against the incentives of driving growth. They would suffer on GDP growth if they were very serious about environmental protection. So for a couple of years, nothing happened in China on that front. And then the central government got really concerned and even angry and frustrated, so they decided to put that as a penalizing factor. And then guess what happened? Well, actually environmental protection sped up and in a matter of a short few years, I see blue skies every day in Beijing. That’s how it works.

So GDP is a measure of success in production. What’s the measure or what does it mean to be successful on the consumer side? You said it’s important to improve that. What does it mean to be a successful consumer nation?

The metrics shouldn’t be geared just towards GDP growth alone. It was just singular GDP growth and you can borrow heavily and just spend on infrastructure. That’s not a productive way to drive the economy. That’s what the local governments were doing for a long period of time. In the last few years, innovation, unicorns have been an implicit yardstick for local governments. That’s how we’ve seen these great EV companies. 80 cities doing EVs. I mean, do we really need 80 cities to do their own Evs?Solar panels. Now DeepSeek has become a star. Semiconductor companies. Each local government wants to have their own national champion.

So implicitly technology was part of the yardstick competition as well. But if you can more accurately have a metric for consumption measures, really focus on making sure that it’s coming from consumption this GDP growth rather than from investment or infrastructure, then I think that it might focus the government’s objective a bit more on thinking about how to make people feel more secure so that they want to save more. For instance, creating more jobs, for instance, more on Social Security spending, on healthcare, on elderly care. Because for the longest period of time, this political economy model was brilliant as scaling up supply, but it was extremely weak at raising personal consumption. Because the incentive does not lie in consumption, it lies in production. So you shift the objectives a little bit and maybe the local government will do more to stimulate consumption.

Okay. You mentioned the mayor economy. That seems like an incredibly powerful idea. And you also mentioned that perhaps you’re not sure exactly how perfectly efficient it is and what efficiency there means, how good are you at quickly figuring out the best ideas? That’s what an efficient market does. There’s a component to what you’re saying where you’re a little bit critical of do you really need 80 EV companies? But maybe you do. That seems like an incredible thing to do. So what are the pros and cons of this? Maybe you can speak to it a little bit more.

I think it depends on the timing. If you’re starting something, starting a new emerging strategic sector like EVs or batteries or solar panels, you need the local governments to be involved to mobilize. The big push to coordinate the supply chains. If you wait for the markets to develop over time, it’s going to take a long time. Maybe they don’t even want to do it. Look at the US. The US is very, very behind on some of the new strategic sectors. But once you’ve reached a certain level of market competition, I think the state needs to withdraw or to retreat.

Because ultimately the state is not the best at allocating resources, picking winners. You want the private actors, whether it’s the venture funds or through market competition, to ultimately decide who gets the most resources. But in the beginning, that big push is not really in any of the canonical models that I’ve studied in economics in the Western school of thought, state push, state mobilization, state initiation. That’s not there. But I think if you look at EVs, solar panels, even just thinking about the idea of reforms in the first place, that initial state push was vitally important.

The other negative, although I think by and large positive aspect, is I don’t think that we need 80 cities to do their own EV brands, but to get started, maybe that’s what it would’ve taken to drive that incentive. And then ultimately, it’s up to the market to decide who are the last five remaining EV companies through market mechanisms. That’s Chinese-style industrial policy. Industrial policy was heavily criticized and again, if I talk to my Harvard professors, they’ll be very, very, very skeptical about the role of the state, especially in such a major way. But if you look at the Chinese experience, the evidence for success is all there. The cities that have pushed the most on supporting that particular sector ultimately did the best in terms of production, but also in terms of innovation, measured by patents. It’s all in the data. But the downside is that a lot of the capital is wasted. And this is what I also discussed in my book is that it is inefficient, although maybe it’s necessary. The amount of waste of investment plowed into these companies that will ultimately just go under, but also the misallocation-

… Ultimately, just go under, but also the misallocation of resources, because it’s led by the state, are some of the downsides, but I guess on balance, it’s been positive, because look at China’s internal combustion engine effort. Nothing, right? Semiconductors. Thanks to Biden, thanks to Trump, it’s improved dramatically, but all these things that they tried to do before, they couldn’t do, but when it’s a new thing, like something that there’s no incumbent, no particular advantage in any country. Actually, China’s really spearheading these sectors.

Can we linger a little bit more on this mayor economy? It just seems like such a powerful thing, where one mayor looks over to the next and looks, even just a trivially simple number like the GDP. Why don’t we do that in the United States or in the West more, just compete on GDP?

Well, you need to be elected and reelected, right? Is that what your electoral base cares about? In China, it’s what the central government, your boss, cares about. If you ask the consumers, they’d rather you spend on social spending, right? The things we talked about that stimulates consumption, on education, on healthcare, things that stimulate demand, it’s te difference of political system.

Maybe, can you speak to the difference? Another difference is the long-term, multi-generational thinking that permeates Chinese culture, so how does that differ from the western-style capitalism of quarterly-focused thinking?

The Chinese are both the most patient and the most short-termist economic actors I met. The patience, I don’t need to explain, because I think the political continuity means that they can make plans for two decades ahead, right? Even longer. The investment of Chinese parents in their children is a multi-decade long project, and they save. Chinese people love to save, because they think that they’ll have even more money if they save that money, rather than spend it on a ski vacation. That, I think it’s patently obvious to most people around the world, but I think that most of them would not have known that there’s a very popular motto in China, which is called, “Short, flat, fast.” That’s the impatient part of the Chinese culture, especially with respect to the economy. Short, flat, fast was used to describe a winning volleyball strategy that eventually became adapted to describing the society, as a whole, and economic decision making.

Nice.

If you’re an investor, you only want to invest in things that you can quickly turn around, make a lot of money, and don’t need to do much work. It also applies to marriages, so a short courtship, a very flat, emotional relationship, and a fast divorce, that is how you see these companies rise within a very short period of time. Of course, investors are only interested in those companies that can turn around and exit in a very short period of time, making many, many multiples. And so, in that sense, people are very, very impatient, right? I sit on some boards of these long-standing companies, and the values are just so different. Even though a lot of these public companies are constrained by the quarterly results and so forth, but the values are about sustaining something, a company, for a long time, thinking about organic growth, thinking about investments for the future, sustainability. Maybe it’s that competition. Maybe it’s the speed that we’re used to in China. People think about short, so this dichotomy is very, very interesting.

That’s surprising to me.

Yeah. Well, this is-

It’s a surprising idea, right? So, that there is a kind of, in the west conception of Chinese culture, Chinese economy, that everything is usually 50, 100, 200 years out. You have this long vision, but you’re basically saying that there’s a deep, in the business sector, impatience about everything.

That’s a transitory phenomenon, I’d say, but if you look at the cheaper stuff, poor quality, that’s a reflection of that, the copying, it’s the same kind of mentality. Just get ahead quickly, but again, that is all shifting. That is all shifting, because China’s now in a different stage of development. If you ask the younger generation, they really care about quality. They care about values, and these companies, these very successful companies, successful in five years, ten years, found themselves in a very difficult position after a longer period of time.

That short, flat, fast attitude, which was so popular, especially before the pandemic, that’s actually somewhat disappearing, so in some sense, this economic downturn is not that bad for China, because it made the Chinese realize that it’s not always going to go up, and it made them really look down deeper into what they really should be focused on, that there will be cycles, there will be up and downs, and so these very short-termist thinking and opportunistic way of driving business will ultimately fail. It’s bad for China that we’re having a sustained economic softness, but I think it’s also a very, very important lesson for the Chinese people to go through. Growing up in China

Let’s go, if we can, a bit to the personal. So, you grew up in China. What are some moments from childhood that were maybe defining to your understanding of Chinese culture and Chinese economy?

We look back at those moments when everybody in China was very poor with a bit of nostalgia. I remember no doors were locked. I was in Beijing, and I remember every day in the summer, everybody just went downstairs and chatted with everybody else. It was very social. It was very community-based. The neighbors help each other. We had very, very little, small apartments, very limited access to certain goods. When I was born, even in Beijing, there were these vouchers for how many eggs you can buy, and even Beijing, there were three or four blackouts per week, typically. There was a sense of community. There was a very strong bond between people and within the family, because they were going after a common goal, making your life better, right? Struggling, striving to make your life better, and I remember being on the back of my father’s bike, getting up 6:00 AM every day and going to nursery. That’s the typical day. Not a lot of material goods, but people had a sense of purpose, and that’s radically different. It’s completely different now in China.

Do you think that, if you go to the human condition, do you think that nostalgia has some truth to it, or is it just nostalgia like any other? Is there some aspect of a intense, competitive, vibrant economy that loses some element?

Absolutely.

Of everybody being poor together?

Well, everybody having a common goal and a sense of community, right? That is what’s missing in these extremely individual-based, capitalist societies, and I think what the Chinese government is striving to do with Chinese, socialistic characteristics is to somehow try to preserve a bit of that socialist character, while still relying on market-based incentives, but if you’re an extremely individual-based society, I think you do lose a lot of that, and I think some of the backlash that we’re seeing from society is a reflection of that, right? People being alone more and more, the death of despair in the US, addiction, that they’re lonely. Competition means that you kind of have to be somewhat badass, and you sometimes put down values and you forsake harmony in order to get ahead. That’s certainly the Chinese society now. That was not the case before.

Do you think that’s a natural consequence of capitalism almost always, that you become more individualized, you become lonelier, you feel lesser if you are not winning, and thereby, somehow that breaks down society community more and more?

I think it’s a spectrum, right? And Europe is somewhere in between, I’d say, but Europe also is not as technologically and innovative as the US, but on a social level, there is more social protection for the people. There is a stronger sense of community, I’d argue. It’s not perfect. Ultimately, it is a choice, and this is what I think that China has to decide right? Do you want technological supremacy and radical breakthroughs? Well, yes. If you do, then you have to tolerate that there are going to be some people who are just going to be uncomfortably rich, like in the United States. You can’t say that you detest the financial system for its greed, but then not accept the fact that it is what fuels innovation, right?

Risky capital fuels uncertain investments, which allows for countries like the United States to be making these breakthroughs. That’s what China wants, but at the same time, China can’t tolerate these extremely rich people around and the power that is accrued to them. They want to be a leader in technology, but then the financial system is not liberalized. It’s highly regulated, but there’s also intervention. Even if we look back at the French civil law, versus the English common law, the former protects creditors, and the latter is more friendly towards debtors, which gives them more breathing space to innovate, but also to fail and to innovate again. That makes a big difference, so it’s all about a spectrum, right? But you can’t have it both ways.

We don’t, often enough, have that nationwide conversation about what we want to be as a country. There’s just a group of people yelling, “We don’t want billionaires,” and another group saying, “We don’t want communists or whatever.” It’s a very trivialized kind of chanting, but there is a balance. There is a spectrum, and you get to decide, “Do you like the nice things, the nice toys?”

And the power that the US has. First time in the US

And the power, the geopolitical power, the military power, cultural power, influence on the rest of the world? Yeah, you get to choose which do you want. So, the first time you went to US, what was that like? You mentioned Harvard. How did that change your understanding of the world?

Well, it’s funny that we’re talking about this now, because I was able to go to the US on a scholarship to an American high school, because the US, at that time, was open arms, all open arms towards international students. They kind of wanted to be the country that was going to educate the future leaders of the world and their elitist institutions, like Harvard, was really going to be, they’re the center of the world. So, they welcomed students like me and many, many others to be exchange students to study in the US, and we thought, “Wow. We’ve never seen a more generous country.” I was able to go to an American high school and live with an American family, which was, wow, can I say a big change from China, not only because I was plucked from the Communist Youth League party and then straight to supporting their democratic campaign, because the host family was running for State Attorney general in New York.

Wow.

So, I was kind of going to these conventions, handing out flyers, and trying to get votes and, I don’t know, in Chinatown or something, but it was so interesting to see that’s how the system worked. But in the course of doing that, I realized that people had a very simplistic understanding about China. Even when I was 14, I decided that one thing I wanted to do was to dispel some of these deep myths about China, because the China that they knew, and again, it was all the three T’s back in the late 1990s: Taiwan, Tibet, and Tiananmen Square. They thought about China, they thought about these three things.

I was like, “Well, that’s strange, because that’s not how I’m feeling in China, with all this bidding for the Olympics before 2000 and all these buildings going up and down, all this excitement about joining the WTO, all these radical reforms that are taking place, and then all this effervescence that you feel in the air.” It’s not GDP growth as numbers. You actually see it, and they’re describing China as if it was a place shredded with white terror, and so I thought, “Hm. That’s interesting. There’s a big gap, big gap of understanding,” and even today, that many years later, people know China a little bit more, but the sentiment hasn’t profoundly changed.

It’s still the three Ts, I feel like.

Some variation of that.

So, what about the level of misunderstanding of Chinese people of the West? Is there a similar level of misunderstanding the other direction as well?

I don’t think to the same extent, because there’s Hollywood. You can see daily American life, although it might not be totally realistic. There was a huge amount of admiration of US technology innovation, but also the American dream. I think our newspapers, even though there’s bias everywhere, is not focused only on reporting the really bad stuff and portraying a negative side. I think these few years have been a little bit different, but so many students went to the US, right? So many people travel to the US, and this is an interesting thing. I’ve rarely met an American who has been to China and who still goes on about how bad China is. I think that going to China makes all the difference.

I feel that’s one of the big gaps of my life that I need to alleviate, is to travel in a real way for a long time to really experience the people and the cultures, and China’s a big place.

Mm-hmm. Go dig deep, and don’t just go to Beijing and Shanghai. China’s government vs business sector

Let’s go back to the economics, so can you just dig a little deeper on the relationship in China, between the government and the companies and the private sector? So, how much freedom do companies have?

Another big misunderstanding, and a fundamental one, is that people somehow think that the state suppresses the private sector. It’s not at all as simple as that. For the most part, if we look at the local government’s incentive system, they want to help the best, private companies, which are the most promising, because it makes them look good. It adds to their GDP. It adds to the jobs, investment. They are so helpful to these private companies. Actually, I know many of these local government officials working tirelessly, day and night, especially in bad times, to coordinate between debtors and creditors, and to smooth out and define relationships with banks. They want to help these private companies, because again, their incentives are aligned. Deepseek is a private company, by the way, so it has done the country proud, and why would the state want to go and suppress these private companies, which ultimately is kind of a beacon, represents a beacon success for China.

Now, on how much freedom they have, it’s really ranged from too much freedom. That’s part of the problem, where you have defense companies buying art auction houses, real estate companies, like Evergrande, buying soccer clubs, doing EVs, companies investing in real estate that has nothing to do with their core business. That’s how much latitude were given to private companies, and there were consequences. They were not reined in, and then you go to the other extremes, where they’re scolded, they’re reprimanded, they’re reined in, and they’re kind of folded into submission so that is the whole spectrum. You have the whole range, but I guess what we’re really getting at is it is a country that is moving from a no-rule of law or very little rule of law, very immature markets, to something that is being gradually established: bankruptcy laws, corruption laws, rules and regulations on what’s possible.

One interesting point is that, in China, you ask the companies to innovate first, and then you regulate after, right? So, that has led to things like P2P platforms. It’s led to lots of kind of financial innovations, some of which has actually been very helpful and good, some of which had been disastrous, but the intention to regulate after the fact is to really not slow down or hinder the innovation. This is a very different approach from Europe. You regulate first, and then companies have to work around that. So, this is why the Chinese economy is so complex. You cannot reduce it to simply a statement saying, “The state is unhelpful for the private,” or something like that. There are certain sectors where these SOEs dominate, when it comes to national security in terms of energy, but let’s not focus on these few sectors. By and large, most of the economy, if you actually admit to the fact that China’s highly innovative and highly entrepreneurial, means that it must be the private sector that is driving the show. Communism and capitalism

Innovate first, regulate after, really interesting. I also, in my mind, am contrasting it with the way the Soviet Union and Russia, since operated. That doesn’t sound at all like this model, and it’s interesting that countries that, at least on the surface, had a similar cultural communist problems, the bureaucracies that form inside the communist state. It just seems that China broke away from that somehow. I don’t understand exactly what happened.

In the West, they group these economies together, as if they’re the same thing. No, it’s not the same at all. There’s so many differences, so much more flexibility. You can have dynamic entrepreneurialism, at the same time have socialist characteristics, and I think this is what China has been able to shape and mold, a unique model that balances between government industry, between state coordination and market mechanisms, and between individualism and communalism. It’s not necessarily black and white. You can have all these things at the same time.

So, what are the pros and cons of being an entrepreneur in China versus the west? If you get a choice, you have a dream, you want to build epic things, and you get to choose where to start that business, what are the pros and cons of each path?

In China, the speed is just awe-inspiring. You have a good idea, you implement it. You realize your dream very fast, because there’s also the support system, right? The infrastructure there, the digital infrastructure there, the engineers are there, the talent is there, and they’re cheap. The market competition is there to keep you going. The consumers give you a very, very fast feedback. Look at Xiaomi. It was making phones, and now it makes one of the world’s best EVs, 270,000 cars sold in one day a few days ago with a new model.

Wow.

They were phone makers, so there’s an advantage to that, okay? But I would not feel safe, not because of danger of expropriation or nothing like that, but the bankruptcy laws are not there, right? It’s not necessarily always fair competition. Things don’t happen necessarily in an orderly manner. If you have a competitor, you can have a very evil competitor, and evil competitors are there everywhere in China. They would call the police on you, put you in jail, spread false rumors about you. Maybe that happens also in the US, but there’s a different level in China. Also, the mold that you can have to protect yourself, the IP protection, that’s much weaker in China, because the legal system is not very effective. If you have a good idea, you’ll be copied, and there’s a lot of work. You have to dine and wine with the local governments. I mean, that’s not allowed anymore, by the way, but you dine and wine, figuratively speaking. You have to have a very good relationship with them. That’s a different kind of work.

The wine and dine and the evil competitors is an interesting challenge. That, in some maybe distant ways, akin to the problems of the Soviet Union, I think, I guess in the United States there’s less of that, and I don’t even know if that’s based on laws, because there’s a lot of lawyers in the US that could do the same kind of evil competitor stuff, technically.

That’s true. The potential negative ramifications are there, but I think personal protection is a big difference. If you make a mistake, if your company’s not run well, you go to jail. I think that the US is much, much more tolerant on entrepreneurship, entrepreneurs on failure.

Since we’re talking about it, there was a lot of controversy around Jack Ma “disappearing” reappearing a bit later, and there’s been sort of rumors of some tense relationships that he has with the Chinese government. What is important to understand about the whole situation? To what degree is it reflective of the issues entrepreneurs face in China?

In the US, capital controls politics, one could argue. In China, it has to be the other way around. Capital must be reigned in by politics. As part of the capitalist class, do not have the ambition to exceed the powers of the political class, is really at the core of it, I’d say, is the biggest difference between US and China. There are important details that I think the West has not fully provided to the public. For instance, and financial, as innovative as it was, was doing banking jobs without being regulated like a bank, right? So that, obviously, poses a host of financial stability questions and rules and regulations and so forth, so the fact that IPO was halted, you could say that there were strong, economic, regulatory grounds for that.

But I think, more broadly speaking, if you’re an entrepreneur, part of the capitalist class, keep your head down, make money, and that’s fine, right? Do some philanthropy. There are also many, many other billionaires that are just fine, that are actually very much in favor of the political leadership, and they do their thing. Now, I’m not saying what’s right, what’s wrong. It’s just a very, very different culture and different country. In the US, it’s great to be colorful. You have a very, very colorful president. He would never have been able to make it in China. You have the likes of Elon Musk. It’s great to be different. It’s great to stand out. You do not want to stand out in China.

The moral of the story is that the top leadership understands that it needs these top entrepreneurs, the likes of Jack Ma. They have done so many great things for the country, even for the world, but in China, garnering too much influence and power, even through social media, doesn’t make you look that great. It’s not a good thing for you, personally. There’s a saying in China that you just don’t want to be the tallest tree. The tallest tree gets the most wind. I don’t agree at all with the Western conclusion that this anecdote, this story, has meant that entrepreneurs don’t want to be entrepreneurs anymore, the young kids don’t aspire to be people like Jack Ma. That’s not true at all. The incentives are still there. It’s a different kind of rich, elite class in China.

So, on what dimensions do you think that the height of the tree is measured? Is it more about just mouthing off in public? So, can you still be the richest person in China and actually not clash with the state?

Absolutely. Don’t be too outspoken. Don’t try to get too much attention and too much influence and just, again, it’s a cultural thing, but just keep your head down, be humble, contribute to society, do philanthropy, work, collaborate with the government, and you’re kind of okay.

So, the signal the Jack Ma situation sends to the entrepreneurs in China is not, “Don’t be an entrepreneur.” It’s more like, “Don’t…”

Be too colorful.

Don’t be too colorful, and colorful means you can be colorful about the technical details of your technology, but don’t be colorful about Xi Jinping and politics, and just stay out.

Yeah. Stay out of politics, but I just want to say, that said, Jack Ma was really an emblem of extreme success for China, and the Chinese entrepreneurs look up to him. That’s really important. It was a signal that, unfortunately, was misconstrued by the side and by also outside world, but it’s laid a different path for what these entrepreneurs should be doing.

What do you think happened to him? So, he’s now, I think, living in Japan.

That’s by choice.

By choice.

No. He’s an extremely fascinating character, and if he were in the US, he’d thrive. Funny, witty, smart, wise, creative, loves a good life, and I think it’s by choice that he’s roaming around the world, given that he has more free time.

You think he loves China?

All of them do. All of them do, because-

All of them do. All of them do because their lives, their destinies were totally changed because of China, because of the government, because of Deng Xiaoping, because of everything.

So I know a lot of people from the former Soviet Union, and there’s a deep resentment of broken promises, broken dreams. So that is not something you see.

That’s not how I would describe that generation and their feelings towards China. Of course, you always get exceptions, the ones who have moved to the US and who wants a democracy, but by and large, people are deeply grateful to China, the Chinese government, the Communist party, if you want to label it as that, because they’ve seen their lives be totally transformed. I mean, Jack Ma went from being a school teacher to becoming one of the most powerful people in the world. I mean, if you didn’t have China, how could that have happened? Right? China’s view on innovation and copying ideas

Can you speak to the thing you mentioned a few times, which is the difference in American versus Chinese or maybe Western versus Chinese approach to entrepreneurship, zero to one versus one to N? Maybe can you explain that and what will it take for China to become a consistent zero to one innovator for the individual entrepreneurs to create totally new things versus doing the things you mentioned about speed and scale?

The US will lead for some time on breakthroughs on disruptive technologies, the zero to one technologies that ultimately change the world. But innovation is a process. It goes from invention to production and commercialization and diffusion, diffusing technology throughout all parts of the economy. And on those two stages, I think that China has a unique advantage, even if it still can’t do the zero to one breakthroughs, because in the end, how much this technology is adopted by the countries and by the various parts of the economy is fundamentally crucial to how much productivity will be unleashed. And China’s innovation currently, the DeepSeek is really one example, and I think it’s really the beginning of the scale-based leading edge technology, cost-cutting driven kind of innovation model, could be just as powerful, maybe even more effective and powerful than the breakthroughs. And it’s a very different approach to innovation.

The Chinese companies focus on solutions, problem-solving. Again, that comes back to the education system, right? You’re giving a problem. I’m going to find the answer. The Chinese students can do it. You want them to write their own question, they can’t do it, right? I’m exaggerating a little bit, but it’s a little like that, right? They see a problem. They’re going to go after it. They’re going to find the best solution. And that’s really, really useful, right? Because we don’t need, or developing countries especially don’t need these frontier technologies that they can’t use. And China currently has this AI Plus program, which is about pushing AI into every single plausible sector with the help of the state. So adoption diffusion is very important. Why China can’t do breakthroughs or can’t do zero to one technologies? I think at the root of it, and there are some deeper, we talked about the proximate reasons, the short, flat, fast, for instance, right? You don’t want to spend too much time on investigating something that you don’t even know if it’s commercially viable.

So basic research is still weaker than in the US universities, but also this kind of intrinsic motivation. It’s very different, right? In China, it’s driven by extrinsic motivation. You are rewarded by compensation, financial compensation, all these kind of extrinsic motivation is what drives you. But intrinsic motivation, pursuit of knowledge for knowledge’s sake, that was deep in the Confucius philosophies. But of course poverty has changed all that. The profound commitment to scholarship, to research, which we know is very much true in the US universities, it’s starting. It’s starting, but it’s not there. So I think these two approaches are actually quite compatible with each other. I don’t know what all this fuss is about, right? China uses technology very well. It can scale up and reduce costs, and then it can spread it around. And the US makes the highest value added by inventing these technologies. But again, diffusion matters.

Well, yeah. The things you mentioned, the scale, the manufacturing, the diffusion, from a economics perspective, you wonder which is the more important skill to have. And it seems like the cost-cutting, the efficient, large scale, fast manufacture, the diffusion is much more important for the success and the growth of the economy.

I think where it ultimately leads to an impact on the economy, that’s more important. It’s this persistent question we have. Why don’t we see the productivity in the numbers, right? You’re in AI. AI, we had long periods of investment. You hadn’t seen it in the numbers until maybe even recently, and it’s still very slow. But China’s pushing that in the sectors, robotics, AI, cloud, industrial, Internet of Things, and even companies like Huawei, I think it’s gotten a little bit of too bad of a rep in the US, but American engineers working for Huawei said that they’re so happy working for Huawei. The intent focus on innovation, but also on solution driven innovations in Africa, in rural areas really changes people’s lives. It doesn’t change the world, but it changes individual’s lives.

What’s the feeling that Chinese entrepreneurs have about copying technology? Because I think one of the cultural things in the US, it’s just really not respected if you copy, so that’s seen as a big problem. And is there some degree to where in China it’s not?

No, unfortunately this is a big cultural difference. Our sense of property rights is actually quite different from the US. I think that will change over time. But absolutely, you’re right. They have no qualms about copying as long as it leads to success, right? That’s the difference in values. As we mentioned in the beginning, you asked why the level of competition is so fierce. Well, they all do the same thing. Once they’ve seen one successful thing, everybody does the same thing. You’d have no respect for doing that in the us. But in China, it’s all fine. But I think that over time it will change. Just give it a little bit of time.

So fundamentally, it’s a bad thing.

In the end, if China’s all about innovation technology, you cannot not have very strict IP protection.

Sure.

And ultimately, again, we’re still in the short, flat, fast stage. When we graduate from that stage, you’re going to have very different views about these things and you’re going to try to diversify and do different things. But again, it’s a stage. Chinese people were hungry. They’re still a little bit hungry. They’re not going to be as hungry in the future. DeepSeek moment

So can you describe the DeepSeek moment and DeepSeek as it represents what China’s thinking about in the space of AI? And does China have a chance at outrunning US in the AI race?

DeepSeek was a surprise to the world, but I don’t think it was that much of a surprise to the same degree to the Chinese. And remember that DeepSeek happened in times of crisis, urgency, not in times of comfort. A lot of these technological breakthroughs and leapfrogging happens in times of crisis. This is called crisis innovation. And you got to thank the US for that. When the Chinese were comfortably importing chips from the US, the whole industry stalled for 20 years. I mean, why would you plow in billions, tens and billions and even more when you can just import the best? You don’t want to do your own innovation. It’s because of these export controls, these sanctions on these companies, that Chinese companies in the Chinese state felt an existential crisis a few years ago by being cut off from these critical components. And guess what happened? In a short amount of time, a degree of domestic capacity ramping up and catch up has been nothing short of remarkable. Again, thanks to US truculence on technology.

Now, I’m sure there are many aspects of hyperbole related to DeepSeek, but it just shows you that the gap is much smaller between the China and the US on leading edge technologies than what was expected that these export controls were not effective. They may have even backfired. And it shows you that China has this relentless focus on taking some of the existing technologies and using scale and the advantages to cost and to diffuse. And this is just the beginning. I think it will happen in many other industries as well, including in semiconductors, and that’s a Chinese approach. Now, there’s an interesting dilemma here, which is that this is happening in a time of extreme economic softness, slowdown and missed uncertainty, trade wars, a lack of confidence, slowdown in private investment and consumption, a withdrawal of foreign investment from China, especially the US venture funding.

Imagine what China would’ve been like, let’s say if the economy was doing better. But you could also argue that it’s because people feel threatened that they make more leaves. Now, I wish the world is not… We don’t have to drive each other to the corners to do something great, but that is the reality. And I don’t think that there’s an easy say between who wins because I think the winning idea is part of the old playbook. You’re all kind of part of a network. Different countries, different players have different choke points on each other. I don’t think it’s just about the US and China.

And what’s more, you use your leverage once, and that leverage has a half-life. It becomes a lot less effective the second time around because other countries, other companies are going to try to substitute away. If China uses the rare earth leverage, which I think it is now a little bit, there will be alternatives and substitutes. Got to be very, very careful of what coercion leverage means. Same thing with the US, right? So I think this is all the old thinking of who wins, who dominates. I think we need a new playbook. CHIPS Act

So to you, maybe when you refer to Biden and Trump, if you go back to Biden, it would be the CHIPS Act. So the export controls created unintended, unexpected effect where it had the reverse geopolitical effect.

I hope it was unintentional. Otherwise, you’d be questioning the level of intelligence of the US administration. But I think that the things they laid out did the opposite of what was intended. It sped up domestic capacity. It motivated the whole country to do this whole of a nation program to go after technologies, kind of like the way they go after Olympics, Olympic gold medals. They wanted to maximize Olympic gold medals, and they put the whole nation at work and all the resources, and that’s what China did. Huawei, another example, they were sanctioned. Guess what? They have come back to life stronger than ever before. And this is not unique to this episode. If we look throughout history, these blockades don’t work. The continental system actually indirectly led to Industrial Revolution in the UK. When the Spanish blockade, the Portuguese, they came up with a very ferocious, forceful naval power. And you’re talking about China here. They just don’t lie down and lie flat and say, “Oh, we give up.” Right? They’re more motivated than ever before.

So the lesson is don’t force people or nations into a corner.

Yeah. You make them have a very comfortable situation and they tend to become complacent and they stagnate. Tariffs and Trade

All right. So can you talk through the whole saga of the Trump’s tariffs that’s still going on, especially tariffs on China? From your perspective as an economist, to what degree was it justified? To what degree was it effective? To what degree is it bad policy for US, for the west, for the world, also for China?

China has been preparing for this for the last five years, and for the return of Trump and for Trump’s maniac trade policies. You’d think that Trump also had five years to prepare for this battle with China. It didn’t show. You can say that the Chinese, at least this time around, have played their hand pretty well when dealing with Trump’s tariff threats and the trade war with a level of calibrated assertiveness. They have really thought through everything very elaborately. And look, this is not good for either country. Let’s just be clear. It’s bad for US and China and it’s bad for the world. And every country has a stake in the US-China trade war because whether you trade directly or indirectly with China, you’re going to be affected. They are one of the largest intermediate exporters in the world. And Chinese manufacturing goods anchor global manufacturing prices.

The cumulative tariff burdens, when you get to Canada, when you get to Mexico, when you get to any other final destination, these tariffs will affect you. So it’s clearly very, very bad for the world. China’s core principles, and I think that this is not well understood from the rest of the world towards the US, and something that they have kept up is equivalence, reciprocity and realism. China’s not going to lower tariffs unless the US does. You kind of stand up to Trump like a man. That’s the only way to deal with Trump. That’s its view. The deal has to be realistic. The phase one deal of the last time wasn’t realistic, and China thinks, look, the US is going to use this as a leverage, right? That’s not possible. This can’t be seen as political concession. The deal has to be seen as mutual commerce.

So where China can have room to negotiate is opening up things like services. American banks, American financial institutions have a lot of business to do in China. They can buy a limited number of more goods. They can discuss about transparency around rules and regulations on e-commerce, on data. All of that is fine. But don’t confound economic issues with political issues. Hong Kong, Taiwan is not part of the deal, by the way, in case anyone was wondering. Trying to change China’s state hybrid private sector model, don’t go there. Anything that challenges China’s technology, security, that’s not really part of the discussion. I think that people have to be clear about also what China thinks and wants, and also the Chinese to be clear about what Trump wants, although I don’t know anybody, even Trump himself knows exactly what he wants, in order for these very complex negotiations to actually succeed.

Okay, so China has a few red lines, so don’t mention Hong Kong or Taiwan.

Don’t mix the political issues with the trade deal.

Right. And then is there some degree maybe you can speak to culturally where stylistically there’s red lines, meaning don’t bully China language-wise, or does that not matter? Because there’s a kind of way of speaking in the United States that I feel like in diplomacy in general, neither side wants to be humiliated and in great deals, even when one side on paper wins, you want to make the other side, especially the side that gets the shorter end of the stick, feel like they’ve won and show the rest of the world that they’re the winner.

Well, that’s diplomacy.

That’s diplomacy.

We have an absence of diplomacy. But you’re absolutely right, there needs to be respect. The Chinese at least really care about respect. And I wish there was just a bit more cultural fluency, and I think a lot of things would be so much easier between the two countries, just understanding that because you can actually push China to do a lot of things, all within reason that would work in favor of the US, but understand that respect is vitally important. Face-saving is very, very, very important.

To what degree, what Xi Jinping says and what they’re putting out there in the world represents the truth? So he has a whole way of being of like, “Let’s de-escalate. Let’s all make good deals together. Almost like, let’s be friends.” Modi a little bit has a similar way of being like, “Let’s just…” And the implied thing is, forgive the French, but if you fuck with us, we won’t be nice, but let’s just all be nice together. Is he speaking the truth?

Xi Jinping is not Putin, right?

Sure.

And there is a genuine desire on China’s part to de-escalate. Again, coming back to the level of pragmatism. Under economic strain in China, you don’t really want to be picking fights. They don’t agree at all with Trump’s economic views and world vision, let’s just put it simply. So understanding that a lot of this is also driven by American internal politics, which they are aware of, helps a bit, but there’s a genuine desire to take the temperature down with the US even if the weather doesn’t fundamentally change.

What does a good diplomacy look like here for both sides? On just strictly on the economics, on the trade, the tariffs, what’s the best possible outcome for the world?

I think that Trump can show to the American consumers that he has gotten some sort of a deal, right? That the Chinese have bought more American goods or promised to buy American goods, and then the American companies can come into China. And then a lot of the previously restricted investment opportunities are now not restricted and the American banks can make money in China. He can say that. And I think that could be part of a really realistic deal that somehow American companies will be better protected through IP protection. And again, that’s in China’s interest as well. So I don’t see a fundamental conflict here. And at the same time, they lower the tariffs not to the rates where they were before but lower and you don’t prohibit trade. And then for China, that would also be a success. So you can actually have success for both places, but being realistic is part of the game.

Question to you as an economist, is tariffs a useful, effective tool for global trade?

No. I think that there is a real problem in global trading system and globalization in general that is not going to be resolved by tariffs. We do need to think about more harmony between countries where let’s say not one country dominates. And here I’d push back on China and say, “Yes, you have amazing companies and competitive companies, but you just can’t dominate everything. That would not be good for global harmony. You need to give other countries an opportunity. You need to develop your own internal economy, rely on your consumers as part of the deal.” Tariffs, this kind of highly protectionist method is very distortionary and it’s going to be bad for the US. I’d actually argue that both China and the US have totally taken advantage and also enjoyed the global economic realm under the US liberal order. I think that China quite likes it actually.

US kept at peace and during this peaceful times, things were working very well economically, technologically. They kept the sea lanes open. They did their part to preserve peace to the extent they can, I guess. But China wants peace. Only with peace can they do what they can and actually US, despite saying they’ve been victimized, look, they’ve had a very, very good time. Never have quality of life, standards of living, technology risen as much as the US did under its own liberal order than it has ever before, and the amount of influence and power. Yes, of course, you can blame the US for lots of things that happened, but it actually had a really good time and China as well. So now they’re going to take this apart. They think that they’re going to be somehow better off that American people and Chinese people are going to be better off under more disorderly, fragmented rule of a jungle kind of world. That’s an illusion. That’s what politicians tell their people, but that’s not the truth.

So what are, if not tariffs, ways to incentivize countries like the United States to build internally? So to build semiconductor chips internally, for example?

Well, exactly. Tariffs is a way to punish foreigners. But what you really want to do is to strengthen your own domestic competitiveness. And I want to draw an analogy to the US-Japan competition. In the 1980s, Japan actually took over in many parts of the semiconductors industry even though the microchip was invented in the US. But guess what happened? Well, it actually drove more competition and more mobilization in the US actually creating this innovation system, changed a few really critical laws that helped with US innovation and the consumers benefited. The US took over again as the leader of the semiconductors industry. There’s no better way than to strengthen yourself to be competitive because ultimately, tariffs have not done anything to help the US.

The trade deficits have widened since Trump, right? They haven’t closed the imbalance with China and with the rest of the world because ultimately the US saves less than it invests. And that’s a macrophenomenon. It’s not a trade phenomenon, but I fear that the US, by dropping off of this global trading network and system, it will lose more and more of its power. You have power when you’re deeply engaged and embedded with a country. Once you’ve left it, you actually lose any sort of leverage.

So there’s got to be ways to incentivize industrial policy, building more stuff internally without tariffs, right? You just invest from a federal perspective, you invest in companies, maybe like more than carrot towards the domestic versus stick versus the foreigner.

All kinds of subsidies that are justified for the green transition for innovation, R&D, support for the university system, the US is the world leader in terms of attracting talent, it has everything going for it. But it was a little bit complacent. And by dropping off of that global network, it’s going to do itself more disservice.

Yeah. Tariffs don’t quite make sense to me, but maybe I’m dumb. It just doesn’t make-

It doesn’t make sense to economists either. And economists are not all dumb.

All right. You did mention immigration a little bit. I think that’s a component of it also. You said your own experience was that US was much more open to immigration in the past. What do you think about this on the human side, the protectionism, the closing of the borders that the US is doing? What are the pros and cons of that from an economics perspective?

On US immigration, I understand both sides of the story to be very honest. And I also understand a bit of the protectionist streak, not only coming from the US but also from Europe and various parts of the world, which is going to be a trend. I understand that before you care about people in the rural villages in Indonesia, you really care about the Northern Brits in this country and they have not fared well. I understand that your jobs may be under threat because of this uncontrolled influx of illegal immigrants.

From a purely economic and rational level, you’d say immigration is very important because it keeps the prices down, keeps inflation down, it keeps up the supply, which is very important when you have that much demand. And look, the standards of living have also improved for many people who can afford it. The low-cost workers being able to sustain the service economy. So I understand both sides of the story. I think that in the end, it is a balance. And I do believe even as an economist, that social harmony, and I come back to this word harmony repeatedly, even though as an economist, this thing doesn’t even exist, is becoming ever more important.

And as a nation, some kinds of skilled immigration is actually what makes the US the most technologically advanced country in the world. At the same time, you do have to think about your own citizens, the ones that have had generations and been around, and you have to think about their livelihoods.

Yeah. The puzzle of social harmony is a fascinating one. You spoke to the long history of China, how they-

That was Confucius.

Yeah. That’s Confucius. And then there is a kind of social harmony, a very different set of-

… and then there is a kind of social harmony, a very different set of ideologies in the United States and in the West broadly. And it’s all a puzzle. And you do want to have some cohesion. But in the United States, one of its beautiful aspects is the diversity of humans. And so the continued influx of diversity feeds the machine that makes America great also. But too much breaks the fabric of that society. So it such an interesting puzzle. And some of it is like we humans can’t balance. So you go one extreme, the other. And you just oscillate back and forth.

And then also politics, especially in the United States, there’s a red team and a blue team. And when the red team is at the top, the blue team just pulls all the way to the other direction, and vice versa. And we just kind of oscillate back and forth in this way, and hopefully make progress over time.

But I want to come back to the point of choice. What makes America so great is that it tolerates instability. It tolerates clashes, it tolerates volatility. Think about the financial crisis, right? The financial volatility of… Again, the US dollar is where it is because of this deep liquid financial system in the US that no other country has managed to build. There are clashes everywhere in society, but it is a very diverse country with all the benefits to that. It is a highly, highly unequal country, economically speaking. The CEO pays, the businessmen being able to be in top political positions. You balk at that level of cronyism, if you will.

But the US is the technological leadership and it is able to stomach that volatility and clash without breaking apart. And other countries don’t have the capacity of the institutions, the culture to be able to tolerate and still maintain to keep the society together. So I think it is very interesting. But yeah, it’s a puzzle.

So we talked about the economic side of tariffs, and you mentioned the other red line and the three T’s. Can we talk about Taiwan? So how important is Taiwan to the Chinese economy and the global economy?

Taiwan has among other things, TSMC, which is vitally important for the global economy. It’s also very important for the Chinese leadership and the Chinese people. You don’t want to ask what I think, ask the Chinese young generation. They would one day like to see unification. It’s part of the patriotic, the dream, if you will. And it’s a chip between the US and China. So everybody is watching Taiwan. But I’d say that this attention is not necessarily good for Taiwan, because all this uncertainty on the political risk has meant that investment there has dramatically been curtailed.

And mainland China is a very, very important economic partner to the Taiwanese economy. I think that I don’t have a lot of views around this, but I just say this, I think there’s more political wisdom of the Chinese government side than we assume outside of China. And that strategic ambiguity, but also strategic patience, especially given China’s economic situation currently means that more likely or not, I think that if China does really well economically. And Taiwan is not doing as well economically as we’ve seen that over time, this is still the best strategy from China’s point of view to resolve these differences. I think any military use and action would be actually quite detrimental to China.

So what’s a way to avoid military conflict here? It seems like a red line unification is the red line for the United States and it just feels like a very tense situation. So is there a path forward here that avoids any military conflict where everybody’s happy from an economics perspective, from a semiconductor manufacturer perspective also?

Well, first of all, you have to keep the communication channel open, right? There was a risk of that being shut off during the Biden administration. That’s highly, highly dangerous.

Meaning US-China communication.

Yeah. There’s also something that I think people miss, which is that the soldiers in mainland China, that’s part of the one-child policy generation, right? There’s only one son. Families have only one son. And I think to assume that the Chinese people desire and would be able to forsake that generation for unification purposes, or be able to tolerate lost lives for this, I think is also a bit of an exaggeration in stress. And I think Chinese people also really… They really care about peace and stability. Chaos is just not part of what they think is good for them.

The role that TSMC plays is so critical given the choke point they have on the rest of the world in the semiconductors industry, which we know is one of the most important industries sustaining the economy. Not to mention things like AI and technologies. Look, the US has been trying to build another TSMC outside of Taiwan. It’s very, very, very slow. There are a lot of cumulative knowledge, experience, and skills that are involved. It’s not that easy.

The Chinese don’t want to see an eruption of TSMC either, because again, it’s vitally important for everybody. Whilst I don’t think that this is really necessarily a bargaining chip, because if you really see what the Chinese thinks about Taiwan, it goes beyond economics. It goes beyond the logical. It is about realizing a dream, which even I tended to not place enough importance. But when I talk to the young people in China, I realized that it’s still their dream.

It’s just unfortunate that this dream is mixed up in the fact that Taiwan with TSMC has been incredibly good at manufacturing. It’s just an interesting puzzle of why it’s so difficult, a low cost at scale to manufacture chips. And it’s just incredible that they were able to do it. And it’s an interesting puzzle for how China can do it domestically and how US can do it domestically. And it seems like there’s increasing urgency on that. And I think if we look out in the next a hundred years, the urgency is good because it’s probably good for each individual country to be manufacturing majority of their chips. It’s less likely to lead to conflict.

Well, this is the trend that you need to manufacturing things that are important for national security. It’s not efficient, but it’s so-called strategically safer. One-child policy

You mentioned one-child policy, so can we speak a little bit more to that? What broadly, what impact has it had on the Chinese society? On culture, you already mentioned some of it, some of the impact on the economics, on the culture, on the demographics of China.

It’s probably one of the most radical policies that China has enacted in its history. And the enforcement was very strict. In my class, nobody had a sibling except my friend who was a Uyghur. 98% of urban households had only one. The other 2% are twins, which you’re allowed to keep. Thank goodness. If you had the good fortune of giving birth to twins, it had lots of unintended consequences on the economy and society as well.

Maybe on the good side, it’s actually a golden age for Chinese women because the Chinese girls never had as much education investment apportioned to them as they’ve had after being the only child in the family. And you raised a daughter like a son. And if we look at all the skill gaps and the education gaps and the returns to education, actually girls fared better. Apart from the top, top, top leadership in the Chinese political class, you look at the CEOs and major companies, in the ministry, civil servants, there are a lot of Chinese women.

And actually, recently, if you look at the surveys, the Chinese families would prefer to have a daughter than a son. Because they’ve seen how much bargaining power you as a Chinese woman and as a rare bride, or a scarce supply of brides goes, you have raised your bargaining power and you can command high amounts of dowry. That was an unintended good thing about the one-child policy. And to the opposite, the recent relaxation of the one-child policy, actually women are now encouraged to have as many kids as they possibly can.

The flip side of the one-child policy has not necessarily been good to women in the job market because they think, “Ph, well, you’ve only had one child. Oh, guess what? You can have another child.” So that’s not necessarily good for long-term employability. But on the economic side, I’ve written about this in my academic papers, it’s been one of the very important causes of high saving rate. I always tell people, “You want to stimulate consumption? Well, have more kids.” You know how much one of those costs, right?

Yeah.

Especially in China, the tutorial ships, the education. You have to buy a house. You have to buy a house for them so that they can get married eventually.

Yep.

So it’s very, very expensive to have a child. If I have more children, you spend more. But maybe people don’t want to have more children because the cost of having a child is so high. And this is driven by the competition. And why is there so much competition? Because there’s a one-child policy generation, right? You want your child to be the dragon or the phoenix, and you put everything into that one child. That makes the child more anxious, makes the whole environment more competitive.

And in the end, these one-child policy children don’t want to have a lot of kids, because they don’t want them to see them suffer what they have suffered. So there are all these kind of unexpected consequences, but also changing the social fabric. I’d like to say that it broke the hierarchy of the family where the parents had the dominant role. Now the kids are the boss. They boss everybody around, they boss the grandparents around.

It relates to the puzzle, the housing puzzle. How is it possible that the Chinese youth can afford these really expensive real estate with their meager income? Well, one common thing is that they have six wallets, you and your spouse, together with the parents, and maybe even the grandparents would chip in. So there’s this kind of intergenerational family dynamics that makes our models focused on the individual consumption, just completely inappropriate to describe these dynamics.

But the demographic side is the other challenge, which is they were so strict about the one-tile policy and they kept it in for too long, so that once they decide to loosen it and decided that fertility rates were way too low to sustain the Chinese economy in its future, it was already too late. And now, they’re finding all kinds of creative ways to make people have more kids. This is not something that they can demand and command in ways that they can demand and command emerging strategic sectors.

So all these really interesting social anecdotes where they’re encouraging even single women in a highly conservative society, encouraging single women to raise children, nothing to be afraid about that, lots of support system going there. I mean, they’re radically changing the whole thinking around these kind of issues.

Well, it seems like even the West, a lot of the developed countries have a demographics problem. It seems like a lot of countries are not having enough babies.

South Korea.

South Korea.

Very, very, very low fertility rate. It’s just that for China’s stage of development, it should be having more babies than it is currently having. So the one-tile policy accelerated that demographic transition. It really squeezed in many, many decades into two. But my view about the demographic aspects for the economy is not as pessimistic as most people because, meanwhile we’re talking about aging, there are also high rates of unemployment, right? When we’re talking about is there enough people to do the jobs? We have things like AI and not enough jobs, and these kind of questions that are first order.

We haven’t even figured out the relationship between labor force, productivity, what are the factors of production that will be most important for future economy? And so we shouldn’t be terrified that there’s a looming aging problem. Because I think the more important question is that skill gap. What kind of skills do we actually need in the economy? What kind of education system should we design in the economy to better suit the country to an ever evolving and transformative technological society?

Because if that’s successful, then we’d be able to respond to whatever puzzle the demographic situation creates.

Yeah. If you look at the most recent evidence on this issue, they found that post-1990, aging economies became richer. Not the other way around, which was true for the pre-1990 sample. And the reason is that these aging societies much more rapidly adopted new technologies, automation that actually helped the entire economy. So should we be panicking about this now when we’re actually also panicking about the fact there’re not enough jobs around? There are other issues that are more relevant for the Chinese economy today. China’s economy collapse predictions

There are constant predictions of China’s economy collapsing. You have pushed against that narrative. But you’ve also spoken to some of the challenges it’s going through. What’s the GDP going to look like? Is the Chinese economy going to collapse? Is it going to flourish? What do you think?

Collapse is such a strong word, and the West has been using this word repeatedly. If I remember correctly, maybe four to five times, maybe even six times since 1980s during the period of China’s fastest growth. I tend to not think that Chinese economy will collapse. But will a slowdown continue? Will it be able to lift up again? Will it be able to come out of this cycle soon? I think that’s more relevant. And the Chinese economy has a lot of potential because the fundamentals are still there.

When we talk about the fundamentals, it’s the skills, it’s the human capital, it’s the physical capital, it’s the macroeconomic stability and political stability. That’s a lot going for a country if you look around the world right now. And this is why the entrepreneurialism is still there, because the fundamentals are there, even though the economy is weak, consumers are not confident and private investment is insufficient. The fundamentals are there.

Is China where it should be far, far, far from it. Because China’s potential, based on the fundamentals, is a much higher level of per capita income than where it is currently. It’s kind of currently in a $10,000 bracket. And this is also a puzzle because you’re a $10,000 per capita income country that can actually do leading-edge technology and can be neck to neck with US companies on these high-tech. That’s the first time in history.

Even the Soviet Union, which was very technologically advanced, did not have the extent of commercializable civilian technology and the technologies that were pervasive throughout the economy. But fundamentally, we have to understand how much of this real estate crisis has impinged on the economy and explains the persistent slowdown.

Can you explain the real estate crisis?

A few years ago, there was a crackdown on the real estate sector. And again, it comes back to a lot of the social issues we were discussing. Why aren’t people having kids? Well, maybe it’s because housing is too expensive. Maybe it’s because education system is too competitive. The speculative bubbles in the real estate is making housing unaffordable, and that’s not part of the Chinese social characteristics. And so when they decided that the property investors were going to be reined in that housing was to be lived in, not speculated. It really brought down the whole sector in terms of investment, in terms of the financing of the sector. But ultimately, it made such a massive impact or such a massive dent on the economy, because it really embodied the two fundamental pillars of the economy. One is the fiscal system and one is the financial system.

So coming back to our local mayor economy, where did you think the local mayors got their funds? Through real estate, they sold land. Real estate property developers came in, they can develop the entire local economy because the services will come in, the jobs will come in. And by the way, you are an equity owner of the entire city. So you want these property developers around. Many countries throughout history all have this property transition, right? You need to wean the economy off of property. In a good situation, it takes three to five years. In a bad situation, it can take 10 years.

I don’t know where China belongs currently. But the real estate collapse also meant the local finances, local government finances also shrunk dramatically. Real estate was a really important part of the financial industry, it brought that down. Together, it really had a major impact on the economy. But also from the consumer side, their wealth was primarily tied into real estate. Not the stock market, not other kind of investment opportunities, it was real estate. So they felt poor, they consumed less. Advice for visiting China

So in the spirit of understanding China better, maybe to get a bit of your advice, if I were to visit China, what’s the right way to visit to experience it, to see the people, to talk to the people maybe outside of the big cities? Is there any advice you can give to somebody going to China?

Checkout Speed, his travels into China. I think they represent a more dynamic reality than just visiting Beijing and Shanghai and Shenzhen, the big cities. I actually think a lot of the opportunities, especially economic opportunities, are in the second, third tier cities now in China. And there’s a return of talent. These companies, Pop Mart, they’re coming from these second-tier cities that care about the local economy, about fun, entertainment. That’s what the new generation is about, they don’t want to be lining up some factory doing manufacturing jobs.

If you think that the Chinese new generation is still all about that, you should really study them a little bit more. They’re all about making their lives more fun and more interesting, right? That’s the cycle, right? In the beginning, Chinese people are hungry. They want to look for jobs, and they find these jobs and manufacturing. Now they want a work-life balance. They are a spearheading fashion. They spend so much more on entertainment, travel, clothing, restaurants. They have come out with these amazing coffee chains that have beaten completely Starbucks within a very short amount of time. This is all the new generation.

Where are the opportunities? It’s in the local areas. It’s all about localism. Not globalism, localism. Being rooted in your local economy, you’ll actually find so many more opportunities. You go to Chongqing. I actually was watching a video about Chongqing. I thought we were in Shanghai. I was so surprised. And you go to Chengdu, it’s fun. People work a little bit less, but it’s really exciting. It’s very fun. People are really nice. Go to Xinjiang, take a look for yourself. There’s ski resorts being open there. You have a very interesting, colorful, dynamic complex country, and it’s not defined by Beijing and Shanghai.

So the small cities are flourishing and are developing a personality of their own.

They are flourishing more than the first major-tier cities.

Interesting. What’s the most beautiful thing to you about China and its people that you wish more knew?

Behind all this competition and the ambition, you have a very genuine group of people. They are funny, they are community-based, they are authentic. Actually, it’s not contradictory, right? You have a society which is heavily controlled, but they find ways to be truly, truly authentic. And ultimately, they’re just a very social group, right? Again, I keep on coming to this being lonely aspect of the western society and increasingly living alone. That is not China. It’s still a very, very warm country, and they’re warm to foreigners, and they are friendly.

Well, very grateful for you being a voice of balance, a voice of reason in this world, and for the book you’ve written on China that a lot of people deeply respect, and for talking today. Keyu, thank you so much. This was an honor.

Great to be with you. It’s a pleasure.

Thanks for listening to this conversation with Keyu Jin. To support this podcast, please check out our sponsors in the description and consider subscribing to the channel. And now, let me leave you with some words from Confucius, “It does not matter how slowly you go, as long as you do not stop.” Thank you for listening and hope to see you next time. This entry was posted in transcripts on August 13, 2025 by

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Host of Lex Fridman Podcast. Research Scientist at MIT, working on human-AI interaction, robotics, and machine learning. View all posts by Lex Fridman →