Keyu Jin: China's Economy, Tariffs, Trade, Trump, Communism & Capitalism | Lex Fridman Podcast #477

- The following is a conversation with Keyu Jin,

an economist at the London School of Economics,

specializing in China's economy,

international macroeconomics, global trade imbalances,

and financial policy.

She wrote the highly lauded book on China titled

"The New China Playbook: Beyond Socialism and Capitalism,"

that details China's economic transformation

since 1978 to today.

And it dispels a lot of misconceptions about China's economy

that people in the West have.

This is the "Lex Fridman Podcast."

To support it,

please check out our sponsors in the description

and consider subscribing to this channel.

And now, dear friends, here's Keyu Jin.

What is the single biggest misconception the West has

about China's economy today?

- The biggest misunderstanding

is somehow that a group of people, or even just one person,

runs the entire Chinese economy.

It is far from the reality.

It is a very complex, large economy.

And even if there is an extreme form

of political centralization,

the economy is totally decentralized.

The role that the local mayors,

I call this the mayor economy, plays in reforms,

but also driving the technological innovation

that we're seeing right now,

it is actually not run by just a handful of people.

It's more decentralized than the US's.

And I think more broadly,

a big misunderstanding is really the relationship

between Chinese people and authority.

- Can you elaborate on that?

- Well, people think that somehow

there's almost blind submission to authority in China.

We have a very nuanced relationship with authority,

whether it is between kids and parents,

or students and their teachers,

or with your bosses and the Chinese government,

it's kind of the same thing.

There's paternalism,

they think that they're responsible for you,

but deference,

a certain amount of deference to authority

is not blind submission.

It's been written in implicitly in our contract

for thousands of years that in exchange for some deference,

we are given stability, security,

and peace, and hopefully, prosperity.

- So there is some element that we have in the West

of freedom of the individual,

so that a little bit of the rebel is allowed

imbalance with the difference to authority?

- Yeah, absolutely.

Without that,

how can you have this radical,

dynamic entrepreneurialism you see in China?

If you don't have a sense of self,

a sense of the fact that you can find opportunities,

you look for opportunities, you drive opportunities,

it's all self-motivated.

- Is there still a young kid in China that's able to dream

to be sort of the stereotypical Steve Jobs in the garage,

start a business and change the world by doing so?

- There are millions of young kids like that in China.

They might not be thinking about changing the world,

and this is where the Chinese approach to innovation

is very different from the Silicon Valley one, I'd say.

But they see opportunity.

They see a country with a billion consumers.

They see scale, they see speed,

they see that with their dreams and the team

that you have in China,

with engineers, and the digital transformation,

you can do so many things.

And this generation of young people

think about transforming their local economy.

I think we're gonna get into this,

but it's no longer gonna just be manufacturing.

The young kids are entrepreneurs.

- Well, let's stand the big picture,

but there's a perception that China

is a communist country.

So to what degree is China a capitalist country

and to what degree is it a communist country?

- I've rarely seen a more capitalist society than China

from the pure economic side.

I've rarely seen companies that are as competitive

as Chinese companies.

People as ambitious and obsessed with making money

as Chinese people.

Kind of ruthless actually.

And look, consumers shop, firms invest.

If you invest well financially, you'll get great returns.

What is not capitalistic about the Chinese economy?

At the same time, the social fabric is highly socialist.

First of all, the state or enterprises

dominate many of the sectors.

The state banks control the financial system.

We often talk about common prosperity,

about equal opportunity, just and fair society,

but even daily stories,

a walk in the park behind my my parents' apartment,

you're gonna find at least 50 organized social groups

on a daily level singing, dancing, exercising,

doing whatever these fantastic idiosyncratic hobbies

they have, getting together every single day.

And free courses for the elderly and retired.

That sense of communalism, that sense of belonging,

that strive for harmony at the societal level is there.

- So just to go back to something you said,

there is a value for competition culturally.

So on the business side, on the economic side,

there is sort of a cultural value

of people competing in a meritocratic way.

- Competition is ferocious in China,

especially when it comes to Chinese companies,

but also in education.

I should be thankful that I'm not born later that I am,

because I thought China was pretty competitive already

going to the schools and studying for the exams.

It is a different level today.

Competition is not necessarily in the culture, I'd say.

It's driven really by the economic

and social circumstances of the day.

The Chinese companies are all hardworking.

They're all going after the market share.

They all kind of wanna do the same thing.

It's not quite like in the US where you open a coffee shop,

well, next door I'm gonna open a bagel shop, right?

In China, the coffee shop does well,

everybody wants to open the same coffee shop.

And I think, again, I'm sure we're gonna get to this,

but there's a lot of that kind of competition

which really drives the world sometimes crazy

of replication.

But it's because it's not easy, right?

It's not easy to make money.

In education system,

there are not enough jobs for the young people.

So how do you get ahead?

Let's say, if you're part of a lower stratum society,

how are you gonna make sure that your children

are gonna have a better life than you?

You invest in education.

So everything is about competition.

In a country with 1.3 billion people,

that's somewhat to be expected.

- Let's go back to the roots of that.

So you described the China's economy model

is rooted in its history.

So can we talk about Confucianism?

Can you explain to what degree those roots

run back to Confucianism, and in general,

to other parts of Chinese history?

- Yeah, Confucianism is more of a moral philosophy

than let's say religion or a belief system.

It prioritizes social harmony above anything else.

It's not about metaphysics, but more about ethics.

And at the individual level, the responsibility,

the duties are all meant to preserve that social order.

So it's filial piety, it is loyalty,

it is how to be a Chinese gentleman.

But things like saving, frugality,

is part of the moral discipline.

Education is part of the moral cultivation.

So there's a very strong emphasis that you as a citizen

have a responsibility to contribute to society as a whole.

- On the education side,

a part of Confucianism is a value for meritocracy.

So how does that permeate the education system in China?

You've already spoken to it a little bit,

the value of competition in that

it's already getting more and more intense.

But it would be very interesting to get your understanding

of the education system,

its history, and as it stands today.

- If China were relatively successful economically,

a huge part of the reason is by and large

it's been meritocratic.

That is changing somewhat now.

But the only way that you have

still that many poor people,

especially a couple decades back,

still be in harmony with society,

seeing all these rich people make tons of money

and you're still belonging to that lower stratum,

the only reason is that you believe

that your children have a future through meritocracy.

And even though it's imperfect,

it's highly imperfect standardized testing,

all this competition,

all of the hours and the tutorials

to studying for standardized exams,

well, that is a very realistic scenario in China,

because there's that many people.

When I was growing up in school, we had 60 people per class,

and there were 10 classes in one grade.

Now imagine that many people applying for colleges

in the American way,

how many essays would have been written

and need to be scrutinized,

but also that gives room for total corruption

if you know what I mean, just connection-based.

And actually the standardized exams,

as imperfect as it is to select talent,

is still by and large fair.

And that's how that whole generation

of entrepreneurs, bureaucrats,

government officials were selective.

You look at the Chinese premiers,

the presidents of the past,

they all went to great schools.

A lot of them were engineers.

And same thing for civil servants.

It has changed somewhat.

The meritocracy I think is eroding in China.

I'm worried about that because it is fine

that you get into a good university based on your own merit,

but finding a job now becomes much less meritocratic.

People with connections get jobs more easily than others.

Of course, this is not just a unique Chinese phenomenon,

it's actually everywhere.

But I guess what I'm saying is that that meritocracy,

which was so fundamental to the Chinese,

ancient Chinese education system, by the way,

civil servants were selected

based on standardized exams in the past.

That's always been throughout Chinese history.

And that relates to Confucianism.

Now, the opportunities,

and coming back to the competition point

is that the opportunity's getting slimmer and slimmer.

And again, this is not a unique Chinese phenomenon, jobs,

where are the jobs gonna be, right?

So meritocracy has become more of a problem.

- Do you have any memories of your own experience

in terms of competition, the good and the bad of it?

Maybe from that,

can you pull out the thread of the value

of that kind of competition?

Basically, I grew up in the Soviet Union,

so there's a kinda brutality to competition,

but I think it ultimately molds really interesting people.

- There is a good and bad part of competition.

I remember when I was going into middle school,

every single midterm exam, final exam,

you are ranked from number one to number 800

in your entire grade and publicly displayed.

- [Lex] Nice.

- Nice, right? - Very nice.

- Imagine the majority of people and how they feel.

But it does drive ambition in part.

And you don't take anything for granted.

And you work hard, you keep the spirit up.

But going to the US,

I finally realized that Americans are totally competitive.

It's just that they don't display it.

It's not as apparent.

I remember I went to a very competitive high school,

but everyone's like so chill, oh, I'm not studying, oh...

They're studying, they are secretly studying.

When I was doing my PhD at Harvard, people say,

"Oh, my parents say don't work so hard."

People say, "Don't say you worked."

They're working hard, right?

Just you don't show it.

In China, it's kind of a noble thing

to show that you're working hard,

and that you're number one,

or that you're top of the class and you wanna display it

and you want to let everybody know.

But in the US, everybody's like secretly doing it.

- Yeah, some of is the signaling,

the culture emphasizes the signaling

is it better for everything to come easily,

thereby showing that you're a genius it comes naturally,

or is it better to show that you worked extremely hard

for the thing,

but the ultimate result is there's still competition.

But I don't know, when you're visually displaying

and explicitly stating that it's good

to be number one and it's bad to be number 800,

I think that permeates throughout the culture

to where you understand,

first of all, you understand that hard work is the only way

to improve, to succeed in life.

And second of all,

you just create this framework of early on understanding

what it means to live a good life.

And a part of that is to find the thing you're damn good at

and get even better at it, master it,

become hopefully the best person in the world at that thing.

I dunno, that's an ex extremely important lesson

for society to teach.

- That's the right, I would say,

the right kind of competition

or the efficient kind of competition.

I feel that in the Chinese education system,

it was not necessarily efficient

because it kind of frames you and molds you to be thinking

in a certain way, what's been taught to you.

You don't have the bandwidth, or the time,

or creative freedom to be more creative

and to think outside the box.

There it's just the box.

You maximize the box and that's it.

You don't actually know what's outside of the box,

and you never actually go there.

That's the bad part of Chinese competition.

And when I got to the US,

the high school teachers were asking us

to question authority to question text.

I'm like, "Wow, really?

You can do that?"

So I started asking why.

- All right, so there has been this miracle

in the Chinese economy from after Mao

under Deng Xiaoping where the Chinese economy

got transformed and grew incredibly.

So can you explain what happened?

The different transformations that happened,

the different reforms that happened under Deng Xiaoping.

- Deng Xiaoping was by far our most pragmatic leader.

And I think everybody's grateful to Deng Xiaoping.

My father's generation would not have seen

that amount of prosperity and peace and opportunity

without Deng Xiaoping.

It started in the late 1970s when Deng Xiaoping

came out with this open up and reform mandate,

and it was very tough.

Again, coming back to the big misunderstanding of China,

it's not as if one leader decides

that that's what we're gonna do

and then everybody follows order and does that.

No, there are tons of political barriers,

tons of incentive, compatibility problems

at the local level.

In the end, you need the local provincial governors,

the mayors to do the job.

And how many perfectas are there in China, right?

A lot.

And they have their own interests, right?

We know this around the world,

politically, it's the most difficult thing to do.

But somehow Deng Xiaoping was able to break tradition,

break convention,

come out with this completely new way of thinking

about society, life, and economy.

And it was so transformative.

I remember people of that generation told me one time

that society was gonna 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's gonna 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 deputy army,

I mean, 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, right?

And there was the agricultural reform in the 1980s

that meant that farmers could decide

what they were gonna 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 was history, right?

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.

Right 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, right?

It's not about being radical and radically successful.

It's about being safe, right?

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.

- 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 gonna promote them? Am I gonna put them in jail?

Am I going to fire them? Am I going to reward them?

Am I gonna 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,

there's like,

why don't our American mayors in each city

do these very radical things, and then push for GDP growth,

and technology 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 mayor's 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 gonna like peak at my neighbor's mayor's

city's GDP growth.

And I'm gonna 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, right?

So you need to do better than them.

And whether that was efficient structure or not,

I cannot comment,

but is certainly just fueled this massive

and rapid expansion, economic expansion.

First it was industrialization.

Everybody wanted to do exports.

Then they discovered,

"Oh my gosh, we can have so much fiscal revenues

coming from land, right?

Selling land.

Let's build real estate and let's urbanize."

And then the money kept coming in to these local governments

and that they can spend it

on nurturing more companies, or supporting real estate,

or supporting investment and they can do a better job.

So then it was geared towards real estate,

and that's how the property cycle became the big thing.

Everything was at double speed

because of what the local government's incentives

were designed to do.

I say now that China's biggest challenge

is consumption, right?

It's not production.

We know that China's very, very competitive in production,

in 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 wanna do it seriously,

because it goes against the incentives

of driving growth, right?

They would suffer on GDP growth if they were very serious

about environmental protection.

So for a couple years,

nothing happened in China on that front.

And then the central government got really kind of 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 the matter of 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 growth alone.

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.

And that's what the local governments were doing

for a long period of time.

In the last few years, innovation,

unicorns have kind of been an implicit yardstick

for local governments.

That's kind of how we've seen these great EV companies,

80 cities doing EVs.

I mean, do we really need a 80 cities

to do their own EVs, right?

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 wanna 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 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 kind of component to what you're saying

where you're a little bit critical of do you really need

EV companies, but maybe you do.

That seems like an incredible thing to do, right?

So what are the pros and cons of this?

Maybe you could 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, right?

The big push to coordinate the supply chains.

If you wait for the markets to develop over time,

it's gonna take a long time.

Maybe they don't even wanna do it, right?

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 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, right?

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 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 in 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.

So it's the difference of political system.

- So maybe can you speak to the difference,

another difference is the long term

multi-generational thinking that permeate Chinese culture.

So how does that differ from the West,

sort of 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.

So that I think it's patently obvious to most people

around the world,

but I think that most of them would not have known

that there's a very popular motto in China

which is called short, flat, fast.

That's the impatient part of the Chinese culture,

especially with respect to the economy.

Short, flat, fast was used

to describe a winning volleyball strategy

that eventually became adapted to describing the society

as a whole and economic decision-making.

If you're an investor,

you only wanna invest in things

that you can quickly turn around and 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.

(both laughing)

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 turnaround 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 longstanding 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, it 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 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 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, 10 years,

found themselves in a very difficult position

after a longer period of time.

So that short, flat, fast attitude, which was so popular,

especially before the pandemic,

that's actually somewhat disappearing.

So in some sense,

this economic downturn is not that bad for China

because it made the Chinese realize

that it's not always gonna 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,

sustained economic softness.

But I think it's also a very, very important lesson

for the Chinese people to go through.

- Let's go, if we can, a bit to the personal.

So you grew up in China.

What are some moments from childhood

that were maybe defining to your understanding

of Chinese culture and Chinese economy?

- 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.

And that's the typical day.

Not a lot of material goods,

but people had a sense of purpose.

And that's radically a different,

it's completely different now in China.

- Do you think that if you go to the human condition,

do you think that nostalgia has some truth to it,

or is it just nostalgia like any other?

Is there some aspect of our intense, competitive,

vibrant economy that loses some element?

- Absolutely.

- [Lex] Of everybody being poured together?

- Well, everybody having a common goal

and a sense of community

that is what's missing in these extremely individual-based

capital 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 in 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, they're lonely, right?

And competition means that you kind of have

to be somewhat badass,

and you sometimes put down values and you forsake harmony

in order to get ahead.

That's certainly the Chinese society now,

that was not the case before.

- You think that's the 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 gonna be some people

who are just gonna 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 their power that is accrue 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,

well, 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,

and 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 wanna 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?

- 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?

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 in institutions like Harvard

was really gonna 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."

And I was able to go to high school,

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.

So I was kind of going to these conventions

and 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.

And that's probably, even when I was 14,

I decided that one thing I wanted to do

was to dispel some of these deep myths about China,

because the China that they knew,

and again, it was all the three T's back in the late 1990s,

Taiwan, Tibet, and Tiananmen Square.

They thought about China,

they thought about these three things.

And 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

on these radical reforms that are taking place.

And then all this effervescence that you feel in the air,

it's not GDP growth as numbers, you actually see it.

I said, this is really,

and they're describing China

as if it was a place shredded white terror.

And so I thought, "Hmm, that's interesting.

There's a big gap, big gap of understanding."

And even today, that many years later,

people know China a little bit more,

but the sentiment hasn't profoundly changed.

- It's still the three T's, I feel like.

(both laughing)

- 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, they can see daily American life,

although it might not be total 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 traveled to the US.

And this is an interesting thing.

I 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 like one of the big gaps of my life

that I need to alleviate is to travel in a real way

for a long time to really experience

the people and the cultures.

And China's a big place.

- Go dig deep and don't just go to Beijing and Shanghai.

- 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

in the private sector?

So how much freedom do companies have?

- Another big misunderstanding and a fundamental one

is that people somehow think that the state

suppresses the private sector.

It's not at all as simple as that.

For the most part,

if we look at the local government's incentive system,

they wanna 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 kind of smooth out

and define relationships with banks.

They wanna help these private companies because, again,

their incentives are aligned.

DeepSeek is private company, by the way.

So it has done the country proud.

And why would the state wanna go

and suppress these private companies

which ultimately is kind of 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 reigned in.

And then you go to the other extremes where they're scolded,

there reprimanded, they're reigned in,

and they're kind of folded into submission.

So that is the whole spectrum.

You have the whole range.

But I guess what we're really getting at is it is a country

that is moving from a no rule of law

or very little rule of law, very immature markets,

to something that is being gradually 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 re regulate after, right?

So that has led to things like P to P 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 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.

- 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.

That 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?

Like if you get a choice, you have a dream,

you wanna 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 you're 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.

And 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 the new model.

They were phone makers.

So there's an advantage to that, okay?

But I would not feel safe,

not because of danger of expropriation, nothing like that,

but the bankruptcy laws are not there, right?

It's not necessarily always fair competition.

Things don't happen necessarily in 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 it's a different level in China.

And 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.

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 'em.

That's a different kind of work.

- The wine and dine and the evil competitors

is an interesting challenge.

That in some maybe distant way's 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,

quote unquote, "and reappearing a bit later."

And there's been sort of rumors of some tense relationships

that he has with the Chinese government.

What is important to understand about the whole situation?

Like to what degree is it reflective

of the issues entrepreneurs face in China?

- In the US, 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.

And 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.

I mean, 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 wanna stand out in China.

So the moral of the story

is that the top leadership understands

that it needs these top entrepreneurs, the likes of Jack Ma.

And 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.

And there's a saying in China

that you just don't wanna be the tallest tree, right?

The tallest tree gets the most wind.

So I don't agree at all with the western conclusion

that this anecdote,

this story has meant that entrepreneurs

don't wanna be entrepreneurs anymore,

where 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,

collaborate with the government, and you're kind of okay.

- So the signal the Jack Ma situation sends

to the entrepreneurs in China is don't be an entrepreneur,

is more like, don't-

- [Keyu] 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 wanna 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, look, 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 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, right?

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 wanna 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?

- 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 end?

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 changed 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 as 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 gonna 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 gonna go after

and they're gonna 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 wanna 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 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 sort of economics perspective,

you wonder which is the more important skill to have.

And it seems like the cost-cutting,

the efficient, large scale fast manufacturer,

the diffusion is much more important

for the success and the growth of the economy.

- I think where it ultimately leads 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, right?

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 individuals' lives.

- What's the feeling that Chinese entrepreneurs

have about copying technology?

Because I think one of the cultural things in the US

is just really not respected if you copy.

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, right?

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 to you fundamentally, it's a bad thing.

- In the end,

if China's all about innovation technology,

you cannot not have very strict IP protection.

- [Lex] True.

- And ultimately, again,

we're still in the short, flat, fast stage, right?

When we graduate from that stage,

you're gonna have very different views about these things

and 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 gonna be as hungry in the future.

- 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 gotta thank the US for that, right?

When the Chinese were comfortably

importing chips from the US,

the whole industry stalled for 20 years.

I mean, why would you plow in billions,

tens of billions and even more

when you can just import the best, right?

You don't wanna do your own in 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 cut 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, slow down,

and missed uncertainty, trade wars, a lack of confidence,

a slow down in private investment and consumption,

a withdrawal of foreign investment from China,

especially the US venture funding.

Imagine what China had would've been like, let's say,

if the economy was doing better, right?

But you could also argue that it's because

people feel threatened that they make more leaves.

Now, I wish the world 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, right?

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 gonna try to substitute it away.

If China uses the rare earth leverage,

which I think it is now a little bit,

there will be alternatives and substitutes.

Gotta 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.

- 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...

- I hope it was unintentional,

otherwise you'd be questioning the level of intelligence

of the US administration, right?

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 technology,

is kind of like the way they go after Olympics, right?

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 at throughout history,

lease blockades don't work.

The continental system actually indirectly

led to industrial revolution in the UK

when the Spanish kind of blockade the Portuguese,

they came up with a very ferocious, forceful naval power.

And you're talking about China here,

they just don't lie down and lie flat and say,

Ooh, we give up."

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.

- All right, so can you talk through the whole saga

of the Trump's tariffs is 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,

(both laughing)

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 gonna 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, right?

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 gonna lower tariffs unless the US does, right?

You can 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 gonna 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.

- And then is there some degree maybe you can speak

to culturally where stylistically there's red lines,

meaning don't bully China like 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 wanna make the other side,

especially the side that gets the short end of the stake,

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 a 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 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 deescalate,

let's all make good deals together,

like Modi a little bit has a similar way of being like,

"Let's just..."

And the implied thing is like, forgive the French,

but if you fuck with us won't be nice,

but let's just all be nice together.

Is he speaking the truth?

- Xi Jinping is not Putin, right?

And there is a genuine desire on China's part to deescalate,

again, coming back to the level of pragmatism.

Under economic strain, in China,

you don't really wanna 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?

What is the best possible,

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 that American companies can come into China.

And then a lot of the previously restricted

investment opportunities are now non-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, right?

Not to the rates where they were before,

but lower and you don't prohibit trade.

And then for China, that would also be success.

So you can actually have success for both places.

But being realistic is part of the game.

- Is tariffs...

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 gonna 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, right?

Rely on your consumers as part of the deal.

Tariffs, this kind of highly protectionist method

is very distortionary and it's gonna 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 a 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, right?

Only with peace can they do what they can.

And actually US, despite saying they've been victimized,

no, look, they've had a very, very good time, right?

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 gonna take this apart.

They think that they're gonna be somehow better off

that American people and Chinese people

are gonna 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 ships internally, for example?

- Well, exactly.

Tariffs is a way to punish foreigners.

But what you really wanna do

is to strengthen your own domestic competitiveness.

And I wanna 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 have widened since Trump, right?

They haven't closed the imbalance with China,

with the rest of the world

because ultimately the US saves less than in a mess.

And that's a macro phenomenon.

It's not a trade phenomenon.

But I fear that the US by kind of 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 gotta be ways to incentivize industrial policy,

building more stuff in internally without terrorists, right?

To just invest from a federal perspective,

you've invest in companies maybe like 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 as everything going for it.

But it was a little bit complacent.

And by dropping off of that global network,

it's gonna 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.

(both laughing)

- All right.

You did mention immigration a little bit,

so 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, you see,

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 gonna 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, right?

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.

'Cause you spoke to the long history of China, how they...

- Yeah, that was Confucius.

- Yeah, that's Confucius.

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 wanna come back to the point of choice, right?

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, right?

The businessmen being able to be in top political positions,

you kind of balk at that level of cronyism, if you will.

But the US is the leadership

and it kinda 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 a 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 Ts.

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 wanna 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.

It's a chip right 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.

- You 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 and stretch.

And I think Chinese people also

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, right?

There are a lot of cumulative knowledge, experience,

and skills that are involved.

It's not that easy.

The Chinese don't wanna 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 like a interesting puzzle of why it's so difficult

at low cost at scale to manufacture chips.

And it's just incredible that they were able to do it.

And it's a 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, right?

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.

- You mentioned one child policy,

so can we speak a little bit more to that?

Like 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 (indistinct)

98% of urban households had only one child.

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 raise 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 mar job market

because they think, "Oh, 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?

Especially in China?

The tutorial-ships, the education,

and they have to buy a house.

You have to buy a house for them

so that they can get married eventually.

So it's very, very expensive to have a child.

If you have more children, you spend more.

But maybe people don't wanna 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 wanna have a lot of kids

because they don't wanna them to see them suffer

what they have suffered, right?

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 their 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, right?

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 child 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 and its future,

it was already too late.

And now it's 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, right?

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.

Seems like a lot of countries not have enough babies.

- [Keyu] South Korea-

- [Lex] 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 child policy accelerated

that demographic transition, right?

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, right?

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 help the entire economy.

So should we be panicking about this now

when we're actually also panicking about the fact

there are not enough jobs around?

There are other issues that are more relevant

for the Chinese economy today.

- 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 gonna look like?

Is the Chinese economy gonna collapse?

Is it gonna 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 the slow down 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, right?

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, right?

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, right?

And so when they decided that the property investors

were gonna be reigned 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.

- 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 wanna 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 wanna look for jobs and they find these jobs

in the manufacturing now,

they wanna work-life balance.

They are a spearheading fashion, right?

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 opened 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 people knew?

- Behind all this competition and the ambition,

you have a very genuine group of people.

They are funny.

They're 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, I'm very grateful for you being a voice of balance,

a voice of reason in this world,

and for the book you've written in 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.

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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.