Why Everything You Know About China is Wrong? (Episode 1)

When I was a teenager back in year 1997, I arrived in the United States as an exchange student at the Horus Man School in New York. My headmaster at the time was a visionary man, Dr. Lawrence Weiss, who anticipated China's future significance and believed it was important for his students to be exposed to an authentically Chinese perspective. I was eager to learn. I was eager to understand the America that had so impressed all of us back home. But I quickly discovered that to my new

classmates, I was an exotic. I had been parachuted in from a land that seemed geographically and ideologically far-flung. And uh they had questions, a blizzard of them. When will China become a democracy? Do you feel oppressed? How do you wake up in the morning? One asked with genuine curiosity knowing that you can't elect your own president. I was fortunate enough to live with a a hospitable American host family and they plunged me straight into democratic political life, handing out leaflets,

attending fundraisers, and the well-informed, politically savvy people I met there, they all surprised me by posing the exact same questions as my fellow students. It became clear to me that even sophisticated Americans, people I deeply respected, possessed a very simplistic understanding of China. The China they imagined was a place of repression and backwardness. It was a China that was entirely alien to the one I knew. The China I had just left was bubbling over with excitement and hope.

We were debating new economic reforms, our bid to host the Olympics, the possibility of joining the World Trade Organization. Our political science textbooks were in a constant state of revision as Marxist thought gradually morphed into socialism with Chinese characteristics. Every summer when I returned home to Beijing, the city's skyline astonished me with its latest transformation. Now, fast forward nearly three decades. That backward homeland of my childhood

is the world's second largest economy. And yet, so much of the world is still asking the exact same questions. There is a deep-seated conviction, especially in the West, that China's present course must end in disaster. For decades, the most popular book to write about China is the one that predicts its imminent collapse. You've seen the headlines. The Great Fall of China. China's economic model is running out of steam. Financial implosion looms on the horizon. China

has in effect become the land that failed to fail. And uh this brings us to the title of my talk today. Why everything you know about China is wrong. It's wrong because the fundamental lens we use to view China is wrong. We are stuck in a binary. We see the world in terms of socialism versus capitalism, state versus market, autocracy versus democracy. When a western observer looks at China, they see a powerful all-encompassing communist party. They see state-owned

enterprises or ses. They see five-year plans and they conclude naturally that this must be a state dominated inefficient Soviet style command economy. But what if I told you that today in China the private sector not the state accounts for more than 60% of national output? What if I told you it accounts for 70% of the nation's wealth and a staggering 80% of all urban employment? 30 years ago, it was the other way around. This is the great China puzzle. How does this vibrant, almost ferocious

uh entrepreneurialism with 20 million private firms springing up like mushrooms coexist with an all powerful centralized communist party? My American friends see this as a total incompatibility. My European colleagues see the party's role in a thriving market as a mystery. They are trying to read China in translation and the truth is getting lost. The assumption is that China's system must converge with Western values or it will collapse. But what if there is a third way? What if

China has forged a unique economic model, a hybrid that is beyond socialism and capitalism, a system that for all its deep flaws, its waste, and its contradictions has successfully lifted 800 million people out of poverty and is now competing at the global technological frontier. That is the system I want to introduce to you today. It is not an ideology. It is a playbook. And to understand it, you must first throw away your old maps. So if it's not the old Soviet model, how does it

actually work? When you think of the Chinese economy, you probably picture a handful of leaders in Beijing pushing buttons and pulling levers, centrally planning every last detail. This is incorrect. The true secret to China's growth, its its unique engine is a system I call the mayor economy. The central architecture of the Chinese state is political centralization paired with economic decentralization. This is perhaps the most important concept to grasp. The central government

actually work? When you think of the Chinese economy, you probably picture a handful of leaders in Beijing pushing buttons and pulling levers, centrally planning every last detail. This is incorrect. The true secret to China's growth, its its unique engine is a system I call the mayor economy. The central architecture of the Chinese state is political centralization paired with economic decentralization. This is perhaps the most important concept to grasp. The central government

in Beijing sets the grand strategic direction. They set the vision, we must become a tech power. We must reduce pollution. We must achieve common prosperity. But then it delegates the execution of that vision to thousands of local officials, governors, municipal party secretaries, and yes, mayors. And here is the genius of the system. It aligns their incentives. In the west, a mayor worries about local budgets and re-election. In China, a mayor's career, their entire political future, their

promotion up the party ladder has historically been tied directly to their economic performance. This is managed through the communist party's nomenclatur system, effectively the world's largest HR department, uh, which appoints, evaluates, and promotes officials. For decades, that performance was measured by one single powerful metric, GDP growth. This creates what we call GDP warship. It transforms every local official in China into essentially a hyper motivated CEO, a venture

capitalist. They become, as the book describes, effective equity stakeholders in their own jurisdiction. This is not a metaphor. When the local government of Hefe, a relatively obscure provincial capital, decided it wanted to become a high-tech hub, what did it do? It didn't just offer tax breaks. It invested $1 billion directly into a struggling private electric vehicle company called NEO, which was then on the brink of bankruptcy. The local government became NEO's largest shareholder.

capitalist. They become, as the book describes, effective equity stakeholders in their own jurisdiction. This is not a metaphor. When the local government of Hefe, a relatively obscure provincial capital, decided it wanted to become a high-tech hub, what did it do? It didn't just offer tax breaks. It invested $1 billion directly into a struggling private electric vehicle company called NEO, which was then on the brink of bankruptcy. The local government became NEO's largest shareholder.

Within a year, NEO's value exploded. Hu made a handsome profit and more importantly, it built an entire electric vehicle industrial cluster. This mayor economy is the engine. It creates a paradise and jungle. If you are a large state-owned enterprise or SOE, you live in paradise. The gates swing open. You get easy loans, state guarantees, and monopolistic power in strategic sectors. But if you are a small private entrepreneur, you are born into the jungle. You face high entry barriers,

exorbitant costs of capital, and a bisantine network of red tape that can require hundreds of approvals. And yet, this is the miracle the entrepreneurs in the jungle won. They outco competed, out innovated, and outgrew their statebacked rivals. How? by forming an unlikely symbiotic and in the early days often illicit relationship with those same local mayors. The mayor needed GDP. The entrepreneur could provide it. This led to ingenious and very Chinese solutions. In the 1980s, when private

enterprise was still ideologically toxic, entrepreneurs would put a red hat on their private company, registering it as a collective or a township enterprise to give it the appearance of being stateowned. the local mayor would look the other way or actively help because this Red Hat company was boosting his GDP numbers, helping his next promotion. This unlikely brew, this state business nexus is the core of the playbook. It is not capitalism. It is not socialism. It

is a hybrid system that worked. It built the economic behemoth that now stands on the world stage. So this mer economy is the hardware. It's the unique operating system. But it doesn't work without the software and that software is the people. This is the second and perhaps more profound area where everything you think you know about China is wrong. When you think of the Chinese people, you probably picture a billion frugal, diligent, conformist workers. You think

of a nation of savers. But this image is dangerously out ofd. The truth is there are two China living side by side, separated by a single radical policy. That policy of course is the one child policy introduced in the late 1970s. This policy was the most radical act of social engineering in human history. And it didn't just change the country's demographics. It fundamentally rewired the economic incentives and the social fabric of every urban family in the nation. It created a new generation, my

generation, that is profoundly different from our parents. Let's look at the puzzles this policy created. Puzzle number one, the savings addiction. The world has always been struck by how much the Chinese save. The average household saving rate is over 30%. In the West, it's often below 10%. The common explanation is, "Oh, it's cultural. Confucious taught frugality." This is at best a tiny part of the story. The real drivers are far more pragmatic and they are a direct

consequence of this policy. First risk. For thousands of years, the Chinese social safety net was not the state. It was your children. Having many children was a blessing. I'll use my own family as an example. My father was born in 1949, one of five children. When my grandparents retired, their five children worked together as a team to care for them. My father bought them an apartment. His siblings provided financial support. A daughter living nearby looked after them dayto-day. They

were secure. My father and his four siblings, however, were all limited to one child. One child, no matter how successful or filial, cannot replace the support network of five. This put a massive uninsurable risk onto my parents' generation. Their only rational response to save to save compulsively to build their own safety net. Second, marriage. This is what economists Shan Jingi and Shiao Jang call the competitive saving motive. The one child policy combined with a persistent

unfortunate cultural preference for sons led to a tragically skewed gender ratio. We have millions of missing women. This creates an intense scramble for wives. And in this fierce marriage market, a bachelor's eligibility is tied directly to his material possessions. As the popular saying, a modification of Jane Austin goes, "A single man in one of a wife must be in possession of a property and a car." This pressure forces not just the man but his entire family, his

parents, his grandparents to save aggressively to help him secure a home um just so he can compete for a wife and continue the family line. This brings us to puzzle number two, the accidental golden age for women. The dark side of the sun preference was the missing women phenomenon. But it had a powerful completely unintended consequence for the girls who were born. In a family with only one child, a daughter in effect is raised as a son. For the first time in Chinese history, an urban

daughter did not have to compete with a brother for the family's precious and limited resources. In the past, uh, a family with a boy and a girl would on average give the son more years of schooling. But now, parents poured all their educational hopes and investments into their only daughter. The results are stunning. In 1978, women made up only 24.2% of college students. By 2009, that number was over 50%. Today, if you look at publicly listed companies, the percentage of female

executives rises dramatically with each generation. For those born in the 1950s, it's 12%. For those born in the 1980s, it's 35%, for the 1990s cohort, it's 42%. The one child policy, while draconian, did more to economically empower urban women than any other policy in China's history. And this leads to puzzle number three, the little emperors who killed saving. This new generation, my generation, and those after me is a world apart from our parents. My family lived on rationed

food coupons. I remember when the first McDonald's opened in Beijing. A happy meal was a rare treat, a reward for good grades. This new generation, the little emperors and empresses, were born into a world without siblings and for the first time a world without shortage. They are confident, privileged, and most importantly, they are consumers. They are the ones who turned Singles Day, a quirky anti Valentine's Day invented by lonely students, into a 140 billion online

food coupons. I remember when the first McDonald's opened in Beijing. A happy meal was a rare treat, a reward for good grades. This new generation, the little emperors and empresses, were born into a world without siblings and for the first time a world without shortage. They are confident, privileged, and most importantly, they are consumers. They are the ones who turned Singles Day, a quirky anti Valentine's Day invented by lonely students, into a 140 billion online

shopping event bigger than America's Black Friday and Cyber Monday combined. They don't just save, they borrow. They use apps like Alipay, which has a function called Huab. It literally means just spend. This generation with its knack for lifestyle consumption is the engine that will finally turn China from a nation of savers to a nation of spenders. So when you analyze China, you cannot analyze one Chinese consumer. You must ask, are you talking about the parent who saves out of fear and

tradition or the child who spends with global confidence? These two forces are pulling the economy in opposite directions. This brings us to our final and most critical discussion. We have this unique mayor economy hardware powered by a paradoxical one child generation software. This system has created staggering growth, but it has also created staggering risks. And this is the final misunderstanding. The West sees China's financial system and predicts an imminent spectacular

collapse. The evidence is obvious and they are right in a way. The system is full of bombs. Bomb one, the stock market. It's the world's worst. Why? Because it was never designed for investors. It was designed to bail out failing SOE. The best firms, Alibaba, Tencent, JD.com, fled to New York because they weren't profitable enough for the rigid approval-based domestic market. Bomb two, the housing bubble, ghost towns, Beijing prices on a fraction of the income. How is this possible? Because

collapse. The evidence is obvious and they are right in a way. The system is full of bombs. Bomb one, the stock market. It's the world's worst. Why? Because it was never designed for investors. It was designed to bail out failing SOE. The best firms, Alibaba, Tencent, JD.com, fled to New York because they weren't profitable enough for the rigid approval-based domestic market. Bomb two, the housing bubble, ghost towns, Beijing prices on a fraction of the income. How is this possible? Because

it's not a normal market. It's the funding mechanism for the mayor economy. And it's propped up by the six wallet phenomenon, parents plus four grandparents. Bomb three, the shadow banks. This is the $3 trillion dark doppelganger, the wealth management products and trust loans that funded the mayors and the property developers. So why no collapse? Why no Lehman Brothers moment? Because in the west a financial crisis is a crisis of confidence in private actors. In China, the system is

a closed loop. Think about it. The lenders are the major banks which are stateowned. The borrowers are uh the LGFS which are stateowned. The regulator is the state. The state cannot in effect default against itself. When an LGFV cannot pay back its loan to a stateowned bank, there is no panic. There is no default. The central government simply orders the bank to extend and pretend to roll over the loan to evergreen it. This is the great trade-off. The Western system is resilient. It can crash,

absorb the shock, and bounce back. China's system is profoundly inefficient and wasteful, but it is incredibly robust. It uses state power to prevent the crash in the first place. This brings me to my final point. The old playbook, the dwan, ping, quai, or short, flat, fast model is over. China is coming of age. The real challenge for China is no longer just growth. It's the social problem. It's the massive income inequality now approaching US levels. This is the new existential threat. And

this is why starting in year 220, you saw the state begin its dramatic, shocking crackdown on its own tech billionaires. This isn't a return to Mauism. This is the new playbook. This is the painful, clumsy pivot from letting some get rich to the second half of Deng Xiaoping's promise, common prosperity. China is now trying to solve the central riddle of 21st century capitalism. How do you manage the immense uh society bending power of technology, the displacement of jobs and

the runaway wealth of a few before it leads to the social and political polarization that is tearing the west apart. So everything you know about China is wrong because you are still reading the old translated manual. The new complex and far more uncertain playbook is being written right