Dan Wang on China's Breakneck Economic Growth

In the past couple of years, the world has fully awoken to the incredible economic and technological growth exhibited by China. But what lessons are there for America? Are there even lessons for America? Dan Wang, research fellow at Stanford University's Hoover History Lab, has probably been one of the foremost commentators and observers on China's rise, having taken seriously their efforts to push the technological frontiers for years now. Now, he's out with a new book BREAKNECK: China's Quest to Engineer the Future. On this episode, we talk about what he's seen in the country, whether China is legitimately on the road to socialism, and how perceptions of the country have changed since he started doing his research. Read more:Samsung, SK Hynix Lose US Waivers on Chip Gear for China PlantsChina Warns Against Excess Competition in Booming AI Race Only Bloomberg - Business News, Stock Markets, Finance, Breaking & World News subscribers can get the Odd Lots newsletter in their inbox each week, plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlotsSee omnystudio.com/listener for privacy information.

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• 0:00Speaker 00

  Finance is increasingly being built on digital rails. But as the adoption of virtual assets, tokenization and stable coins grows, can regulation not only keep pace but help accelerate it? Find out more later in the podcast.

• 0:16Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting and hiring practices.

• 0:59Speaker 01

  But according to recruiters, advisors and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company. And Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at chatgpt.com.

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  Bloomberg Audio Studios. Podcasts, radio, news.

• 2:30Tracy Alloway?

  Hello and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

• 2:34Joe Weisenthal?

  And I'm Joe Weisenthal.

• 2:35Tracy Alloway?

  Joe, we are recording this on August 27th. Did you catch the Trump Cabinet meeting yesterday?

• 2:44Joe Weisenthal?

  I saw your tweets and they looked like sort of the most obsequious. I mean, a lot of these unusually obsequious, but even, yes, I saw your tweets.

• 2:54Tracy Alloway?

  You could just say yes. So there were a bunch of things that stood out, but one in particular was Donald Trump talking about building out new energy capacity. And he said specifically, I'm going to quote here, "You know, in China, they do it very quickly. They have one person that says, do it, and that's it. But essentially, we have one person that says, do it, and we've given that order."

• 3:18Joe Weisenthal?

  Yeah, you know, like, he's very abundance coded. He wants to like, he wants to get rid of all of the, or he seems to have this impulse to get rid of all of the myriad checks and balances and all these things that stand in the way of developing things. So it sounds like Trump is abundance pelt. I assume that's the direction you're going in.

• 3:37Tracy Alloway?

  Yes. If there's one thing I think you could say about China's economy and its political economy, it is that China is pretty good at building things.

• 3:45Joe Weisenthal?

  Yes.

• 3:45Tracy Alloway?

  Right? And we've seen various examples of that over time. Back when I was living in Hong Kong, I took the high-speed rail from Hong Kong to Beijing, and that was absolutely amazing. You get to Beijing in less than a day. The US is nowhere near having anything like that. And I speak as someone who takes Amtrak in the Northeast regularly. On the other hand, China, at various times, has produced too much, right?

• 4:12Joe Weisenthal?

  It's accused as such, right? I know that people say this.

• 4:16Tracy Alloway?

  Okay, but for instance, you think back to the ghost city.

• 4:20Joe Weisenthal?

  Sure.

• 4:20Tracy Alloway?

  Bridges to nowhere.

• 4:22Joe Weisenthal?

  Sure, and they were bridges to nowhere at the time.

• 4:24Tracy Alloway?

  Amusement parks that no one goes to.

• 4:26Joe Weisenthal?

  Definitely, although we have amusement parks here that no one goes to.

• 4:30Tracy Alloway?

  Disagree, disagree hard. But this has sparked a new movement in China by policymakers called Involusion.

• 4:38Joe Weisenthal?

  Yes.

• 4:39Tracy Alloway?

  Which is basically an attempt to reduce overcapacity in terms of building things.

• 4:44Joe Weisenthal?

  There's definitely no question that there does seem to be this phenomenon, which the government in Beijing seems highly cognizant of, which is this sort of like profitless competition, much of it driven by the incentive structure that is borne by the provinces promoting their local champions. And so for as much like sort of success as some of these companies have on some metrics, there's no money to be made in many cases. It sounds sort of nice from the consumer perspective, you know, it's like Zerbi or 2010s when we were all getting like, you know, cheap Ubers and stuff like that. But, you know, there's a seems to be a risk of certain internal imbalances on that front.

• 5:20Tracy Alloway?

  I think the issue is you have a lot of companies who are basically producing all the same thing and therefore, you know, racing to the bottom in terms of price and no one can actually make money. And I don't know about you, but if I was a startup founder, I would probably want to make money, right? At some point. I would not want to be locked in a forever competition in terms of who could drive the absolute lowest cost.

• 5:43Joe Weisenthal?

  Well, what if you were just a normal consumer who wasn't a founder?

• 5:46Tracy Alloway?

  Sadly, that is what I am. Okay, well, on this note, we have the perfect guest. We're going to be speaking with Dan Wang, friend of the pod and who has just written a new book called Breakneck: China's Quest to Engineer the Future. He's also a research scholar at the Hoover Institution. So, Dan, welcome back to the show.

• 6:06Speaker 06

  Thanks so much, Tracy. Really glad to talk about Moby Dick with my friends.

• 6:11Joe Weisenthal?

  Why do you cause trouble? Why do you cause trouble? You know?

• 6:14Tracy Alloway?

  I was actually wondering if you were going to bring up the Moby Dick reference in the book.

• 6:19Speaker 06

  Joe, I've been a [BLEEP] for a very long time, and maybe this is what we need to be getting into.

• 6:23Tracy Alloway?

  That's right. Okay, simple question. To start, why does China like building stuff?

• 6:28Speaker 06

  China likes building stuff because it is made up of leadership that is very heavily engineering pilled. Many of them have been engineers trained of a very Soviet sort, hydraulic engineers, electrical engineers, thermal engineers, which is kind of a term in China that means producing coal and processing coal. They treat the mega project as the solution to every problem. They are building enormous dams. They're building a big new dam now that is going to use 60 times more concrete than the Hoover Dam. It's going to produce, I think, three times as much power as the Three Gorges Dam. But this is a lot of their solutions to a lot of different economic problems and social problems as well, that

• 7:13Speaker 06

  new highways, new homes, coal plants, hyperscalers, it's what they know how to do and it's what they're going to do.

• 7:19Joe Weisenthal?

  First of all, before we go any further, I just want to say, like, having spoken to you for years, I'm thrilled of all the recognition you're getting for this book.

• 7:27Speaker 06

  Thank you.

• 7:27Joe Weisenthal?

  I know we weren't like the first to discover Dan Wang. I think Tyler Cowen got there first, but it's been fantastic talking to you over the years. And there's sort of like a vindication, I think, of your career, et cetera, because now everyone wants to see the world through the Dan Wang lens. So I just wanted to say how exciting it is and happy for you that you're getting all this attention.

• 7:48Tracy Alloway?

  Joe's channeling the Trump cabinet meeting.

• 7:50Speaker 06

  Oh, wow, good.

• 7:51Joe Weisenthal?

  I'm being...

• 7:52Speaker 06

  Am I Trump?

• 7:53Joe Weisenthal?

  Yeah, I guess so.

• 7:55Speaker 06

  Okay, good, okay.

• 7:56Joe Weisenthal?

  As Tracy mentioned, Trump talked about, you know, someone says, do it, and then they do it. But I'm curious, like, how much is it, would you say, like, the political system really allows for that versus the actual, like, breadth of labor and just engineering knowledge? Like, how would you tilt the sort of political structure versus the skills?

• 8:16Speaker 06

  I think it's both. So China has a lot of economic ministries, like the NDRC, the National Development and Reform Commission, and the MIT, the Ministry of Industry and information technologies. You have all of these planners that are making new plans all the time. And they have exactly great plans to know where the next subway station in Beijing or Shenzhen or Kunming ought to go. And so there's plenty of shovel-ready projects because people have already been planning for these things for years. And every time China's economy has any sort of a wobble, then the Communist Party says, OK, well, we're going to build another really big dam or we're going to build more highway systems. So you have a lot of shovel-ready projects in place.

• 9:00Speaker 06

  And then you have the government thinking that, well, pouring more concrete is still going to be the solution to a lot of our different problems. And on top of that, you have a very skilled manufacturing workforce. You have a very skilled public sector that has been building a lot of high-speed trains, that have been building a lot of big ships, that have been building subway systems. They know how to do this stuff. And so it just comes really naturally. You have the system plus the politics all favoring a lot of construction.

• 9:27Tracy Alloway?

  When you say Chinese policymakers are made up of engineers, I have two questions. So one, how did that come to be? And then secondly, could you maybe give us some specific examples of how that manifests in actual policy? So for instance, does having an engineering background make you perhaps better at making strategic decisions about economic priorities? Like, how does that background actually come into play?

• 9:53Speaker 06

  I think China's engineering state has deep roots. But the modern manifestation really took shape after the 1980s, when Deng Xiaoping took over from the total mayhem of the Mao years. And Deng Xiaoping thought, well, Mao was kind of this poet. He was a warlord. He was a romantic. He was a murderer. What is the opposite of all of that? Well, we're going to put mechanical engineers within the Politburo. And that is exactly what Deng Xiaoping did. So throughout the 1980s and the 1990s, they don't put a lot of engineers in the Politburo, such that by the year 2002, every single member of the Standing Committee, all nine people, especially Hu Jintao and Wen Jiabao, the General Secretary and the Premier at the time.

• 10:36Speaker 06

  Everyone had degrees in engineering. And that has fluctuated a little bit. By the time that Xi Jinping came to office, whose undergrad was a chemical engineer. You know, I think he saw the light and his doctorate was Marxist economics. So, you know, we have a pseudo economist up there. By the time that Xi came into office, his premier, the Ke Qiang, was trained in, I believe, law and economics. But now, in the 20th Party Congress after 2022, China's engineers are really dominant again, which you have a lot of people from the military industrial complex be in the top of the Politburo. But I also want to suggest, but playfully and lightly, that there are ancient roots of China's engineering state as well.

• 11:20Speaker 06

  This is famously the state that administered a vast examination system, in which people became mandarins by doing these exams administered by the court. You had a lot of Chinese emperors that didn't hesitate to conscript people to build great walls or grand canals. So these are fortifications and waterway systems. And so I don't want to take this too literally, but you can sort of see how a lot of emperors never really hesitated to completely restructure a person's relationship to our land. And so that's a little bit deeper, too.

• 11:52Joe Weisenthal?

  So, you know, Tracy mentioned that, and I have no doubt that it's true, that there's, you know, these various like white elephant projects or things that get built that aren't necessary, and your book talks about them. All that being said, it seems like one of the objective facts in the world is that Chinese living standards and the economy has expanded dramatically in the last 10, 20 years, like to an extraordinary degree. Does the success of all these Chinese planning boards, do you think it like strikes a heart in certain conventionalism? Planning isn't supposed to work. Economists are very skeptical of planning. The Hayekian idea that the market and prices are the best signals for these things. What kind of challenges China's success posed to some of these ideas?

• 12:36Speaker 06

  I don't want to think that China's success strikes at the very heart of planning in economics. I think that China has not demonstrated the success of central planning at large. I think I would defend a narrower case that a lot of construction has been good for a lot of people. So I think that China's-

• 12:59Joe Weisenthal?

  What other test is there?

• 13:00Speaker 06

  Well, maybe there are other tests, which is that whether people are happy. I think that is a decent test. Whether they feel the ability to have creative expression, whether they feel that their lives are going to be better because they're able to save some money. I think it's not just about the physical living standards, although I think that is really important because I've spent plenty of time in China's richer zones. I was living in Hong Kong, Beijing, and Shanghai, where you can see that these cities get better and better every year. You have new subway stations. Shanghai this year will have 1,000 parks, up from 500 in 2020. All of these cities are really highly functional. I've been in China's southwest, in Guizhou Province, China's fourth poorest province,

• 13:42Speaker 06

  and you have these enormous bridges that are bridges to nowhere when they start, but then to nowhere has become maybe to somewhere after it is built. And people actually feel a lot of pride about all of these things. And so I think that a lot of construction, a lot of home building, a lot of electricity production through coal as well as hydro and solar, these things are all really good. I think you can definitely point to a lot of costs. There's a lot of material waste in all of this concrete that's very carbon intensive. There's a lot of financial problems. Guizhou can't really pay a lot of its debts right now. There's a lot of displacement of people. Three Gorges Dam displaced something like a million people. I would say that physical construction is mostly pretty good, though there are plenty of costs.

• 14:23Tracy Alloway?

  Can you talk more about financial problems from all of this? Because obviously, the local government debt situation has been much discussed, but you point out in the book, for instance, that you can see evidence of some of this impact in things like Chinese stocks. So because you have all these companies who are basically racing to the bottom in terms of price, it's difficult for them to produce a profit. And so the stock price basically has traded sideways for like a decade. I guess part of that would also be capital controls and the impact from that. But how does this manifest in terms of finances?

• 14:57Speaker 06

  Well, let's take a look at something like the solar industry, which I think is kind of an emblematic Chinese success. You have China producing something like 90% of the solar PV modules in the world. But China isn't only producing the final product, it is also producing all of the polysilicon, as well as all the tools to produce solar. And in the solar industry, you have basically zero differentiation between most of the big solar producers. You know, something like the third largest solar producer in China is not that different from the 15th largest, and maybe not even that different from the 30th largest. They're all making pretty undifferentiated products. And what this has represented is kind of a strategic triumph for the Chinese government, that they have a lock on one of these critical industries of the future

• 15:42Speaker 06

  that a lot of countries will need. It is awesome for consumers everywhere. So if you are trying to build a solar panel onto your roof, either in China or in the US, you know, solar costs have plunged something like 94% since the year 2000 or so. I think that's about the right figure. And it's been total misery for these companies, as well as their investors. And maybe this is what socialism with Chinese characteristics means, which is a lot of state power, a lot of consumer power, but not very much financial investors' benefit.

• 16:30Speaker 00

  What's next for virtual assets? I'm Jacob Grease, host of Economy Scale, a series exploring growth in key global sectors. And this episode, we're diving into the digital forces shaping finance. Sean McHugh from Dubai-based Virtual Assets Regulatory Authority has this to say.

• 16:46Speaker 07

  We're seeing a lot of insocial players come in, digital asset dedicated hedge funds, high-frequency traders and that sort of thing, and folks who service insocial clients.

• 16:55Speaker 00

  As more capital enters the market, adaptive regulation is likely to become increasingly key. Reece Merrick of Ripple says...

• 17:03Speaker 07

  A lot of regulators globally would like to keep the industry at arm's length. That's the opposite here. I think also what you'll find is that regulation and frameworks can come out, but some of them are maybe a slight iteration on some 80-year-old policy and not actually in line with what the technology can do and offer. And again, that's very different in Dubai.

• 17:22Speaker 00

  Listen to the full episode wherever you get your podcasts. This series is brought to you by Bloomberg Media Studios and the Dubai Department of Economy and Tourism.

• 17:32Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting and hiring practices,

• 18:15Speaker 01

  but according to recruiters, advisors and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at chatgpt.com.

• 18:55Joe Weisenthal?

  So, speaking of Herman Melville, this is not about Moby Dick. I'm actually thinking about his novella Bartleby, in which, you know, the famous character Bartleby decides, I would prefer not to. He's working on Wall Street, and then one day, he would prefer not to. And the people around him are completely exasperated at this person. And of course, we saw a few years ago, people were talking about the lie-flat movement. And so when you talk about, oh, you know, like, perhaps it's come at the cost of happiness. Like, how widespread is this? How much of this success in China? I mean, one of the other aspects of, you know, unions aren't legal in China. I presume striking isn't legal in China and so forth. Like, how much of this material success that everyone enjoys,

• 19:38Joe Weisenthal?

  to some extent, in your view, has come down to a sort of extracting the worker surplus? And how big do you think is? Is there like a larger brewing impulse to fight against that?

• 19:49Speaker 06

  Well, when I first read Bartleby the Scrivener, I saw some commentary that it's actually a lot about homoeroticism. I thought that maybe that's where we were going to go, but maybe we'll take a look at that later. I think that whether people in China are happy is always a very interesting and excessively broad question. And I always wonder about things like that.

• 20:09Joe Weisenthal?

  I wonder if anyone's happy in the world, but keep going.

• 20:11Speaker 06

  You know, Bhutan, with something like four traffic lights in the country, is supposedly super happy. We don't really, we don't really get that. Certainly, we can observe that there are a lot of Chinese, mostly elites, who are interested in creative expression. Many of them have become deeply unsatisfied. So they are moving to the Netherlands, they're moving to New York, they're moving to Chiang Mai. I've seen some of their events here in New York. There's a feminist stand-up comedy, which is, I know, having a lot of comedy shows in Chinese. That is pretty active of a scene here in Manhattan, actually. And so there's a lot of people, journalists, who have had their pieces completely censored, Six Ways to Sunday, who are pretty dissatisfied.

• 20:55Speaker 06

  There's plenty of people dissatisfied in Shanghai, who had a horrible time throughout the lockdown. And we had these astonishing numbers of something like, at its peak... Forty thousand Chinese flying to Ecuador where they don't have to get a visa to walk up to the southwestern border in the United States because they are so upset with Xi Jinping. But is the broader mass of Chinese unhappy? Well, pretty hard to say. I think there are plenty of people who are working for state-owned enterprises and not really enjoying much of their time there. You could be working for one of these big tech companies and working 996 hours, 9 a.m. to 9 p.m., six days a week, and that's not very happy. You could be living with your parents because...

• 21:37Joe Weisenthal?

  Which, by the way, is the same in Silicon Valley.

• 21:39Speaker 06

  Well, I thought it was the same in Bloomberg, but...

• 21:41Joe Weisenthal?

  Yeah, it's probably 997 in Silicon Valley, but...

• 21:43Tracy Alloway?

  Do you get equity in the company in return for your hard work?

• 21:46Speaker 06

  Maybe some of them do, but it's probably not to the same extent in Silicon Valley. But at the same time, if you're a young Chinese living in Shanghai, perhaps your cost of living is not super high because you're living with your parents. You get to save some money by working at a state-owned enterprise. You have excellent cafes popping up all the time. A lot of things are pretty cheap. You can get a bowl of noodles really cheaply. And for people who are debating whether they want to try to make a career in London or New York and try to be really ambitious or just have a tomping lifestyle, life-flat lifestyle in Shanghai, maybe that's kind of a wash. So I don't see simmering discontent that threatens the top old regime, but certainly there are plenty of people dissatisfied.

• 22:30Tracy Alloway?

  There's also arguably a sort of existential dread hanging over certain sectors or certain entrepreneurs, which is that at any time, the Chinese government could change its mind about what industry it actually wants to promote and nurture. And we saw that happen, I think, when you and I were both in Hong Kong in 2020 slash 2021. And this was a big deal. So this idea that China all of a sudden kind of turned its back on more consumer-oriented technology companies. How big of a legacy did that have? Or how big of an impact did that have on the sort of entrepreneurial spirit of China?

• 23:11Speaker 06

  There is plenty of data to suggest that VC funds in China are having a hard time actually raising funds and also having a hard time deploying their capital. Certainly, it's become pretty difficult for a lot of startups to exit because they can't necessarily list in the US and they can't necessarily list very easily in China as well. China's consumption over the last few years has been pretty limp. After the COVID crackdowns, a lot of companies had to have pretty extensive layoffs and they're just not having a really easy time, given the limp consumption spending at large in China. I think this goes to a kind of a broader point within authoritarian systems, which is that no one feels very safe in a lot of authoritarian systems.

• 23:55Speaker 06

  You can be an elite in Beijing and what is your life going to be? Your life could be working in the financial industry, which is a definite elite everywhere, including in Beijing. And two years ago, Beijing announced that it was going to have a salary cap of $300,000 roughly for people working in state-owned banks. And if you made over that figure last couple of years, you may have to give some money back to the government. Maybe you're working for a tech company and you think that online education is going to be totally safe because Chinese love education and they're always going to be spending more money on their kids. And then that worked until the government declared everything must be a nonprofit. If you're working for the military, if you're working for the government, your life could

• 24:37Speaker 06

  be subject to either a corruption crackdown or some sort of political winds changing and your patron is no longer in place and then your whole network of patronage has to fall. And so this is one of these things where there is kind of this apocalyptic sense that hangs over you if you're living in Beijing, Shanghai, perhaps even Hong Kong, where a lot of your life could fall apart and there's no one really to protect you, no lawyers that you can turn to, no court system to really turn to.

• 25:04Joe Weisenthal?

  You know, one of these things that comes up a lot, and I don't really find it to be that interesting with conversation, like, oh, is China communist or capitalist? And it seems like a very tedious conversation. I mean, it has a Leninist system of government. I think that fact is safe to say. Is it going in the direction of something that we could call socialist? I think Deng Xiaoping said the goal was to have a modern socialist state by the year 2049, so 24 years from now. Is it going in a direction that would be described as socialism?

• 25:36Speaker 06

  Well, there are a bunch of Marxists over there and they would always tell you that history is the most important and we are marching towards socialism. So their answer is yes. I have my doubts. I took a look at China today and I think it is the most right wing major country in the world. This is a country that really prizes manufacturing above all else. It doesn't really have much by way of immigration. You have a state that enforces totally traditional gender roles and you have a pretty minimal welfare safety net where taxes in China are not actually that high. It is pretty regrettably funded on consumption taxes. This is a country that arrests union organizers and has busted up certain Marxist reading groups in universities.

• 26:19Speaker 06

  And I take a look at that and I think, doesn't this look kind of like Eisenhower's America? You know, this is-

• 26:25Joe Weisenthal?

  I mean, it certainly doesn't sound liberal.

• 26:27Speaker 06

  It doesn't sound very liberal at all and I'm not even sure if it sounds very socialist. There is absolutely a Leninist aspect in which state control of public enterprises, you know, public ownership of production is very much real. Many important sectors, telecommunications, aviation, energy are state owned. And you have some redistribution between the provinces. But, you know, kind of my handy snapshot is not to think of China as socialist or autocratic. I think these are pretty limited terms that don't really offer much anymore. My simple formulation of China is that it is a Leninist technocracy with grand opera characteristics, pretty rational most of the time, but then every so often will do something pretty preposterous and then kind of collapse in something really ridiculous.

• 27:11Tracy Alloway?

  That said, we have seen recently China make some moves to boost social safety nets. So they've said they're gonna, you know, do more for seniors and they're also gonna try to boost consumer spending. One thing that I thought was kind of amusing was they basically rolled out a cash for clunkers equivalent. And again, I think of all those- Things, a focus on consumer spending, social safety nets, although arguably in the US, those are perhaps declining, cash for clunkers, that sort of thing. I think that is very American in many ways in terms of the political economy. And meanwhile, in the US, you know, Trump is talking about how he wants to be more efficient in terms

• 27:52Tracy Alloway?

  of controlling the economy like China. We've also had some instances of the US government taking stakes in companies recently. That seems very Chinese in certain respects. Is the US starting to emulate China and China emulate the US?

• 28:09Speaker 06

  Tracy, when I first heard of the tariffs on liberation day, I thought that liberation doesn't sound very much like an American word. It sounds much more like a Chinese word to my ears.

• 28:21Joe Weisenthal?

  The Five Liberations Campaign.

• 28:23Speaker 06

  Yes, right. We're gonna, we're gonna liberate Taiwan into socialism. You know, this is what they're up to. And certainly, there are a lot of aspects in which the US, and Trump in particular, is copying China. We are making Intel a state-owned enterprise with American characteristics. There is a lot of questions now with data probity and whether the unemployment figures are going to be well-reported. And there is kind of just this, you know, visiting stochastic terror on the downtrodden, especially undocumented immigrants. And all of these things are not very nice things that I think that Trump is learning from Xi. And right now, I think what we have is authoritarianism without

• 29:05Speaker 06

  the good stuff. And the good stuff of actually building quite a lot of mass transit and clean technology generation, clean energy generation, rather. You know, we don't really have the Port Authority bus terminal being built and renovated on time. We don't have California high-speed rail. We don't have smoothly functional cities that have a lot of public order. And I don't think that the US should try to emulate a lot of these things, but I think there are better things to emulate because a lot of what Trump is building are gilded ballrooms and detention centers. And, you know, we're getting quite a lot of just, I think, many of the worst aspects of authoritarianism.

• 29:42Joe Weisenthal?

  You know, I'm curious. I said at the beginning, you've had this huge rise. Everyone is obsessed with this story right now. Everyone, it's just every, every day I wake up, it's on social media, it's coming from DC, etc. Everyone is sort of maybe miles agape, but the capacity of China to build that dam or, you know, you open Instagram and it's some crazy drone show or something like that that shows the technical prowess there. You know, this wasn't the case, this sort of popularization of all this, when you started your book, or certainly not the first time we had you on the show. What do you make of that? Like, how has perception of China changed, or maybe even your own perception of China changed, since you started really focusing on this stuff?

• 30:27Speaker 06

  Well, Joe, maybe Chinese industrialism has been my white whale for quite a long time. I'm sorry.

• 30:33Tracy Alloway?

  Very good.

• 30:34Speaker 06

  I'm sorry. I'm sorry. I moved to Hong Kong at the start of 2017 from Silicon Valley, where I used to be working, in part because I was feeling that a lot of the technologies that was important in Silicon Valley at the time were not so interesting. It was a lot of cryptocurrencies, it was a lot of consumer platforms. We hadn't even gotten to SaaS for business yet. And so it was just not that interesting. And so when I had lunch with Arthur Krober, and he told me about something called Made in China 2025, I thought that ultra high voltage transmission, electric vehicle batteries, memory chips, these were far more interesting. But I felt that it was actually making a distinctively unpopular

• 31:17Speaker 06

  decision among my Silicon Valley peers, because they thought that they were the center of the universe, which is a view they still hold. And what are we doing if we're not being in San Francisco and not pursuing some aspect of tech? And so when I moved to China, it definitely didn't feel like the elitist, you know, popular thing to do. But I was really glad to go take a look at what China was building. And I think that there is a broader sense in Silicon Valley that... You know, tech is important, but non-tech is also important. Right now, I feel like a lot of folks in Silicon Valley, where I spent a lot of time as a fellow at Hoover, you know, a lot of folks are trying to build God in a box. And that attention has shifted to AI. And I feel like that has become a totalizing aspect once more.

• 32:00Speaker 06

  And I feel like part of my task is still to remind people that drones are important and bridges are important and we live in a material world and, you know, let's build up a manufacturing base as well.

• 32:27Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw, innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

• 33:09Speaker 01

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• 33:51Speaker 02

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• 34:36Speaker 02

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• 35:04Tracy Alloway?

  So with the focus shifting to AI, you could make an argument that the U.S. has the lead there still, even though we've seen moments of panic with the deep-seak model earlier this year and things like that. But on the other hand, I suppose you could argue that AI also needs vast amounts of physical infrastructure, including data centers, energy, chips. Who has the upper hand when it comes to AI?

• 35:27Speaker 06

  I don't have a super strong view on this, but I could outline a potential scenario in which China is going to be leading on AI based on a few factors. First and most important, as you point out, Tracy, that China has a lot of electrical power. So the U.S. may have all of the computing because it has all of the advanced chips from Nvidia. As Howard Letnick says, China has at best the fourth best chips in terms of AI, and that is a pretty substantial constraint. But what is a bigger U.S. constraint maybe right now going forward is that There just isn't enough electrical power, especially if Trump is taking wind turbines offline and being very discriminatory about certain types of energy.

• 36:09Speaker 06

  And China, I think, has organized itself as a civilization to deny nothing towards heavy industry. Whatever heavy industry wants, it is going to get. And that could be powered by solar, it could be powered by wind, it could be powered by coal, it could be powered by nuclear. But China will not have this issue that Meta faced earlier in the end of last year in which a rare species of bee prevented Meta from building a giant new power facility. And China will definitely not do that. So China has a lot of electrical power. China may not have a lot of advanced chips, but it has a lot of mature chips, which are going to be necessary for inference. So if we do invent God in a Box, we're going to be running queries all the time to figure out how to automate and shop and whatever else.

• 36:53Speaker 06

  And that is going to require a lot of processing power. And I think this is where China's mature chips are going to have a pretty good advantage. And China also has, I think, another unique advantage, which is that its training data might be more strategically valuable. China has most of the manufacturing capacity in the world, or about 30% of manufacturing value add, but that is quite a large chunk. And what does the US have? Well, we have a lot of consulting companies and a lot of healthcare companies. So maybe the US will automate something on the scale of McKinsey and China will automate something on the scale of Foxconn. And they're going to have a lot more manufacturing production and we're going to have a lot more better consultants.

• 37:37Tracy Alloway?

  Yeah, I suppose there's a synergy here where you could use AI to make your manufacturing more efficient, right?

• 37:43Joe Weisenthal?

  No, totally. And we talked to Cameron Johnson about that, the diffusion of AI within it. And right, like a factory that's monitored properly is brimming with fresh training data all the time. And that has a compounding effect and an accelerating effect and so forth, potentially widening that gap. I want to ask actually another AI question. It's not even about US-China per se, maybe a more US question. You use the word totalizing, and I've been Think about this exactly in a couple of different ways. Like, one is, like, I wonder about whether people have lost interest in things like, say, drug discovery, in part because of this implicit assumption, well, once we achieve AGI in two years, that will do all the drug discovery.

• 38:25Joe Weisenthal?

  So why are we even bothering with working on that in the meantime? And also, it feels like much of culture strikes me in the US as sort of disappearing and other things like that people are just sort of losing interest in lots of things because AI is crowding out in the psychological space, everything else. And I'm curious if in your time in Bay Area, thinking about these things, whether that rings true or not.

• 38:51Speaker 06

  Definitely. I hear the craziest [BLEEP] when I'm in California. And I hear, you know, I think a lot of people are very smart, Stanford kids who are very smart and yet they could be very narrow minded and not have a very broad view. I heard some things like, people say, well, maybe we don't need to think so much about climate change, for example, anymore. And I say, oh, well, why don't we have to think about climate change? Because AI will figure out what we need to do with climate change and implement everything. Maybe we don't need to, you know, be so careful about teaching kids how to read the great books or maybe even to read at all because AI will just help us get there. And they're trying to, you know, manifest the eschaton in Silicon Valley.

• 39:36Speaker 06

  And there is also this bit of an apocalyptic error in which maybe the world will end in 2027 because AGI will be out there and it's not going to be aligned and all of the, our world will kind of just end. I really don't buy that view. I believe that we have to have a longer term view about everything. There is kind of this, you know, sense often in DC, this is not consensus, but every so often one would hear that, oh, the Communist Party is so weak, their legitimacy is so thin and that might topple over at any moment and we don't really have to treat it seriously.

• 40:08Joe Weisenthal?

  It's cope, isn't it?

• 40:08Speaker 06

  That feels very much like cope. And there is also a Silicon Valley variant, which is not really the same about China. But there is this sense that, well, you know, we're all going to ascend into utopia in 2027 when we, you know, invent all the AI and the superintelligence.

• 40:24Tracy Alloway?

  I like how binary everything is. It's either utopia or, you know, the apocalypse. On the note of potential own goals, one of the things we've had now is years and years and years of US export controls on semiconductors going into China. And I remember you were very early in describing this as a sort of Chinese Sputnik moment. This idea that this was the moment when China really realized that it actually had to produce these things itself and try to regain or get the lead over the US when it comes to crucially strategic technology. Now that the dust has kind of settled, although clearly things are happening on the tariff side. But now that we've had years and years and years

• 41:07Tracy Alloway?

  of export controls, does it look like that spurred China's technological development?

• 41:12Speaker 06

  I think that it definitely spurred China's technology development. If we take a look at some of these sanctioned companies today, SMIC, which was on the entity list in 2020, now has doubled the revenues of that level. Huawei, which had the most severe export controls, it was kind of like a new export control invented specifically to hurt Huawei, has by now recovered its revenues back to the 2019 pre-sanctions levels. And being in China was just this really stark reminder that US export controls really accelerated a lot of Chinese efforts to do better. Now, Beijing has always had this ambition to be a technology power. It's had this ambition for a very long time. But for the most part, it didn't have

• 41:55Speaker 06

  a lot of China's most dynamic companies willing to sign on because a lot of China's most dynamic companies, let's say Huawei, ByteDance, DJI, they were able to say to Beijing, well, we need to make the most efficient 5G equipment or the most efficient drones or the most efficient short-form video, whatever it is, products that we should export around the world. And therefore, we need to be buying the best products in the world. And that was overwhelmingly things like Qualcomm chips or Nvidia chips or whatever else. And what the US government did was that it kneecapped their ability to access US equipment at a stroke. And that fully aligned them into Beijing's goals of technology pursuit. And now you have Huawei. Being all sweetness and light to Chinese domestic vendors to say, well,

• 42:40Speaker 06

  why don't we work together? We really have a lot of common interests here. Huawei was not super big into semiconductors in 2019 in terms of their production. But now Huawei is one of the biggest spenders in semiconductors R and D. And I believe I just saw a Bloomberg piece saying that Huawei's chips are now rolling off the production line. And that was something, I think, entirely created by the US government, that all of these fiercely competitive companies really were fighting for their lives, solving seven problems a day before breakfast because they had to solve all of these problems. And I think that probably wasn't necessary over the broader strokes.

• 43:19Joe Weisenthal?

  One of the things that causes alarm for DC regarding China, I mean, look, it's great that countries are getting richer and the technological frontier is being pushed and innovation anywhere theoretically can help anyone everywhere. But this question, and it's more sort of political or perhaps geopolitical than economic, is, does China have ambitions outside of its borders, right? We know the US has, we have military positions all over the place and we clearly have ambitions outside of its borders. China has no formal alliances, I believe, with any country, et cetera, but there's always this concern. What do you think about China's interest in the rest of the world beyond sort of export destinations?

• 44:03Speaker 06

  I think that China is very deeply interested in Taiwan and the South China Sea, in which it defines as within its own borders. And so that is a matter of dispute. I think that China is very keenly interested in dominating most of Southeast Asia.

• 44:21Joe Weisenthal?

  What does dominating mean?

• 44:22Speaker 06

  I think that they would really like for the leaders of Malaysia and Vietnam and the Philippines to come regularly to Beijing to kowtow for the emperor's pleasure. And maybe that is a pretty big threat to US interests. I think that is something that we can debate. I would be skeptical that China has broader goals to seize Japan. I think that would be pretty fanciful. I think that China's success right now is building a lot of advanced manufacturing. You're right, I've been tracking this for a very long time. I remember my first appearance on Odd Lots in 2017 to talk about Made in China 2025. And I was pretty constructive that China was going to figure out a lot of these technologies. And I think that was fairly out of consensus at the time.

• 45:07Speaker 06

  And I think that was fairly, China has made incredible strides beyond my expectations of, and I've been pretty bullish about a lot of that. And something I worry about is that I think that China's success in advanced manufacturing will continue. I just wrote a piece with Arthur Crowe-Burton, Foreign Affairs, pointing out that even though China's economy is slowing, and even though there's all sorts of problems with the economy and the political system, they're going to keep advancing on manufacturing and technology because they have the manufacturing process knowledge and they have the investments really to push them forward. And I think that we're already seeing that China is deindustrializing Germany. Brad Setzer has great charts on this all the time, especially in the automotive sector.

• 45:50Speaker 06

  I think that China will continue to deindustrialize the rest of East Asia, Europe as well, and that will move on to the United States as well. And I don't have too many great views about the security threat or what is going to happen with military. But I think the clear and present danger is that China's technology keeps advancing, and that will further deindustrialize parts of the Midwest as well as many parts of Europe. And I think that is going to create all sorts of political problems in the West as well. And that is the big danger that I'm nervous about.

• 46:20Tracy Alloway?

  What does the US need to do in order to preserve its own manufacturing capacity and, I guess, ideally build it out?

• 46:28Speaker 06

  I think there has to be a lot more investment in manufacturing process knowledge, which is all of the tacit knowledge that we can't really write down, that we have to be a lot better at producing things like not only semiconductors, but also electric vehicle batteries and broader sets of electronics as well. I think it would be a good idea for the US to invite more Chinese companies to build factories in Michigan, Ohio, Wisconsin, find, put some controls on them. But if China's forced technology... Program worked against, let's say, Apple and Tesla and all of these other American companies. Why don't we do it to them and, you know, learn from the best in terms of manufacturing? I'm really skeptical that everything that the Trump administration right now is doing has been good for manufacturing.

• 47:11Speaker 06

  As best as we can tell, the US has lost 40,000 manufacturing jobs since liberation day. And that was the last data reading that we have, 40,000 jobs lost. I think that it doesn't make sense to pursue technology while kneecapping the NSF and the NIH. It doesn't make sense to kneecap top universities. It doesn't make sense to deport a lot of lower skilled labor that are really important for construction as well as manufacturing. And it doesn't make sense to try to intimidate higher skilled people, researchers, to be in the US as well. Now, maybe there's something good to be said for energy production in the US. There's probably something good to be said for the deregulatory agenda under Trump to build a little bit more.

• 47:53Speaker 06

  But right now, I'm not seeing much energy and, you know, fervor to build more than, let's say, detention centers, coal plants, skilled ballrooms. Not really the sort of, you know, advanced manufacturing that America needs.

• 48:06Joe Weisenthal?

  It's funny to think about coal powered electric vehicles in the future, coal powered AI data centers or whatever. But it seems like a plausible thing that we'll see at one point. One area where the US is clearly dominant, and we've already touched on this, is like global internet services. And obviously, you have what I guess now we'd call the legacy ones, like your Metas and Microsofts and Amazon. But also, you know, OpenAI is still, you know, it's the biggest in the world. And it could be on scale and have a footprint as big as some of these other giants. It seems like the world is very happy to buy BYD cars and other built things. But we saw the UK de-Hua-hui itself several years ago.

• 48:51Joe Weisenthal?

  Will the rest of the world adopt Chinese core tech? Or do you think there's still an anxiety about this? Maybe because of perceptions of the influence that the party would have over these companies, et cetera. Does the US still enjoy a relative advantage in the comfort that around the world? People have with using sort of US digital services?

• 49:14Speaker 06

  Certainly, I think there's a lot of governments that are really nervous about Chinese technologies. The UK, there's all sorts of restrictions on Huawei products globally. And we've seen even countries really friendly towards China really complain about how much it is flooding their markets. We've seen Brazil complain about this. We've seen Russia complain about this. And so I think governments all over the world are trying to have some measure to block Chinese goods. On the other hand, I think consumers really don't care.

• 49:45Joe Weisenthal?

  That's what I mean. For a car, or I would probably, I'd like a Xiaomi phone. No, I don't know. Maybe. They look, they look pretty cool. Or a ZTE phone, or Huawei phone.

• 49:55Speaker 06

  Careful, Joe. That's a national security threat. We are reporting you. But I think, yeah, definitely, there's a lot of people who-

• 50:00Joe Weisenthal?

  The cameras seem great.

• 50:01Speaker 06

  The cameras seem great. And the BYD cars and the Xiaomi cars seem to be also really good as well. People want to buy these things. And I think the Chinese attitude is, okay, if you want to tariff us, we'll challenge you in WTO if that's still a thing, or we'll try to push back diplomatically. But we're not going to restrain our own exports. What we need to do is, if you want to block our exports and make goods more expensive for your consumers, that's on you. So I think that's kind of its attitude. And I think there's also some nervousness now among European governments from buying American cloud. I don't know if that is going to necessarily lead to fewer purchases, but maybe.

• 50:37Joe Weisenthal?

  Tracy, do you have the Xiaomi dog feeder?

• 50:40Tracy Alloway?

  No, I don't.

• 50:40Joe Weisenthal?

  Have you seen that?

• 50:41Tracy Alloway?

  I wasn't even aware of this.

• 50:42Joe Weisenthal?

  That's the thing, there's incredible Xiaomi. It's not just, oh, it's a phone company, then when cars, you know, there's a Xiaomi rice cooker, there's a Xiaomi toaster.

• 50:49Tracy Alloway?

  What does the dog feeder do?

• 50:50Joe Weisenthal?

  I think it's like a smart dog feeder and it knows when to release more feed into the bowl, using all these sensors and stuff.

• 50:56Tracy Alloway?

  No, I'm old school. I just have a bowl that I fill.

• 50:59Joe Weisenthal?

  That might be my Christmas present to you, if I can acquire one.

• 51:01Tracy Alloway?

  Oh, thank you. You're getting an autographed copy of Herman Melville's Moby Dick, if I can find one. Wait, I shouldn't say that because people will be like, oh, don't you know he's dead?

• 51:12Tracy Alloway?

  You're getting a first edition of Moby Dick, if I can find one.

• 51:17Joe Weisenthal?

  Please with the Rockwell Kent illustrations.

• 51:19Tracy Alloway?

  Okay, all right, noted, noted. I just want to go back to what we were talking about in the intro for a second, which is the new Involusion campaign. Again, it seems like China is trying to get a handle on some of these overcapacity issues. Is it going to work? And what are your general thoughts on this fresh attempt?

• 51:39Speaker 06

  I was living in China when China first announced this big supply-side reform effort back in 2017, when it tried to reduce a lot of its expansions in steel. And this was kind of the big effort. What's really different right now is that China's trying to control not really the activities of the state-owned enterprise sector, it's trying to control more the activities of the private sector. And I think that is much more difficult as well. And I think, you know, it's going to be too early to say, but there may be a future in which China actually consolidates a lot of the solar production to bigger firms. But then all of them become much more capable and they become, you know, much bigger threats to foreign solar makers to the extent that there are any.

• 52:24Speaker 06

  But consolidation is probably going to help raise quality because there are going to be fewer firms earning more profit that are going to be able to reinvest more in expansion in R and D. So I think that overproduction is kind of endemic to China, which is partly why it's the engineering state. This is what they're really good at. They're just not thinking enough about services. And so I'm skeptical that they're going to be able to really tamp down overproduction over the longer run.

• 52:50Tracy Alloway?

  All right, Dan Wang, the book is Break Neck. It's a fantastic read. Joe and I make a very brief appearance, so if anyone's interested in that as well, definitely pick it up.

• 53:00Joe Weisenthal?

  Congratulations.

• 53:01Tracy Alloway?

  Yeah, thank you so much for coming back on and for being on the pod repeatedly over almost a decade now.

• 53:07Speaker 06

  I want to be a friend of the pod for the next decade as well. Thank you both.

• 53:24Tracy Alloway?

  Joe, always good to have Dan on. And I'm so glad he's sort of synthesized and laid out all of his thoughts. Because again, like Dan has been watching Chinese technology and analyzing the Chinese economy for years and years and years.

• 53:39Joe Weisenthal?

  Before it was cool.

• 53:40Tracy Alloway?

  Before it was cool. And really, in many respects, had a front row seat to some pretty big developments like the tech crackdown, like COVID zero policies in China. So it's really good to read his narrative and get his thoughts.

• 53:52Joe Weisenthal?

  No, Dan's the best. I love him. You know, it's interesting, I was thinking about, and I saw some discussion of this online, I forget who, but one thing we didn't talk about is, you know, there is the persistent real estate slump, right?

• 54:04Tracy Alloway?

  Yeah.

• 54:05Joe Weisenthal?

  In China, they have not, there has not yet been a bottom. It's not the end of the world, and actually, cheaper housing, many people would say that would be a nice problem to have from the US perspective right now. But if you think about the combination of consolidating the private sector, if you say, okay, there's overproduction in the private sector, what that means is that there's a lot of people employed who shouldn't be, or who are, it's unsustainable. If you think about that shrinking, that's going to be a contributor to a softening in the real estate. There's fewer people who have jobs, there's fewer people who can buy homes. See, when you think about the internal balances, there's some real tensions, because it's like, yeah, of course, let's consolidate, but then you add to the woes of one of the biggest sectors of the economy.

• 54:45Tracy Alloway?

  Yeah, and I mean, we have seen the youth unemployment rate pick up recently. And I think that's where you start to get into some interesting questions around the social contract that the party has with people and this, you know, expectation that living standards are going to continue to improve forever. Like, that is the pressure on the party, right? And to some extent, as you point out, it's in tension with the idea of having very efficient companies that are operating at scale and at low cost.

• 55:13Joe Weisenthal?

  You know, one of the things, too, that comes up, I think, in a lot of the China conversations, is the sort of uselessness of a lot of political terms that we use here. It came up with Joseph Trigian when we were talking about, like, what does the right, you know, the ultra-left within the party mean, the ultra- Right, et cetera.

• 55:28Tracy Alloway?

  All right.

• 55:29Joe Weisenthal?

  But even hearing Dan talk about, well, it's a sort of right wing Leninist country, et cetera, like these words that we use to describe politics, I think they maybe, they detract more than they clarify when we're talking about China.

• 55:44Tracy Alloway?

  I don't believe in political labels, Joe.

• 55:46Joe Weisenthal?

  No, that's good. That's good.

• 55:47Tracy Alloway?

  All right.

• 55:48Joe Weisenthal?

  I respect that.

• 55:48Tracy Alloway?

  Shall we leave it there?

• 55:49Joe Weisenthal?

  Let's leave it there.

• 55:50Tracy Alloway?

  This has been another episode of the Odd Lots Podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.

• 55:55Joe Weisenthal?

  And I'm Joe Weisenthal. You can follow me at the Stalwart. Follow Dan Wong. He's at Dan W. Wong. And of course, check out his new book, Breakneck. Follow our producers, Carmen Rodriguez at Carmen Armin, Dashal Bennett at Dashbot, and Cale Brooks at Cale Brooks. For more Odd Lots content, go to Bloomberg.com/oddlots, where the daily newsletter and all of our episodes, and you can chat about all of these topics 24/7 in our Discord, discord.gg/oddlots.

• 56:22Tracy Alloway?

  And if you enjoy Odd Lots, if you like it when we have Dan Wong on the show, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

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