Dr. Yasheng Huang - MIT Economist Warns: China's Miracle Is Finished — The Collapse No One Wants to Admit

Dr. Yasheng Huang, MIT economist, explains why he expects China's economy to stagnate, covering demographics, real estate, overcapacity, Russia, Taiwan and the exam system. 💰 Source hot AI deals in our Investment Club https://lr.academy/ai-investment-club/?utm_source=podcast&utm_medium=shownotes&utm_content=39993215&utm_campaign=ic 🏦 Invest in luxury Dubai property https://lr.academy/property-investment-g/?utm_source=podcast&utm_medium=shownotes&utm_content=39993215&utm_campaign=pc 🍿 Watch the full interview with chapters and transcripts for free https://londonreal.tv/dr-yasheng-huang-mit-economist-warns-chinas-miracle-is-finished-the-collapse-no-one-wants-to-admit/

• 0:00Speaker 00

  For China, to invade Taiwan is a sheer disaster. I cannot imagine Europe, United States would continue to do any business with China. There is something very curious about Chinese political mentality. It feels insecure, paranoia is beginning to surface. There seems to be an unnatural level of purges in the Chinese military. And it is really something very striking and unprecedented.

• 0:36Speaker 01

  Why do you think China choose Russia over Europe?

• 0:38Speaker 00

  It is for ideology and politics. There's absolutely zero economic reason to go with Russia at the expense of relationship with Europe. Russia, of all the countries I can think of in the world, has been the most brutal to China. And yet, the Chinese political leadership has this softness for Russia, which is really, really unbelievable.

• 1:06Speaker 01

  Where are we with the AI race between the United States and China?

• 1:10Speaker 00

  China didn't come up with the large language models. But China has become incredibly efficient, scaling the signs into commercial products. I think this is where we should be very humble to recognize where we have fallen short. And the Trump administration is not doing that.

• 1:30Speaker 01

  You were born in China, and yet you are constantly critical of this place. Are you worried about your safety?

• 1:35Speaker 00

  Just before the pandemic, there was a degree of tolerance of points of views and criticisms that we no longer have today, sadly speaking. Do I worry about myself? Well, I live and work in the United States, so there's not that kind of threat. I worry about China, not because it is not a democracy, but because it is moving backward.

• 2:08Speaker 01

  Hi, it's Brian Rose from London Real. You probably know that we've just recently been replatformed on YouTube after 25 months completely in the dark. The truth is, I really need your help. What I really need you to do is click on that subscribe button right now, like this video, and maybe even leave a comment or share the link with friends. We're really fighting against an algorithm that's tried to keep us quiet for so long. And the more subscribers we have, the more people watch our content, the better guests we can bring you, the better content, and we can continue transforming lives. We've been doing this for 14 years now. I want to do this for another 14 years, but I really need your help.

• 2:51Speaker 01

  So click on that subscribe button, like the video, leave a comment, share this, and we're going to continue to bring you more and more great content. Thank you. This is London Real. I am Brian Rose. My guest today is Dr. Yasheng Huang, the economist, MIT professor, and one of the world's leading authorities on China's political economy, technological ambitions, and global power strategy. For more than 20 years, you have studied how China's political institutions shape economic outcomes, and why authoritarian control ultimately suffocates entrepreneurship, innovation, and long-term stability.

• 3:32Speaker 01

  You have challenged the Western narrative of China's "unstoppable rise," arguing instead that demographic collapse, information control, and a deteriorating human capital system are pushing the country into structural decline. Today, I want to go deep into your latest warnings about China's slowdown, the myth of state-driven innovation, the future of US-China relations, and how this power struggle will redefine markets, technology, and freedom around the world. Dr. Huang, welcome to London Real.

• 4:04Speaker 00

  Thank you, Brian. I look forward to our discussion.

• 4:09Speaker 01

  Me too. I'm super excited, and I'm a little jealous that you're at my former alma mater of MIT. I have fond memories. I'll ask you more about that later. I wonder if we could just jump right into it and say, what would you say is the biggest misconception in the West and promoted in Western media about China?

• 4:33Speaker 00

  Okay, so let me start maybe with two misconceptions. And they are at the opposite ends of that spectrum. One is that China is rising as a unstoppable economic superpower, technological superpower, overtaking the United States, overtaking the West. And much of that is a result of the fact that China has defied Western economic rulebook, playbook, right? Rather than market economy, private entrepreneurship. It has grown without these things.

• 5:16Speaker 00

  The other narrative is that there's going to be an imminent collapse of the economy because of the high debt and because of a lot of the tensions that you have described in your introduction. Now, I agree with the fact that there are many, many tensions and contradictions in the Chinese economy. But the scenario that I see is a gradual slowdown stagnation rather than a sudden stop and sudden collapse. So I'm sort of end up somewhere in between, between these two extreme predictions. The issue is, a lot of it really depends on what the Chinese leadership is going to do next.

• 6:00Speaker 00

  Whether or not they are going to reform the economy, reform the political system, or are they going to persist in the current policy trajectory, which I believe is bad for the Chinese economy.

• 6:14Speaker 01

  Okay. You know, one of the biggest arguments that I hear, or at least that resonates with me, and I hear this kind of by the Silicon Valley elite, guys like Marc Andreessen and a few others, that just say that ultimately capitalism is an incredible feedback loop for information. Because it kind of says what's working and what's not working by, of course, compensating the winners and destroying the losers. And that Information feedback is probably maybe the most important thing to to guide the growth of a nation, whereas I guess in a communist or socialist system where maybe those those

• 6:56Speaker 01

  capital expenditures are decreed by a central government, you don't always have that. And fingers are pointed to kind of Russia back in the in the socialist days in the 80s and how ultimately they didn't really know what they needed to do. And that is what kind of killed that growth. Is that too of a simplistic way of looking at this? Or is that ultimately the root of the problem when it comes to growing an economy that isn't based on that capitalistic feedback?

• 7:25Speaker 00

  Well, I think I agree with that view. The issue is whether or not that view applies to to China today. I mean, the economic success to a large extent depends on generation, utilization, application of information. Companies need to rely on correct information to make business decisions. Policymakers need to rely on correct data to make policy decisions and judgments.

• 8:04Speaker 00

  And politicians need the right information about the voters and about the political situation in their country. In the classical centrally planned economy, information is distorted, truth is suppressed. So very often policymakers have the wrong information, or they have no information at all, but they have so much power. So the power relative to the information ratio is extremely high. That often leads to wrong policy decisions and wrong policy choices.

• 8:44Speaker 00

  The issue gets a little bit complicated to um when we talk about today's China because today's China is not a classical centrally planned economy. It is also not a classical capitalist economy. There is correct information, there is reliable information in the system generated by, for example, by exports, markets, by the signals that the Chinese companies receive from the rest of the world, by the signals about technology, the AI future, the EVs and solar panels. But on the other hand, the policymakers are making decisions on the basis of very, very distorted information.

• 9:27Speaker 00

  Um, so this is where the tension is in today's China. The businesses are largely market-driven, they rely on market-generated information. The policymakers rely on information and data generated by local governments. And a lot of that information, for example, about the true state of the Chinese economy. And then during the COVID uh years, uh about what was going on in the country in terms of the public health situation. A lot of that information is hugely distorted. The bankers, who basically in the Chinese system are working for the government,

• 10:09Speaker 00

  very often don't have reliable financial information from the companies. I think this is where China is and it explains some of their successes, but it also is an indication of where the problems are.

• 10:26Speaker 01

  Yeah, it's it's interesting because um I think it was Steve Bannon that actually said on his War Room show in the morning, uh I think a couple of months ago, he said um. He said China is not communist. He said China is more capitalist than America. He said the only communists are the, you know, thousand thugs at the top that make all the decisions. Now, look, I'm not saying he's right on any of those terms that he said, but it was an interesting insight that in fact it is a country that is very good at receiving that feedback. And it isn't classical socialist or communist like, you know, we might have thought of regimes in the past in the West. But also, there is that group at the top that's making some of those decisions. I'm kind of curious what you think about that.

• 11:11Speaker 01

  And also, I'm curious what it would be like if I was in China right now and what I would see as some of the country's problems. You know, if you're in America right now, you might look around and say, "Okay, wow, all of these young people are going into debt with their education, and they can't buy a house like they used to be able to, doctor, thirty, forty years ago." We've got a growing gap between the wealthy and the poor. And we've got, you know, some other issues on the horizon like AI that make everybody nervous. I'm curious if you had to go to China and talk about the problems there, are they similar, are they not? I'm hearing there is this kind of youth generation in China now

• 11:55Speaker 01

  that are feeling like they want to check out. I saw this whole kind of lying flat movement, where it had these young people just maybe even opting out of this society and also facing some repercussions on the back. So I know that's quite a few questions, but I really want to get your thoughts.

• 12:14Speaker 00

  Okay, so let's separate these two issues. One is Steve Bannon's view on China, and the other is what is going on in the Chinese economy today. I disagree with Steve Bannon on many, many issues, and I disagree with him on this issue as well. Let's just be very specific. In terms of his view that the policymakers of, in China, act on kind of market-driven information. Look at the Wangqiao policy. A program that they have implemented. At the beginning, you could argue that the one-child policy program was designed

• 12:56Speaker 00

  to moderate the population growth in a country that was struggling with agriculture, with the economy, with feeding its people. But over time, it became increasingly clear to everybody that the one-child policy was going to be extremely destructive of the economy and of the society, of the basic social contract, marriage and fertility. And also, in a Confucian society, you need the younger generation to take care of the older generation.

• 13:35Speaker 00

  Yet, the policy persisted way beyond the usefulness and the utility of the policy program to a devastating effect. Today, the Chinese birth rate is falling, you know, somewhere one, some, something like, the replacement rate ratio is two, right? So you need two children to replace their parents. And China's ratio today is somewhere, you know, one point, uh, two, one point three, falling rapidly, and it is creating huge problems in terms of the economy and economic growth.

• 14:16Speaker 00

  And by the way, the information about how wrong that policy was, was available for many, many years. Academics wrote about it, and I wrote about it, and, and yet, all of that was dismissed. And then they acted to reverse the policy by 2015, and it was already too late. So this is related to the second question that you asked about what is going on in Chinese economy today. It is actually remarkable for a country that is now, uh, having very low replacement ratio and low fertility rate, they are struggling to find job opportunities for the young people.

• 15:03Speaker 00

  And the visual indicator of that is that if you go to China today, you order a meal, often the meal is delivered to you. Lot of these delivery people, young people, went to fancy colleges. And then they graduate, they cannot find jobs in companies, in businesses, in technology. And then they have to settle for being delivery people. I mean, to me, this is a massive underutilization of the talents and the capabilities of the Chinese young people.

• 15:48Speaker 00

  And this is a signal, a symptom of the lying, flat phenomenon that you described. Because the economic prospects are not very bright. People are writing off work as a way to make continuous improvements. And for years and years, the Chinese economy experienced many strains and problems and issues. But for many, many years, the young people in China were optimistic. They believed in themselves. They believed in their ability to uplift themselves,

• 16:30Speaker 00

  to improve their livelihood by working hard, by studying hard. That began to change three years ago, four years ago, after, during the pandemic, and then after the pandemic. That pivot was extremely risky for the Chinese economy when so much of the society converted from optimism to pessimism. And that has a huge effect across the board, not just in terms of the work, but also in terms of the ability of the middle class to consume.

• 17:10Speaker 00

  Whereas the Chinese economy has this massive production capacity without comparable level of the consumption. And that spells implications for the rest of the world, for the United States, for Europe, and for other parts of the global economy. Because the export is really the only way for the Chinese economy to generate revenue growth.

• 17:32Speaker 01

  Wow, okay. That's fascinating. And I guess then we'll take that and tie it right now into the trade negotiations. You know, it's interesting because it's really hard to get a read on China when it comes to these negotiations with Trump. And of course, Trump is this classic bigger-than-life, you know, real estate negotiator who, you know, has a certain style, all right? That's unlike any we've ever seen in an American president. And I was debating Anthony Scaramucci a week ago Friday, who spent some time in his cabinet and when actually campaigned against Trump but is now coming around. And we were talking about this style that he uses, and Anthony was saying it's not

• 18:16Speaker 01

  practical and it's not based in economics. But I said, "Well, it's actually quite effective because it seems to get people to blink and it gets people to show their hand." And there's evidence of that. You know, we saw the EU sign what I even think they admitted wasn't the greatest deal. You saw the UK sign what probably wasn't the greatest deal. And they all seem to kind of blink when they get this kind of pressure from Trump. I haven't seen that from China. And I was wondering what you can see when you see the behaviors coming from that country? And do you think that they are in moments of pain when it comes to this negotiation?

• 18:58Speaker 01

  Because from what you're saying, these exports are going to be very important for them. And of course, the US as a trading partner is very important. So what do you see when you see the pressure that Trump puts on and their reactions? What do you think is going on there?

• 19:12Speaker 00

  So I think what we have observed are three categories of responses to Trump. One is the European, Canadian, to some extent Mexican response. And that response is, and to some extent Ukraine, right? So that response is to trying to accommodate as much as possible to Trump's really, really outrageous demands. The reason is that these are the politicians who operate in a democratic country. And they have to think about the voters' interests, the interests of their economies and their society.

• 19:54Speaker 00

  A full-blown trade war is going to be devastating for their economies. So they kind of swallow their pride and cater to Trump. And I believe that they act responsibly, given the position they're in. They are democratically elected. They have to pay attention to the economy and to the society and welfare of their people. This is what democratic leaders do.

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• 21:22Speaker 00

  The other response is through corruption and bribe, right? So we see that in the case of Saudi Arabia. We see that in the case of Qatar. Their calculation is let's just provide business opportunities, business opportunities for the Trump families. And then we secure some sort of a truth with the, with the American government that way. This is not something that the Canadian government can do. This is not something that British government can do. They may gave him, you know, little gifts here and there, but I don't think they can gave him a whole airplane worth $400 million in order to secure a trade deal.

• 22:06Speaker 00

  The third response is by countries such as China, which is using whatever weapons that they have to go after specifically after everything that the Trump is trying to do. Look at what China did just a few months ago in the rare earth strategy that they deployed. They escalated the rare earth strategy, export ban, export control, export approval. And look at what the United States did. They immediately began to negotiate with China, right?

• 22:49Speaker 00

  The reason why they can go to adopt this high-wired strategy is precisely because they are a autocracy. They don't have to suffer politically from the economic consequences of a full-blown trade war. That means they can take more risks. And by taking more risks, in fact, the Trump administration caved. And if you look at the recent trade deal between China and the United States. Um, I think China got a good deal, uh, by and large. And China needs the soybean anyway.

• 23:33Speaker 00

  So before they were buying from the United States, before the Trump, uh, trade war. And then they switched to Brazil and they switched to Argentina. They, they need soybean anyway, so now they just switch back to the United States. They don't have to pay extra for that strategy. In terms of fentanyl, I mean, that's very easy for them to control. Uh, it is not something really, really that critical to their, uh, economy. And I think they got two things that are not being discussed publicly a lot. And, and I have to say, I don't have to write evidence that this happened, but I suspected. I, I suspect two things happened.

• 24:18Speaker 00

  One is that the Chinese side got a better deal on technology than they would, uh, otherwise. Uh, uh, during that negotiation. And the other is they probably got some sort of under the table deal or promise from the Trump administration about Taiwan. Um, so that's a huge win for China. And precisely because they don't have to suffer immediately, the political consequences of a slow economy. The trade war, let me be very, very straightforward.

• 24:57Speaker 00

  A trade war between China and the United, uh, United States is extremely bad for the Chinese economy. Jobs lost, export revenue, uh, would, uh, go down dramatically. In the economy that is slowing down, in the economy that has problems generating, uh, employment opportunities. There's no question the trade war is bad for China. But the Chinese leadership values technology more than the trade war. They can hold on on the trade war as a way to extract concessions from the Trump administration on technology. And I think by and large, they succeeded.

• 25:40Speaker 01

  How is Xi doing right now? And is he gonna be there much longer? I think over the last five years or 10 years, it seems that he's a consolidated power. But I'm curious what you see that he has to do in the next few years? And is he gonna be struggling with the property sector? Is he gonna be struggling with this youth sector not being able to contribute to the economy? What do you see are the big things he has to worry about?

• 26:11Speaker 00

  I think we should separate the political discussion from the economic discussion. The economic discussion is super clear. The economic picture is super clear. Despite the fact that China is producing EVs and solar panels and impressive AI models, the Chinese economy is suffering

• 26:35Speaker 00

  in terms of the GDP, in terms of property sector, in terms of the consumption, in terms of the employment, income generation.

• 26:46Speaker 01

  And really quickly, can you see that from the numbers? Or can you trust the government numbers? Of course, I don't even know if we can trust the US government numbers sometimes.

• 26:55Speaker 00

  Well, I think now we have more reason not to trust the US numbers now because of the political intervention in the bureaucracy. For the Chinese numbers,

• 27:06Speaker 00

  so if you just look at the official numbers, before 2015, the Chinese economy grew roughly 8%, 9% a year, year in and year out, since the late 1970s.

• 27:21Speaker 01

  Wow.

• 27:22Speaker 00

  Many academics like myself don't believe that's the true number. But even if you just take off, you know, 1 percentage point, 2 percentage point, there's no question. This is still one of the most impressive economic growth records in the history of humankind. To be able to grow at 5%, 6%, 7% for 30 years and 40 years is extremely impressive. The issue now is, okay, so let me not leave the official number too quickly. Since then, the number, the GDP growth by official numbers has slowed down to 5%.

• 28:06Speaker 00

  Uh, below five percent. Okay, so if you just look at the official numbers without thinking twice about the reliability, accuracy of the official numbers, there's no question that the, that, that, that the economy is slowing down. The real estate sector, which accounted for at one point in time about thirty percent of the Chinese economy.

• 28:32Speaker 01

  Wow.

• 28:32Speaker 00

  Is, is slowing down dramatically. Bankruptcies of the real estate companies, uh, big cities, even big cities like Beijing and Shanghai have seen real estate prices fall by, you know, twenty percent, thirty percent, something like that. It just to gave you some benchmark. During the two thousand eight financial crisis, across the United States, the real estate prices fell about thirty percent.

• 29:03Speaker 00

  So the Chinese real estate, uh, sector, technically speaking, is in a similar situation as the US was in two thousand eight, right? So this is how severe the situation is.

• 29:20Speaker 00

  Employment, um, uh, two years ago, three years ago, the official number, uh, indicated that the youth unemployment reached something like between sixteen to twenty percent, right? And some Chinese academic estimated it was more like fifty percent. And then they stopped publishing the number, they revised the number, and now even by the official number, the unemployment rate for the, uh, youth, uh, sector of the, uh, economy is still incredibly high. China, you know, we, we, in the Western media, they talk about A, uh, EVs and, and solar panels and, and AI. Let's just be very realistic.

• 30:05Speaker 00

  Chinese economy, Chinese society still has more than six hundred million farmers.

• 30:15Speaker 00

  Rural sector is still incredibly large for this economy. In fact, there are different accountings of what constitutes a rural population. And the lowest is, you know, something like forty five percent. The highest can be sixty percent of the population. It's still fundamentally rural, right? And how do you generate this incredible, uh, uh, uh, generate employment, income generation for this incredibly large sector of the economy? Move them from low productivity agriculture to higher productivity urban service, industrial development.

• 30:58Speaker 00

  It is still a living issue for China. So let's just not pretend that such a thing doesn't exist for that economy. Um, and the Chinese rural population has very low income level as compared with the urban population. So the economics, we, we talk about, you know, technology and, but there is a branch of the economics known as development economics. And many people forget this brutal fundamental fact.

• 31:36Speaker 00

  China fundamentally is still a developing country, facing all the challenges that developing economies face. Rural sector, agricultural sector, poverty, uh, income generation, employment. And let's just not pretend these things don't exist. And, uh, and rather than thinking, oh, this is a economy that is going to dominate the world in terms of technology. So I think for me. I don't worry about technology in China. This is a highly capable society. And a lot of the college graduates who are extremely smart, intelligent and capable.

• 32:21Speaker 00

  I don't worry about technology. But I do worry about how you generate continuous incomes and welfare improvement for something like forty-five, fifty, sixty percent of the Chinese population.

• 32:38Speaker 01

  Okay, okay. Besides the real estate sector, I mean, that's a huge drop in prices. That's a huge potential crisis. Are there any, any other factors that you're very concerned about with the economy? I mean, obviously, besides the, the birth rate dropping and some of those other issues. But is there anything else that, that is front of mind for you?

• 33:00Speaker 00

  Yeah, so let's face another reality. China, China's manufacturing capacity accounts for about thirty-five percent of the global capacity. Its consumption accounts for about eleven percent, okay, of the global consumption.

• 33:25Speaker 00

  You know, you went to MIT, so you can do the quick math. What do you do with that gap? Okay? And Chinese population is about, you know, seventeen, eighteen percent of the global population. So how do you resolve this gap between the consumption, the Chinese consumption and the Chinese production? Well, one way to resolve that gap is that every country on earth buys nothing but from China.

• 34:02Speaker 00

  You tell me whether or not in the current geopolitical environment, this is going to be a viable option going forward. Look at the trade war. Look at, and, and, and also, let's just be clear. The trade war or protectionism is not just rising in Europe and in the United States. It is also rising among developing countries. Indonesia, India, Brazil, and other countries are also erecting trade barriers against Chinese products. Okay, so now you have this huge capacity.

• 34:45Speaker 00

  And relative to that capacity, quite modest consumption. And the difference is also going to be difficult for the rest of the world. Even in the best case scenario, even if we ignore all the geopolitical complications that, that we have today. Let's just say that the world is a benign world and, and everybody loves each other. Even if you have that world, let's just say the world immediately after the collapse of the Berlin War. You're going to still have this huge absorption problem on the part of the rest of the world. You're going to have trade barriers and protectionism, no matter what.

• 35:30Speaker 00

  Okay, so now you, you, you, you cannot export at a level that you were able to do before. And the domestic consumption is not coming up.

• 35:43Speaker 00

  You know, what, what do you do? Right, the technical description of that is that you have to write down the capacity. Every time you write down the capacity, that is an economic slowdown.

• 35:56Speaker 00

  And more worryingly, once you write down the capacity, how do you generate the revenue that will pay back all these loans that the companies have taken out? That's going to spell troubles for the financial sector, for the banking sector, right? So in economics, everything is related with everything else. Once you have that process going on, companies write down their asset, write down their capacity, they're going to not going to increase employment. If they don't increase employment, you're not going to increase income. If you're not going to increase your income, where does the saving come from?

• 36:40Speaker 00

  So if you look at the bank, the bank has a lending side, the bank has a borrowing side, the bank borrows from you and me in order to lend to the companies. If the bank is no longer able to borrow as much as it could before from the rest of the society, it is going to limit their capacity to lend to the rest of the economy, to the rest of the society. I think I tremendously worry about getting into that sparrow. Once you get into that sparrow, anything can happen.

• 37:19Speaker 01

  And so fast forward five years from now, what do you think are going to be some of the cracks that start to form? How will China's overall behavior change? And how many of these issues do you think will come to the service and cause real structural problems for China?

• 37:38Speaker 00

  So let me just not minimize the difficulties and the challenges that the Chinese policymakers face in resolving these issues. These issues, the Rome was not built in one day, and these issues... Are not built in one day. They, in my forthcoming book, I go back to the, the, the late nineteen eighties and early nineteen nineties to trace the beginning of this problem. And I think the problem accelerated after the pandemic because the pandemic depressed the Chinese consumption,

• 38:19Speaker 00

  depressed the income generation without depressing the production capacity. So that gap increases even more than, than, than the usual trajectory before the pandemic. I think in terms of the policy solutions, the policy ideas, there are sort of two buckets of solutions. One is really acting very quickly to increase the income of the average Chinese people. And by the way, the way to do that is not going so

• 39:06Speaker 00

  directionally, going so hard, hard on technology, on industrial policy. Because the technological projects don't generate a lot of employment opportunities. So that's one side of the, the issue. The other side of the issue is to resolve the trade disputes, to resolve the geopolitical disputes with the rest of the world, especially with the developed part of the rest of the world. And by the way, Europe is the biggest trading partner with China. In terms of the trade surplus that China generates, the biggest is from Europe. The second biggest is from the United States.

• 39:52Speaker 00

  You know, Trump does whatever he wants to do. He's just in love with the trade war. So maybe there's not much you can do about that. But in terms of the Europe, I, I think it will be good for the Chinese leadership to restore, to repair relationship with the European countries. And the first thing they need to do is to change their policy on Russia.

• 40:17Speaker 00

  Right, so I just don't see how you can have, you know, free trade and free investment activities with Europe while not siding with Europe on Ukraine. You know, Ukraine is on the doorstep of Europe. Russia is invading the doorstep of Europe. I mean, how can you sort of advocate free trade with Europe on the one hand and tacitly supporting Russia on the other? So the first step, and I think it's actually a golden opportunity for China if they make that switch, because Europe has issues with the United States.

• 41:02Speaker 00

  They need an ally vis a vis the United States. And China naturally provides some of the balancing support for Europe. But the necessary condition for that is that China has to change its policy on Russia.

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  Peter Thiel took a half a million dollars and turned it into a billion dollars using the exact same techniques we're using inside the investment club. He met a CEO, his name was Zuckerberg. He pitched him the deal and he said, "Okay, I'll give you a half a million dollars." Mark went public and sold the shares to people like you. Well, what happened to Peter? Well, he exited and got a 2,300 X return. The wealthy invest in early-stage companies, folks. The public markets are for suckers. It's a rigged game. By the way, this happens in crypto as well. It's called pre-sale tokens. This is Solana. Does anybody know this chain? They sold pre-sale tokens for 4 cents. And you can see the date on there, April 5, 2018. Look at Solana today, folks. That thing's up over 1,000 X.

• 42:02Speaker 01

  The media and Wall Street and all these hype people get you to buy the top. Meanwhile, they put their clients in at the bottom and they use you for liquidity to make their clients rich. You can play this same game. You just have to have the financial education and the deal flow. That's it. Why do you think they choose Russia over Europe? Because you make a great point. I never thought about that. But that's clearly going to make everyone in Europe very nervous. But they could just as easily not overtly support Putin and support Europe and probably not have too much fallout. I mean, what do the Chinese really need from Russia? Okay, I guess they need their oil and gas. But Russia doesn't have a lot more they bring to the table, do they?

• 42:46Speaker 00

  I I I think I think this this uh uh kind of sometimes the Chinese sometimes talk about that rationale. They need the oil, gas from Russia. You can get oil and gas from lots of other countries. And in fact, I think they get oil and gas at a higher market prices than than than that they can find from other countries. It is definitely not for economic reason. Look at the size of the Russian economy. It is actually pitiful. It's about GDP is about one point seven trillion dollars.

• 43:24Speaker 00

  One point seven trillion is the size of a Chinese province, Guangdong province. It's about one point seven, one point eight. It's about the size of Texas. Okay, let's just say for the sake of the argument, you get all of that. That's just one Chinese province. That's just one state of the in the United States. The total size of the US import market is roughly three, three trillion dollars, almost twice of the Russian economy.

• 44:01Speaker 00

  The European size is probably bigger than than the US uh import market. So you sacrifice the European market and the US market by pursuing a smaller market. And by the way, the the size of the market is just one factor. The other factor is the margin. Russia is a very poor country, poor economy. So you can sell all the stuff that you produce, but at the lower margin. You are not making as much money as you would if you would uh sell to Europeans and the Americans.

• 44:43Speaker 00

  There's absolutely zero economic reason to go with Russia at the expense of relationship with Europe, at the expense of the relationship with the the United States. Although these days, relationship between Russia and the United States now is is is getting really interesting and complicated. So let me not talk about that relationship. Let's just talk about the European relationship, right? So there's really no economic rationale.

• 45:16Speaker 00

  It is for ideology and politics. There is something very curious about Chinese kind of a political mentality. Which is that this is the second largest economy in the world. It has been able to grow at very high rate for all these years. It has EVs and solar panels and AI. And yet it feels politically insecure about its legitimacy and authority. Therefore, I think the political leadership believes that they borrow legitimacy

• 46:02Speaker 00

  and authority from the Russian autocracy, right? So after all, it was the Soviet Union that transferred the ideology, the communist ideology, and supported the Communist Party in the 1930s. And then in the 1950s, supported China economically. And also not just in terms of money and resources, but also transferred the central planned model to China. So they have this kind of a historical allegiance to the source of their political legitimacy. I think, you know, I may be totally wrong because

• 46:46Speaker 00

  doing that kind of research is impossible. You don't really know what the political elites in China really think about. But I cannot think of any other reason. And let's just also mention some other brutal facts. Of all the Western imperialist powers in the 19th century, and by the way, Britain was one of them. Russia brutalized China the most. They took about eleven percent of the Chinese territories. And after the Second World War, they raided the northeastern part of China, the northeast of China. They took over the Chinese territory, raped the Chinese women. They, uh, they, they did exactly the same thing that they did in Germany,

• 47:32Speaker 00

  which is that they, they, they pillared the Chinese factories and the equipment, took, took them away. Russia, of all the countries I can think of in the world, has been the most brutal to China. And yet, the Chinese political leadership has this softness for Russia, which is really, really unbelievable.

• 47:58Speaker 01

  That's a fascinating observation, very fascinating. Has the Chinese Belt and Road Initiative worked?

• 48:07Speaker 00

  So I, I think it has worked in one way, and it is probably experiencing some strains in the other. It has worked in the following way, which is, as we talked about before, China has this, um, overcapacity. And also, let's also be, um, be fair to China. Because of this incredible economic expansion, the building programs, building railways, building, uh, shipyards and, and airports and all of that. Uh, Chinese companies have accumulated this incredible building capability.

• 48:51Speaker 00

  Right? In the United States today, we have lost that capability. Even if you have the money to build things like nuclear power plants.

• 49:03Speaker 00

  We may not have the requisite skill and capability to build these power plants quickly. So when you build, you also accumulate skill. But when you are built up within the country, you want to export that skill to other countries. And the natural place to go is other developing countries. Because they haven't this level of the buildup capacity. So in that sense, it is a economically clever way of utilizing the skills and capability you have accumulated.

• 49:41Speaker 00

  The way that I think it is not delivering is that, and this is something that I go into great detail in my forthcoming book. There's a myth that you create infrastructure and then you create economic growth.

• 50:01Speaker 00

  The Chinese patent, and many people say that this is how China has grown. They look at high-speed rails and airports and there's a recent book about, about sort of Chinese state engineers building all these roads and bridges and airports. These people got the direction of causality exactly backward. China grew first and then they began to build. Not that they started with building and then they got economic growth. It was actually exactly the opposite. The reason they can build is because they were able to grow and they were able to, because they were able to grow,

• 50:45Speaker 00

  they were able to accumulate resources that can be deployed for building. It's exactly the opposite scenario from the one that many people believe what has happened in China. The problem with the Belt and Road program is, is that it is based on this false narrative that you build first and then you get economic growth. China has built a lot in these developing countries. But there's no evidence that building has translated into long-run, organic, indigenous.

• 51:27Speaker 00

  Or endogenous, to use a fancy economic term, economic growth in these countries. So when you build, because you're putting capital, then you experience growth. But once that building project is completed, that project has not translated into sustained economic growth down the road. Okay, now the problem is that if you don't have this sustained economic growth down the road, where do you get the revenue to pay back the loans that have been lent to these countries to generate economic growth? And, and you know, some people are more severe than I am to describe this phenomenon as a debt trap.

• 52:10Speaker 00

  The reason why there's a, because I, I, I'm not comfortable with that, with that phrase because it implies that China set up the debt trap for these develop, uh, developing countries. I, I don't think that was really the case. But it is a trap in the sense that the growth didn't come from the debt that they incurred, the buildings that they build, the project that they built, so it became a trap. Now, the issue for these developing countries is how do we get out of that trap? Um, and, and especially now Chinese economy is slowing down.

• 52:53Speaker 00

  One growth engine has been the real estate sector, real estate sector is very energy intensive. So you need the resources, you need minerals, you need the, uh, uh, energy to power that growth. But because the economy is slowing down, you don't need as much, uh, resource, uh, energy as before. That can be a drag on the developing economies. I think this is where we are in terms of the Belt and Road.

• 53:24Speaker 01

  Okay. Treasury Secretary Scott Besant was on, I think it was CNBC the other day, and he kind of made a very important or clear point to the interviewer. He said, you know, never in modern history have we seen two, you know, two forces or two countries that are opposed militarily also be the top two trading partners. And he said that's what currently exists with China. Obviously, in the past, it was kind of US-Soviet Union, but we weren't trading partners with them, or at least massive trading partners. What kind of problems does that introduce? Or is that a problem? And how is China expanding militarily that might affect that?

• 54:08Speaker 01

  We obviously see what seems like encroachment on certain territories in the Philippines and in the South China Sea. Obviously, you know, the nuclear buildup. But I'm curious what you see in the future, and does that create tension with that trading partner?

• 54:27Speaker 00

  So I definitely agree with Secretary Besant on his observation. So that's why I'm very uncomfortable with applying Cold War concept to what is going on between US and China. And it is far more complicated than the relationship between Soviet Union and United States during the Cold War. And, you know, let's just be very specific. I was born in China. I studied in the United States, and now I'm a professor at MIT. During the Cold War, you didn't have a lot of Soviet citizens studying in the United States

• 55:12Speaker 00

  and a lot of Americans studying in Soviet universities. And that level of human interaction was simply absent, right? So the trade is one dimension. Capital is another dimension. Academic exchange is another dimension. Students and there's a far deeper interconnectedness between the United States and China than there was between Soviet Union and America.

• 55:46Speaker 00

  And I think to understand that phenomenon, we have to go back to the nineteen nineties, when the decisions made by policymakers in both countries were made about deepening their relationship with each other. On the US side, there was a belief that if you increase commercial relationship, academic relationship with China, Chinese politics was going to change over time. It doesn't mean that it was going to become democratic, you know, one night and overnight, but gradually it was going to moderate its political system. And by the way, it's called the engagement theory.

• 56:31Speaker 00

  By the way, a lot of people now criticize that view. But by the way, the Chinese policymakers also bought into that narrative. The Chinese policymakers at that time argued that, yes, we are not a democracy, but the reason is that we have too low per capita GDP. So the idea is that once the per capita GDP rises, we are going to become more like a global member of the global community and global economy. That obviously didn't happen. I think the fundamental cause is

• 57:14Speaker 00

  is why that theory failed to deliver. Why that theory failed to happen? Rather than that there has always been this geopolitical tensions between the two countries. You know, definitely ten years ago, before the current leadership in China, there were tensions between China and the United States. But the Chinese leadership then valued the relationship with the United States as a source of technology, as a source of market, as a source of many, many other things. In a way that the current leadership in China does not.

• 57:58Speaker 00

  And the current leadership believes that China is already very strong, it is second largest economy in the world. And, and therefore, it should have comparable power over the global order, over geopolitics. And I personally speaking, don't have a problem with a general idea of that way of looking at the world. And you know, as a second largest economy, you are entitled to certain things. Look at Trump, right? Uh, United States is the most powerful economy in the world. And he believes that therefore we're entitled to certain things.

• 58:43Speaker 00

  So that sentiment is, is, is, uh, is sort of a result of the economic development, economic growth. The issue for me is whether or not that is actually good for China. Right? As I said before, you know, you have some thirty-five percent of the global capacity. But you only have about eleven percent of the, uh, consumption. That gap still requires.