Firstly, people trying to use confucianism etc to try and explain trends in Chinese society is a pet peeve of mine. IMO this is goofy, you can read the biographies and interviews of the big players in tech and politics in English and see what they say. Nobody is going back to the Dead Sea Scrolls to explain western economic policy. The stuff you mention later on about the attitude of the state is enough to explain it, I think: the state has this particular industrial agenda and over all else wants to maintain power, while the people in industry are driven to make China the best in the world, outcompete their peers to build great companies, and follow in the footsteps of the Western tech legends they look up to (tho I assume the current generation now looks up to Frank Wang and Wang Chuanfu rather than Steve Jobs). Sure, there is some residual Maoist influence, but I think this is more true in politics like with Xi's childhood, most of the current crop of tech leaders came up during the Deng years (eg Frank Wang, founded DJI, born 1980).
I think Dan Wang's lens, that China is run by engineers and the US is run by lawyers, is more fruitful. Welch is the failure mode for focusing on shareholder value to the exclusion of all else, current China is the failure mode for focusing on industrial outputs and infrastructure delivery to the exclusion of all else. For the bull case I think you want someone like Marko Jukic, where industrial development is basically a philosophical end in itself, and China is a lot less wrong than the West. Now, I don't completely agree with the Palladium guys but Jukic is right that when this industrial mode of development falls over you're left with acres of factories and a giant high speed rail network, whereas when the Western model falls over all the surplus value has been burned up in consumption and rivalrous goods. Meanwhile the field is wide open for one of the big players to decide that they basically want to do the China model but with real markets, reasonable margins that get re-invested into R&D and pretty good (but not too good!) capital allocation.
Also, RE: Taiwan, my impression was that they are far from maxing out development of the island, which stalled out when the DPP took over. Haven't they been under a nightmarish vetocracy since the 1990s, with a terrible zoning-based housing crisis, closing nuclear plants like Germany etc?
Yeah, I recognize culture is both cause of effect of behaviors, and pinning any cultural attitude on something specific is tough, including religion. I brought it up specifically because other Chinese executives had brought up how much Confucianism separated them from Westerners influenced by Christianity, but I edited that part out.
I don’t really get Jukic’s point, and I’ve found his posts at odds with my experience in industry. When US industrial development stopped, we got the rust belt. Is the rust belt a good thing when it’s even bigger? Why?
On Taiwan, I’m sure between the internet and robotics, an island’s GDP can grow quite for some time if the people let it. I just meant that having TSMC on your island is about the best industrial setup possible. I had Claude do a quick analysis and Singapore is off the charts #1 at GDP per square km at $548m/sqft and Taiwan is #3 at $21.9m/sqft. I overstated the case it’s maxed out, but I hope the point was clear that export based development is tricky and at some point there’s a kind of phase change where the growth slows and the strategy has to change, seemingly to knowledge work.
Yeah the overbuilding thing is much more true for infra. The Hoover dam and the interstate highways are still around. Maybe the bailey to that argument would be bubble stuff, like how the fibre buildout in the 90s left a lot of infrastructure behind which enabled the internet, or similar dynamics for the railway bubble. The counterfactual impact of infra that gets left behind over long time scales is just crazy, but usually it’s being built for really myopic reasons, like the Romans building roads for specific wars that were used for thousands of years of trade.
Something else I forgot to mention, what do you think about the China bull argument that the housing crash was “good”, since the govt deliberately engineered it to get money out of housing speculation before the bubble got worse + reduce prices for consumers?
Yes, infra matters but fiber has a long shelf-life and doesn't degrade with use. Other infrastructure does, which is how you get the rust belt—you decide it's not worth investing in refitting and maintaining, which is especially salient as financing costs go up and you have to start making hard choices about what gets maintained. The salient argument there, though, is that you can build higher value things on top of this stuff if it's local. Poring over notes from Bethlehem Steel really drove home how much knowledge work and experimentation is only possible with access to the factories. The US tried not accounting for that at all with globalization, and it opened the door for China to attempt to corner as many industries as they could. The Mojave Pass story drove home that, it's not just enough for China to have an effective industry, others had to lose. The CHIPs Act felt like the first true reckoning for the US about what it means to let even more of our production capability go elsewhere, and the risk it carries to everything built on top of the infrastructure. Now, that reckoning is needed for all the other stuff.
On the housing crisis, I have not studied it as carefully, but if you're digging yourself into a hole, it's best to stop digging. In this case, the size and opacity of the problem is going to hurt for a while, but they're big enough it's hard to believe it would stop them. The real risk still feels like what happens when the average Chinese citizen stops believing in China's glorious future. Afra had a great interview where one participant said, "In China, everyone believes the state will ultimately succeed, but no one knows whether they'll be the victor or the price paid for victory" (https://afraw.substack.com/p/china-os-vs-america-os). I think about that a lot when I try to interpret Chinese policy, what happens if enough people believe their future is the price paid for victory, and that victory is a rust belt.
It seems the Chinese understand the difference between finance and tge "real economy" better than the West. Ultimately, finance is just numbers on a spreadsheet, but technology and factories are real.
I’m surprised anyone can walk away thinking this situation is good. Even the CCP thinks it’s bad! The broader point is probably that there is a huge risk to not having real industry, which independent financiers don’t price because it’s not their problem. The government can and should help there, and it’s one reason I’m bullish on an industrial bank in the US to ensure we support these kinds of businesses.
From the POV of investors, this is indeed crazy. Investors look for high profits and deep moats that protect the business. But are deep moats, monopols, etc, good for the economy? They usually lead to stagnation and rent extraction. The "involution" seems to perform like a capitalistic economy under perfect competition - nominal profits go to 0 but productivity, quality, service, etc go to max. Maybe the chinese producers know that high profits will immediately attract copycats (they have less legal protections and other barriers than in the West) so they protect themselves proactively. Bottom line, it seems the main investor in China is the state, which is more interested on developing a strong production base, world-leading technology and national security than profits, and it seems to be achieving its goals. I guess the main dangers are overproduction and picking the wrong sectors to invest.
The danger is that firms compete with themselves and stop growing because they stop investing in R&D and expansion. Sort of like welchification but maximising returns to consumers rather than returns to shareholders.
The danger is also that the whole thing is financed with eye-watering amounts of debt. Investment for the CCP is very expensive because they are bad at picking winners and happy to subsidize $50 of graft to get $1 of successful industrial development. Yeah, 8% of GDP on finance is too much, but overcorrecting to "money isn't real" is also an error.
Aren't they investing in R&D in order to be able to lower prices? The Chinese firms also seem to keep expanding into other areas.
I don't know if debt is an issue if the CCCP owns all of it. Yes, eventually picking bad investments would result on resource missallocation and less than optimal growth. Missallocation also happens in capitalism, and is many times followed by overcorrection.
Firstly, people trying to use confucianism etc to try and explain trends in Chinese society is a pet peeve of mine. IMO this is goofy, you can read the biographies and interviews of the big players in tech and politics in English and see what they say. Nobody is going back to the Dead Sea Scrolls to explain western economic policy. The stuff you mention later on about the attitude of the state is enough to explain it, I think: the state has this particular industrial agenda and over all else wants to maintain power, while the people in industry are driven to make China the best in the world, outcompete their peers to build great companies, and follow in the footsteps of the Western tech legends they look up to (tho I assume the current generation now looks up to Frank Wang and Wang Chuanfu rather than Steve Jobs). Sure, there is some residual Maoist influence, but I think this is more true in politics like with Xi's childhood, most of the current crop of tech leaders came up during the Deng years (eg Frank Wang, founded DJI, born 1980).
I think Dan Wang's lens, that China is run by engineers and the US is run by lawyers, is more fruitful. Welch is the failure mode for focusing on shareholder value to the exclusion of all else, current China is the failure mode for focusing on industrial outputs and infrastructure delivery to the exclusion of all else. For the bull case I think you want someone like Marko Jukic, where industrial development is basically a philosophical end in itself, and China is a lot less wrong than the West. Now, I don't completely agree with the Palladium guys but Jukic is right that when this industrial mode of development falls over you're left with acres of factories and a giant high speed rail network, whereas when the Western model falls over all the surplus value has been burned up in consumption and rivalrous goods. Meanwhile the field is wide open for one of the big players to decide that they basically want to do the China model but with real markets, reasonable margins that get re-invested into R&D and pretty good (but not too good!) capital allocation.
Also, RE: Taiwan, my impression was that they are far from maxing out development of the island, which stalled out when the DPP took over. Haven't they been under a nightmarish vetocracy since the 1990s, with a terrible zoning-based housing crisis, closing nuclear plants like Germany etc?
Yeah, I recognize culture is both cause of effect of behaviors, and pinning any cultural attitude on something specific is tough, including religion. I brought it up specifically because other Chinese executives had brought up how much Confucianism separated them from Westerners influenced by Christianity, but I edited that part out.
I don’t really get Jukic’s point, and I’ve found his posts at odds with my experience in industry. When US industrial development stopped, we got the rust belt. Is the rust belt a good thing when it’s even bigger? Why?
On Taiwan, I’m sure between the internet and robotics, an island’s GDP can grow quite for some time if the people let it. I just meant that having TSMC on your island is about the best industrial setup possible. I had Claude do a quick analysis and Singapore is off the charts #1 at GDP per square km at $548m/sqft and Taiwan is #3 at $21.9m/sqft. I overstated the case it’s maxed out, but I hope the point was clear that export based development is tricky and at some point there’s a kind of phase change where the growth slows and the strategy has to change, seemingly to knowledge work.
Yeah the overbuilding thing is much more true for infra. The Hoover dam and the interstate highways are still around. Maybe the bailey to that argument would be bubble stuff, like how the fibre buildout in the 90s left a lot of infrastructure behind which enabled the internet, or similar dynamics for the railway bubble. The counterfactual impact of infra that gets left behind over long time scales is just crazy, but usually it’s being built for really myopic reasons, like the Romans building roads for specific wars that were used for thousands of years of trade.
Something else I forgot to mention, what do you think about the China bull argument that the housing crash was “good”, since the govt deliberately engineered it to get money out of housing speculation before the bubble got worse + reduce prices for consumers?
Yes, infra matters but fiber has a long shelf-life and doesn't degrade with use. Other infrastructure does, which is how you get the rust belt—you decide it's not worth investing in refitting and maintaining, which is especially salient as financing costs go up and you have to start making hard choices about what gets maintained. The salient argument there, though, is that you can build higher value things on top of this stuff if it's local. Poring over notes from Bethlehem Steel really drove home how much knowledge work and experimentation is only possible with access to the factories. The US tried not accounting for that at all with globalization, and it opened the door for China to attempt to corner as many industries as they could. The Mojave Pass story drove home that, it's not just enough for China to have an effective industry, others had to lose. The CHIPs Act felt like the first true reckoning for the US about what it means to let even more of our production capability go elsewhere, and the risk it carries to everything built on top of the infrastructure. Now, that reckoning is needed for all the other stuff.
On the housing crisis, I have not studied it as carefully, but if you're digging yourself into a hole, it's best to stop digging. In this case, the size and opacity of the problem is going to hurt for a while, but they're big enough it's hard to believe it would stop them. The real risk still feels like what happens when the average Chinese citizen stops believing in China's glorious future. Afra had a great interview where one participant said, "In China, everyone believes the state will ultimately succeed, but no one knows whether they'll be the victor or the price paid for victory" (https://afraw.substack.com/p/china-os-vs-america-os). I think about that a lot when I try to interpret Chinese policy, what happens if enough people believe their future is the price paid for victory, and that victory is a rust belt.
Fascinating.
Summary: Xi is daddy to Chinese industrial sugar babies.
It seems the Chinese understand the difference between finance and tge "real economy" better than the West. Ultimately, finance is just numbers on a spreadsheet, but technology and factories are real.
I’m surprised anyone can walk away thinking this situation is good. Even the CCP thinks it’s bad! The broader point is probably that there is a huge risk to not having real industry, which independent financiers don’t price because it’s not their problem. The government can and should help there, and it’s one reason I’m bullish on an industrial bank in the US to ensure we support these kinds of businesses.
From the POV of investors, this is indeed crazy. Investors look for high profits and deep moats that protect the business. But are deep moats, monopols, etc, good for the economy? They usually lead to stagnation and rent extraction. The "involution" seems to perform like a capitalistic economy under perfect competition - nominal profits go to 0 but productivity, quality, service, etc go to max. Maybe the chinese producers know that high profits will immediately attract copycats (they have less legal protections and other barriers than in the West) so they protect themselves proactively. Bottom line, it seems the main investor in China is the state, which is more interested on developing a strong production base, world-leading technology and national security than profits, and it seems to be achieving its goals. I guess the main dangers are overproduction and picking the wrong sectors to invest.
The danger is that firms compete with themselves and stop growing because they stop investing in R&D and expansion. Sort of like welchification but maximising returns to consumers rather than returns to shareholders.
The danger is also that the whole thing is financed with eye-watering amounts of debt. Investment for the CCP is very expensive because they are bad at picking winners and happy to subsidize $50 of graft to get $1 of successful industrial development. Yeah, 8% of GDP on finance is too much, but overcorrecting to "money isn't real" is also an error.
Aren't they investing in R&D in order to be able to lower prices? The Chinese firms also seem to keep expanding into other areas.
I don't know if debt is an issue if the CCCP owns all of it. Yes, eventually picking bad investments would result on resource missallocation and less than optimal growth. Missallocation also happens in capitalism, and is many times followed by overcorrection.