Xi Jinping’s paranoid approach to AGI, debt crisis, & Politburo politics — Victor Shih

29:22Yeah. What would cause them to pull the plug? With passive. Yeah. So of AI sort of generating, you know, fallen -goong -related content and it proliferates very quickly beyond the capacity of the sensor to control it, then they'll have to stop, you know, the algorithm from generating new images and new videos and so on and so forth. Suppose it turns out you were saying, look, they can help high -flyer source GPUs and etc. What is the mechanism by which? Suppose it turns out that for high -flyer to continue making deep seat to continue making progress, they need all the GPUs that Huawei can produce and they need a whole bunch of other things, they need energy, they need data centers.

30:05What would it actually look like for the government to say every single Huawei GPU has to go to deep seat? They're going to get access to all this spare land to build data centers. Who would coordinate that? Would that be the leading side security group? Would that be somebody else? Yeah, it could be. Yeah. So that's interesting. So the physical investment will have to share power with some other leading group. Yeah. So I guess that would be a justification for a AI leading group of some sort because, you know, building power center that falls under NDRC, it could be under Li Chang or Halifeng, you know, which is especially Halifeng, which is in charge of investment and financing.

30:47But if Xi Jinping doesn't want Halifeng to share the power, then we'll have to give it all to Dingshusheng and then give him a lot of power. I mean, he can just do it by fiat or create a separate organization to make it happen. At this point, as you know, data centers are being built in China and a very fast clip and I think they're just using existing command structure. There is potentially a foreign aspect of this, right? So it's like, you build up all this cloud computing capacity in the Gulf states. Who's going to be the customer? You know, who's willing to pay billions of dollars to use it?

31:27China, right? So then the foreign policy apparatus will have to coordinate that and so on and so forth. If nothing wrote V2, yes, it's elsewhere. Does it have any end implication to the progression of AI? Who actually ends up controlling these leading groups? Who's purviewing ends up under? Or is it just basically a detail? But in terms of what happens with AI in China, it doesn't have that big of an implication. I think it does matter. Yeah. So you have some decision -makers who have shown to be not very good and even politically not very good. But nonetheless, for some reason, they're trusted.

32:09I mean, precisely because they're not very good. They're very dependent on the on Xi Jinping that they get promoted. The chief negotiator with the United States, Hili Feng, Vice Premier and Charter Finance. He is well known for starting and perpetuating the largest real -state bubble the world has ever seen in Tianjin. I don't know if you went to Tianjin. They're just empty buildings everywhere. So there's the new Manhattan, literally the size of Manhattan, filled with empty office buildings. He made that happen. He finally found it. It sounds like a great tour site. Not because it's real Manhattan.

32:46It's actually it's cool to visit. But it's like, wow, this is great. Where are you going to do with the buildings? We went to the in Amisham. We went to this huge, huge Buddhist temple. By huge, I just mean like there would be this structure of the shrine and you'd go through it and you'd realize behind it was an even bigger shrine that was hiding from view. I mean, you go through that one that we had even bigger one. This happened like five times. We were to drive through this. It would take you like a while. But it's new, right? Not historical, right? Oh, no, yeah, it's new. And then I asked like the head, by the way, there was nobody else there.

33:26Yeah, it was me three white guys and nobody else. And I asked the head monk, how did you guys finance this? And he says, we've got a lot of supporters. A lot of donations. I don't think so. Yeah. So then there it really depends like who's in Georgia of Asia. Yeah. So things you're saying really is a mystery. I think he has great political acumen. He must, you know, in order to gain Xi Jinping's trust, he has some technical background but it's metallurgical forging. Yeah. But he's worked in Shanghai for decades. So he knows how private corporations run. He knows a lot about international trade, FDI.

34:10So I think, you know, if you look at the sort of people in the Politburo Politburo Standing Committee, I would say he's definitely in the top quartile of people that you would want to be in charge of AI. If not the top, you know, two or three people. Right. Interesting. I mean, one thing that I would say about AI is that content creation is a big, it's going to be a big roadblock for China because China is so paranoid about the content that flows on the internet that they put human beings all over the place to slow things down, slow the transmission down. And then now if you have AI creating, you know, tons of content, there will still be human beings, algorithms and human being double triple checking the content because they're just so afraid of some subversive content getting out.

35:07But it's still been compatible with them innovating and having leading companies in even content, right? Like Red Note and TikTok and so forth, not to mention reach out. So if AI ends up, and AI might be even more robust to some of these, yeah, these sensitive content because you can just teach the AI to not say certain kinds of things. But even if that were the case, even if you train something that you think is pretty good, they will still want a human being checking everything. As somebody who is trying to observe what the party is doing, have you found that using an Alums has been helpful?

35:45And if so, which model gives you the best insight into what the CCP is thinking? Yeah, no, I've been using AI quite a bit. And both to sort of code data, you know, it used to be like if text, hand code stuff and now a lot of it can be automated. But in terms of finding out what the Chinese government is doing, I think some of the American models are okay, like Barack is okay, but the most helpful has been deep seek. So to me, it's quite clear that deep seek, which of course was first developed by a hedge fund to trade in the Chinese market. Part of what they were, they really trained the model for was to detect important policy documents and meetings within the Chinese government.

36:29Because when you enter the right, or even not even like especially sophisticated prompts, you know, just like, you know, what is the Chinese government doing when it comes to AI, it comes out with a bunch of very high quality links, which is very useful for my research. So then, you know, immediately you get a sense of like what are the latest policies, what are the latest statements by high level officials? It seems that deep seek puts some, you know, higher waiting, let's say, on this kind of content. So I have, you know, I don't dare to install it on my phone, but you know, I certainly have collaborators who have downloaded the open source model and install into a hard drive and I use the web interface for some of my research.

37:13Do you think it's just because they have more Chinese language data? It's just better at understanding the party communications. So I've used, you know, sort of BIDU's thing. And so I think the typical Chinese language models are more trained on social media content, which will, you know, come back with hits that are like more social media is like, oh, you know, as about AI, we'll talk about like how AI gets used and different things, instead of this kind of policy documents and meetings and so on and so forth. So it seems, you know, just from my inductive observation that deep seek, you know, is trained on this kind of content.

37:48So the high flower can make trades? Yes. So the high flyer can, I mean, you know, obviously, China being China, government policies have a huge impact on how different stocks do. Right. And that's often where you would find the alpha. In the old days, people used to call up their friends who worked for this in that ministry to get insider information. But I think what high flyer has discovered would also generate alpha is to really use algorithm to look closely at these policy documents. Look, coffee isn't the reason that you're going to stay at the RITS, but it could be the reason that you leave.

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39:35But of course, the party is made up of individuals. And many of these individuals, Xi himself, went through periods where the party had extraordinary control over people's life during the cultural revolution and so forth. And they personally and their family suffered as a result of this. And they're educated people. Many of them have been in industry. These are not naive people. So maybe I'm just projecting too much of my Western bias here. But what is the reason that they think it's so crucial that the banks are run by the party and the AI is run by the party and nothing escapes the party state?

40:13Yeah, so the cultural revolution generation, I think a lot of people suffered horrendously, including Xi Jinping himself. But then basically, you have two types of lessons that people drew from it. So the first lesson is like, oh, the party's too dictatorial, China needs to liberalize and so on so forth. So you have a lot of people from that generation who feel that way. Many of them now live in the United States. Basically, they tried to leave China as soon as possible in the 1980s and succeed it. But for someone, apparently, for Xi Jinping himself and others like him, the lesson was just don't be on the losing side.

40:51In any political struggle, make sure you're on the winning side. Because if you're on the winning side, they can do terrible things to your enemies. So that apparently is the lesson that he learned. And he basically honed his skills and built his coalitions for the time that he would take over a high level positions in the party for decades as it turns out. So if you look at the data, when he was in Fujian province, he spent an enormous amount of time hanging out with military officers in Fujian back in the 1980s. Late 1980s, early 1990s, and then you light, well, why did he bother to do that?

41:33Most local officials, they don't do that. I mean, the military is there. You need to be nice to them and all this stuff, but he built a dormitory for them. He even joined a unit of anti -aircraft regiment. He tried as much as possible to do as much as possible with the military because he knew he needed the support of somebody in the military when the time comes. And guess what? Sort of 30 years later, when he was about to be elevated to be Secretary General of the Chinese Communist Party, many of the people that he knew back in Fujian are now generals. They're in charge of important military units.

42:08And once he came to power, then he really promoted some of these people. But then lately, of course, he's purging some of these people, which is really interesting. Yeah, yeah. Yeah, he had a strategic vision about his own career trajectory, and he pursued that in a very determined fashion, I would say. What is the main difference between him and Stalin in less sort of political maneuvering sense? Because all of this sounds very similar to... Yeah, I would say early in the career, they're very similar. So outwardly, they're very low -key. Stalin was the bureaucrat, very low -key, not flamboyant, not making loud speeches like Trotsky did.

42:46But low -key, getting things done, seen as a very reliable person. This was a reason why Stalin was chosen in the... As far as I know, I don't know that much about Stalin. Same thing with Xi Jinping. So his father belonged to actually the liberal faction in the Chinese Communist Party. His father never offended that many people within the party. I mean, everyone at a high level will have sort of screwed over somebody along the way, but his father was in the better category, let's say. And he himself was very low -key. While the other printings were fighting for very good jobs in the capital city of Beijing when Shanghai, Xi Jinping said, oh no, it's okay, I'll go down to the villages, I'll work in Hubei in a rural area, then Fujian, which was kind of a peripheral area, and then Fujian was slightly better, but still not Beijing or Shanghai.

43:47So he got out of the way of this political infighting. I think similar in a similar way that Stalin did, like he early on, he did not confront people too much. But once he came to power, he knew they both knew what it took to control the party, which they govern over. Basically, you form a whole series of coalitions to get rid of your most threatening enemy at a given time. So for Xi Jinping, it was like, oh, well, this guy, Zhou Yongkang, who controlled the police forces and also the Ministry of State Security at the time, doing all this irregular things, being fabulously corrupt, he's a threat to the whole party, so he convinced Fujian Tao to join with him, the Perch, Zhou Yongkang, which was successful, Stalin did the same thing, to Trotsky.

44:38And then after the most threatening person is gone, you form another coalition to purge the next person and so on and so forth. So they both basically did that until they achieved absolute power within the party. Yeah, and if you read the Stalin biography so many of that in the early part, like how people in the Polybure are later I get to end up in the Gulag, because then many of the people in the Polybure later have been to the I wonder if there's a Trotsky, not an analogous person in this story, somebody who was a flamboyant speech maker. Yeah, Bushy Lie. Bushy Lie. Bushy Lie. Yeah. So he was a one competitor with Xi Jinping, but because he was so high profile that he never had a chance to be the top leader of China.

45:17And then of course Xi Jinping made sure that he would fall. Right, and now he's in prison. And now he's in prison. He's alive. His son is in Canada, actually, he's on Twitter now, on X. I should reach out, honestly. Yeah, I think that would be really interesting, actually. Let's move on to another topic I know you studied deeply, which is the local government debt situation. Sure. What is the US there? What is your sense of the situation now? Yeah, it just keeps growing in absolute size, because basically China is trying to tell the world that they don't have a high debt level, which at the central level that is sort of the case, you know, it's still 60, 70 % of GDP.

46:00But the reason why that is the case is because there are a lot of things the Chinese government would like to do. They push it down to the local level. But the authorization of local debt issuance is authorized by the central government. So at the end of the day is really the central government telling local governments like, okay, you need to do this thing. I'm not going to give you money, but I will give you the authorization to issue even more debt. So the debt level keeps going higher and higher. The one thing that has alleviated the cash flow pressure late last year was the central government authorized again, the issuance of close to 10 trillion RMB in special local debt to repay some of the higher interest -bearing debt of local governments.

46:45But that's an accounting exercise. It doesn't literally decrease local debt. It just changes from higher yielding to lower yielding. Meanwhile, the overall size of local government debt in China, I would estimate to be 120 % of GDP to 140 % of GDP. Well, that's a top of 60 % that is owed by the central government. Yeah. So total governmental debt is, yeah, it's, you know, pushing 200. And the high level we'd understand what this debt was for. The debt in Western countries, another OECD countries, is often because you owe money, basically, to pensioners. In this case, it's, it was just that they built bridges.

47:23Or they build all the high -speed rail, all the infrastructure, the beautiful infrastructure that you do see in China. And then more recently, industrial policies. So, for example, if there's a new science park for AI, let's say, right, the land that they acquire, the infrastructure that's built is all built with borrowed money. Then there are these startups. And then the startups are partially financed by some of these central level investment funds that you read about industrial policies. But then actually, the local government also have their own cedar funds, which uses borrowed money to finance some of these venture deals.

48:05For startups is the fact that they can get cheap credit from banks more relevant, is the fact that they can get loans from provincial funds more important. There's also the central government funds, the big funds, and so forth. Is that the, which is the bigger piece here? So a lot of it depends on like your social network and your connections. So if you're startup at Qinghua University, you have access to private sector funds, but also some of the central government cedar funds. If it falls in the right category, you know, some of the conductors, AI, etc., etc. But if you're at Lian Wunfeng, I don't know.

48:42So at Lian Wunfeng, because it started out as a financial institution, so it was mainly private sector money from financial investors. But there are other AI, especially sort of more hardware driven initiatives in the provinces, which are seeded by local government funds. And the point about financial repression is that without financial repression, an investor in China can invest in Silicon Valley. They can go to Sequoia, invest money. But because of capital control, they cannot legally move more than $20 ,000 a year out of China. They have to find domestic investment. So as a result, many of them choose to invest in Chinese high tech, or they choose to put the money in the bank.

49:25So actually, a lot of people just choose to put the money in the bank. And then the state banking system is then financed to, they have to deposit with which to lend to local government cedar funds for industrial policies. And the crucial thing here is that the banking sector is totally controlled by the state. So you're not getting a true rate of return based on the productive value of investment is it's literally like 1 % that deposits 1 % which is, I mean, it's like insanely low inflation rate is very low in China. There's a couple of mixed up questions I want to ask here basically. So you said, well, there were no capital controls.

50:04These people might want to take their money and go invest in Silicon Valley. Very basic development economics would show you that like if a country's less developed, they'll have higher rates of return. So people would want to invest, the Silicon Valley would want to invest in China. Why would cap getting rid of capital controls make capital go the other way? And this goes into other questions of why is it the case that the Chinese stock market has performed so badly even though the economy has grown a lot. And then why is it the case that they have a current account surplus and they're basically accumulating T -bills when the pattern you should see obviously is that like they can earn much higher rates of return building productive things in China than accumulating 4 % yield T -bills.

50:46Yeah. Well, so at the deepest level, I would say there is a deep fundamental difference between capitalism and socialism. And it sounds very philosophical, but I think this might help your Gen Z listeners think about this because for socialism, they only care about output. He's like, okay, whatever capacity we're thinking about whether it's grain production or metal production or these days robotics, we just want more of it. So then the state can use the state banking system which they control to allocate huge amount of capital to maximize the output of all these different things that they care about.

51:28But when you maximize the output, you don't necessarily make money doing that. Whereas capitalism wants to maximize profit which is, as you know, the difference between the cost production and the amount that you can earn from selling the output for socialism, they don't care about that. But the companies aren't socialist, right? The companies are probably thinking. Well, no, but because the financial system is socialist, they're forced into socialist like behavior. You know, you can't go into a bank and say, look, I make robotics. This robot that I'm going to make is going to be highly profitable down the road, but I can only make like 10 of them.

52:07And then the bank would be like, well, this is BS. I know a lot of startups don't make any money. And so, but at some point, notionally, you have to start making money. Whereas the social banking system basically says, you know, even if you never make any money or heartily any money, that's okay. As long as the change government tells us that this is a strategic sector, as long as you can prove to us, you can actually produce the thing that we want you to produce. If you never ever make money doing that, that's perfectly fine. What is the sort of outer loop feedback? The thing which keeps the system disciplined, here, there's private investors who care about actually earning a rate of return.

52:44And so, they're only going to invest in companies, which they think have a viable shot of becoming big, big, huge companies that can actually be at the frontier in technology. If these banks are not actually competing against real investors, and it's not their money. Exactly. They don't care. But it seems like this is compatible with many of the world's leading companies being developed in the system. So, how is it working? Well, so this is where the bureaucracy steps in. Right? So, it's like, well, how would a bank tell what's a good company and what's not a good company? So, then there's a complicated system where the mystery of, so let's say for robotics or for semiconductors, there is an expert group in the mystery of information, organization, information technology that will assess all these different projects.

53:40So, the banks will literally send them. It's like, okay, this company wants to borrow $10 million. Do they have real technology? Is this a good prospect? And some bureaucrat, supposedly, with no financial stake in the company, the completely new show, supposedly, I say supposedly, because in reality, we've seen many cases of corruption in conjunction with an expert panel who, again, with no relationship with the company or with the bank, will sign off on these projects or reject these projects, get sent back to the bank and bank say, okay, these bureaucrats say that your project is good. You're good to go.

54:15Here is $100 million. But it seems to work. Yeah, yeah. No, so, well. It's like, essentially planning isn't supposed to work, right? No, no, no. So, there's selection bias. We see and pay attention to the cases that work. And there have been some fabulous success case, which, by the way, does not include Xiaomi or BYD because those were mainly privately funded at the beginning. And CATL and DJI. Yeah, exactly. So, the success cases actually are not that. I mean, but there are, I'm sure I don't know the cases, but like, there are, well, Huawei. So, I would say, like, Huawei, it was a lot of state funding along the way and so on and so forth.

54:55So, you have success cases, but there are so many failed cases. And billions and billions of dollars just thrown down a hole, basically, for the failed cases. In fact, for a semiconductor, things got so bad that they had to arrest a whole bunch of dozens of people in the ministry of industry and information technology who were in charge of approving these semiconductor deals. They all went to jail because they were in a deal where, some companies submit a bogus project. They approved it. They got a part of the money and so on and so forth. So, it doesn't work very well. I mean, of course, you have fraudulent cases in the US, also, and all that kind of stuff, but the scale in China, the waste in China is a much larger scale phenomenon.

55:43And it's all financed, as you say, with this financial oppression, which is basically a tax on savers. And so, even though there's no meaningful income tax and just value out of tax and corporate income tax, if you factor in the currency devaluation, which is a tax on consumers, and then this financial oppression, which is a tax on savers, it actually might be a meaningful decrease in the quality of life of an average person. Oh, yeah. No, I mean, you definitely see it. Like, you know, for an economy that's been growing 5 plus percent for decades, you, by this time, you would expect, you know, pretty much the vast majority of the population in China, having all the basic necessities, shelters, medical care, et cetera, et cetera, you don't see that.

56:26You know, a lot of migrant workers, they're barely getting by the homelessness is increasingly a problem in China, especially with the labor market being so fickle these days. Elderly care is pretty abysmo, you know, very basic level, let's say, for a lot of people, not for everyone. So some people get very good elderly care if they work for the government or SOE previously. So you see a lot of problems that the Chinese government has overlooked. So this is why I'm saying they have a goal of making all Chinese people very happy and fulfilled. One part of it is being fulfilled, the technology part, but the other part of truly making people living a good life, they're not making as much progress as they should, I would say.

57:11And then just to close the loop on this. So I think sometimes we get impressed when we see, oh, they've got the maiden China 2025 and the NDRC and the MIT and so forth have these very specific, you know, LiDAR needs to get to this point and we need the EV, UV machines at this point and so forth. But your claim is that that part of the system is actually dysfunctional. And in fact, the part that actually works is the 5 % that is totally private. No, so the private sector stuff works a lot better. Do you have occasional successes from the state finance system? So I wouldn't say that there are no success cases, but I would say that for every success case you see, there are just maybe even over a dozen failed cases, which, you know, of course, you have failed cases everywhere, you know, in VC, but the amount of money being wasted in the state financial system would be much larger.

58:11Yeah. Going back to the local government, debt burden, there's a world where AI isn't a big deal, and there's a world where AI is a big deal. If we live in the world where AI truly causes huge uplift to economic growth and so forth, is it possible that this problem doesn't meaningfully harm China's ability to compete at a frontier? And here's why that might be the case. It seems like this problem is especially affecting poor provinces, whereas you have the actual numbers, but are Shanghai and Guangdong in a good position with respect to their fiscal situation? And could they keep funding, you know, top -end semiconductors, AI firms, data centers?

58:57And so China could still keep competing at the frontier in AI, even if the poor provinces don't have the money to fund basic services and so forth. And in the long run, they get advanced AI's and that's a big uplift to economic growth, and they can just grow their way out of this debt problem. Yeah, so we can talk about that. I'm a bit skeptical about that for the case of China, but yes, indeed, as you said, some places like Shanghai and Guangdong, they're still in relatively okay fiscal positions. But then there are other sort of a wealthier provinces with a lot of debt also. So, Zhijian Province, which is where Deepseek is located actually, and also Ali Baba and all these tech companies, they have a high debt load.

59:41But because they start from a pretty wealthy place, they can still service the debt without too much difficulty. But actually, the trade war is going to make it worse for Zhijian Province because a lot of the manufacturing export firms are also in Zhijian. But nonetheless, the case of China is that basically, the financial system is geared toward fulfilling the priorities of the party, i .e. the priorities of Xi Jinping. So even if they can't do anything else, they will do the things that Xi Jinping wants them to do. And AI, apparently, is one of the higher priorities for Xi Jinping because he's helped multiple study sessions.

1:00:22He's had different polyblom meetings and Ding Shisheng, who's one of his most trusted lieutenants is in charge of it, et cetera. So I do expect fair amount of resources being devoted to it, regardless of the situation and local debt. I mean, in fact, at the local level, things are so bad, but they just don't care. So there are civil servants, teachers who are not paid four or five months out of the year. I think he said, well, how can you run a government like that? Wouldn't it just collapse? But then you have to look at the outside options. For your teacher, for your very low -level bureaucrat, what option do you have?

1:00:58Do you want to go back to delivering food to people? Or would you rather at least take six or seven months of civil service salary, at least you have health care, at least you can get your free lunch at your workplace cafeteria every day. People still choose to work for the Chinese government, even if that were the case. But a lot of the previously very generous fringe benefits and so on so forth, that has all been cut down because of the local debt issue, but there's still pouring a lot of resources into national defense and AI and technology. And what would a solution at this point look like?

1:01:34Because if you've already spent all this money, first of all, actually, why is it the case that these investments aren't productive? Because it's not like it's entitlement spending where you're doing it for I don't know, old people, but then at the end of the day, you're not getting any return for it. Theoretically, these are like, you're building real bridges, you're building airports. So why aren't they productive? And then what does a solution at this point look like? Well, so it was very productive. I mean, I think you noted in this art crowbar book review that you did in the 1980s and 1990s because China lacked a lot of infrastructure.

1:02:10But once you build the first high speed rail between Beijing and Shanghai, you build the second one, you build the third one, you know, there's very rapidly diminishing return. Also, as you know, the population is basically shrinking in China and especially in a lot of cities in north -eastern China and also in southwestern China. So you really don't need high speed rails connecting those cities to other places in China because nobody lives there anymore. You can ask about this. So if the reason that the provincial leaders kept doing this construction was because they want to get promoted and they want to get GDP numbers on the book and government spending now is as the GDP, even if the ultimate thing you're building is not that productive.

1:02:56But in the central government has had a problem with this for a while and then they think this is fake. They don't want to keep this fake growth going and they see the local debt numbers. Were they still promoted nonetheless? Like why did they, why were people doing this? Who was a person who created? And also a lot of these people got arrested in the aftermath, right? So they weren't promoted. They were actually arrested. So what was incentivizing them to keep? So when you invest in a large infrastructure project, a lot of money changes hand. And that is so well. So this is a big debate in my field also.

1:03:33Some people were like, well look, the more you invest, more likely you're to get promoted. My argument is that it's not the actual investment. It's the rent seeking that comes along with the investment. So you have to get a contractor for cement. You have to get a contractor for this and that. You get a big envelope on the table as a kickback. Then that allows you to pay your superiors. Because let's say you did a billion dollar investment to build light rail or something like that in a city, you got a hundred million dollar payout from all the contractors. You can give your superior 50 million dollars to thank that person and to up your chance of getting a promotion.

1:04:17And so I would say that's more the realistic mechanism for linking investment and promotion. Then like, oh good job. You know, you generated investment and in GP in this city. We're going to reward you with a promotion. In fact, there's really good work by James Kong showing this. It's like basically, also like when you do real estate deal, you can sell land cheaply to politically connected prinslings. And then they will lobby on your behalf for your promotion. And statistically, there is an effect. So if you sell land cheaply to prinslings, your chance of promotion goes up. I find it fascinating.

1:04:53The fact that whether a corrupt political equilibrium leads to more construction or less construction, because the political equilibrium in America today is that, I don't know, California isn't the least corrupt state in the country. But the political equilibrium is that the fact that there's so many different factions who get their hand into the pocket means that it's not that everybody's like, we need California rail to happen yesterday because I need my share of it. It's that, oh, I'm going to get a little consulting fee to slow this down by five years and another person. So it's quite interesting.

1:05:27And if you read the carobiography of Robert Moses, and you look at the strategies he employed, it actually is very similar to what you're mentioning here, where it's in every single faction's interest that a bridge that Robert Moses is working on gets done. There's some of the mechanisms you mentioned. For example, he would give the banks these discounted bonds for this construction. So the bank lobbyists were encouraged to keep the construction going and he would give, obviously, the unions wanted employment. So they wanted the construction to have every single person at every stage was incentivized.

1:05:58So I find it interesting that China has maintained to me and keep political equilibrium, which encourages too much building, whereas our political equilibrium is that the good. It's discouraged. Yeah, it is. So basically all the regulations in the US, you know, environmental, this and that build the zone sort of stakeholders in lobbying group. Yeah. And then it's in the interest of these lobbying groups to prolong the process so that they can absorb a higher share of the rent. Whereas in China, because they have this command structure headed by a Chinese Communist Party, the secretary of the city or province can cut through all the red tape because he's the boss of all the regulators at the local, most of the regulators, let's say at the local level.

1:06:46So if he wants to do something, he can cut through all of it as long as he can benefit somehow himself. Yeah. So I think that would be, I would say that's a difference. Interesting. Yeah. Okay. And then what would a solution to this problem look like? Because it's like 100 % GDP. Yeah. Okay. So I would say, and of course, the Chinese government will never, ever in a million years do it in its current form, which is to reduce a lot of the other unnecessary spending like national defense, like a lot of the industrial policies, and then use the savings to bolster domestic demand with welfare policies and to gradually decrease over our amount of local government debt.

1:07:33That I think is economically sound because it's like China already has the largest navy in the world. Why doesn't need a navy that's even bigger than the largest navy in the world? It doesn't need that. I mean, it has more than enough for national defense. It has some of the best jet fighters in the world already, some of the best missile systems, like no one is going to invade China or you come close to it. So they actually don't need it. I mean, the tech race, I mean, I do, I'm somewhat sympathetic to China because now that there's US policies preventing Chinese companies from buying all the chips and AI so it wants its own capacity, it's spending a lot of money on it.

1:08:15So that part, I'm somewhat sympathetic, but other aspects of industrial policies, for some of the battery stuff, for solar power, etc. It can certainly reduce a lot of subsidies. It can increase taxes actually on many export -oriented firms, which is one of the reasons why there's a big trade surplus in China and trading balance between the US and China. Get more revenue that way to finance domestic demand and to pay down local government debt over time. The Chinese government, of course, will never do that because it has a very high, places a very high priority over competition with the US across many different fronts and to get dominance over multiple supply chains.

1:09:03But in the world of global trade, why do you need that? I mean, the same thing goes for US. The US doesn't need dominance over every single supply chain. Why is it the case that economists, so when they're talking about rebalancing more towards consumption, the law often suggests that you should do increasing amount of welfare, but it seems like the more straightforward thing to do would just be to get rid of financial repression so that by default, savers would have more purchasing power or get rid of currency devaluation, again, the same fact. So why not get rid of the regressive taxes rather than the law?

1:09:40Because if you just get rid of financial repression, it will only benefit the savers, which is 10 % of households. That savers, 10%, 20 % of households. If you look at median households, they're very little savings, actually. Besides the home in which they live. Yeah, so there's this misconception is like, oh, China has the largest savings deposit in the world. That's true. But if you look at the distribution of the savings deposits, it's highly concentrated in the hands of 10%. So even if you say, oh, okay, deposit interest rate suddenly goes up to 4%, it's only going to benefit the people with large amount of savings.

1:10:15Most people, they're not going to benefit from it. Most people, if they don't have better welfare services, they're going to save like crazy in anticipation of getting sick. So you do need better, certainly medical care insurance in China. That's something, frankly, I worry about the US. If you cut back on Medicaid, it's going to encourage precautionary savings, which you can say, well, but that's a good thing, American, save to little, maybe, but then your short -term consumption is going to come down. Okay, so you mentioned a second ago, well, why do they need this big military? Obviously, the reason is not just self -defense, but a potential invasion of Taiwan.

1:10:53So given your reading of elite politics, was your sense on the probability that they would actually invade Taiwan this decade? So first of all, it's, I think we do know something about Xi Jinping's preference mapping when it comes to this issue. He has said a number of times that, you know, obviously, China should be united. So I do believe that's sincere, but clearly his desire to achieve that is not so strong that he would take a very risky gamble achieving it because if that were the case, he would have done it already. He's been in power for 12 years, you know, he hasn't done very much. I mean, you know, certainly the amount of pressure on Taiwan has ratcheted up.

1:11:42And also from his other policy -making, we know that he's not a reckless policymaker. Was Europe over this kind of reckless? Well, do you think that was reckless? Well, so that was actually conservative, right? So he preserved the lockdown longer than was necessary. Yeah, I mean, it depends on how you, but you could say the same thing about Taiwan. It's like it's conservative because in the long run, maybe they'll pose a national security threat, right? But it is a change from the norm. It's so badly that he would just do whatever it takes to get it. He would have done it already. Yeah, I guess you could argue that he has been trying to build enough self -sufficiency that in the aftermath, China would not be left in the lurch with food or power.

1:12:32And that's why they're doing clean tech. That's why they're doing investments in semis and so forth. So that over the next few years, if they'd beloved enough self -sufficiency, they're in a position where they actually could without it being a huge, he couldn't have done the same thing in 2015. Right. So yeah, so then we've seen the Chinese government engage in all this behavior, stockpiling, this and that, oil, grain, and so on and so forth. And large is Navy, building all this landing capabilities and so on and so forth. So then one argument is like, well, so there's a threshold once he feels that he reaches that threshold, then he'll go for it.

1:13:11But then for me, I don't think that threshold is fixed. Right. It's really conditional on a lot of different things. And there are some exogenous factors, increase the threshold. Other exogenous factors will lower the threshold. So I would say more recently, one factor that might have increased the threshold for him acting is what happened in Ukraine. Right. So Ukraine, you have a case where Putin was very confident about taking over all of Ukraine within a short period of time, turns out he was wrong. He was getting all this bad intelligence, so on and so forth. I think for Xi Jinping, he cannot discount that possibility.

1:13:50And that very likely increased the threshold. Interesting. But then there could be other factors that lower the threshold. This gets to the question of how much information flow is there, how much true information is getting up to Xi Jinping in the authoritarian systems. Obviously, there's a danger that the leader is not getting told what they don't want to know. But you were mentioning a second ago that you think that the top leadership is in communication with experts all the time, is in meetings all day where they are learning about what's happening. Is that your sense? But then you read about zero COVID.

1:14:24And it seems like by year three, it was very obviously a mistake. So to the extent that it wasn't stopped at that point, was that because information wasn't getting up to the top leadership? Similar story with I think there was a very famous case in 2024, where Xi said, why don't we have a billion dollar unicorn tech companies in China? And people responding, does he not realize that the 2021 tech crackdown is the reason that's the case? Did somebody not tell him? So what's your sense of how much he is getting told things, which might make him uncomfortable? For example, that we might not succeed in Taiwan.

1:14:58Yeah, so this goes for a question of the role of expertise in the Chinese government. I think that's a very interesting question. I mean, frankly, I mean, I'm trying to use some kind of data to try to assess that. But my intuition is this, the top leadership always listens to experts. So unlike some cases in the US, the experts are respected they're listened to. But there are sort of interest groups that are close to leadership. They also know that. So they will present different kinds of experts to tell him different sorts of expert opinions. So sometimes, you would get these conflicting advice from different experts.

1:15:40And he will have to make some kind of gut call. Other times for political reasons, they will just ignore the experts. So they will never say, you know, fake news, we don't believe in science and so on so forth. Sometimes even though they know for sure the experts are right because of other political reasons, they'll say, okay, you're right, but we're not going to do what you want us to do for now for a bunch of political reasons. And how do that manifest in zero COVID? Yeah. So I think the timing of it, also the decision not to buy Pax Lovent on a very large scale that might have been some kind of political decision.

1:16:18We show, we have a paper actually, Shif Sen, to you showing that basically they kind of the experts told them the US vaccines were better, mRNA vaccines were better, but the Chinese government is okay, we believe you, but still we want to help our domestic pharmaceutical industry. So we're going to only sell the domestic stuff in China. So that's very clear. If you look at the propaganda, you know, they began to denigrate the Western vaccines and highlight the Chinese vaccines and so on so forth. But I think they do meet with experts a lot. Sometimes the experts are manipulated into things or in things.

1:16:57Other times the experts are sincere, they listen to them, but they still choose to not implement what the experts recommend. Yeah, I guess I'm just trying to get a sense of where does this net out in the confidence of the political system? It seems like they have a track record of making some smart calls, but then occasionally making a call that is so bad that it wipes out all the smart calls and your code being an example of that or obviously one child policy before that, not to mention all the things that I'm outed. And so I'm getting the sense that they will consult with economists or scientists or whatever on some things.

1:17:34But then I guess I still don't understand, well then why did they, okay, we're not going to buy the American vaccine because of this. This is the time of all times to be from making sure the pharmaceutical industry in China is in a good position. Sure, but then did they not know that people were locked in their apartment starving and that this is not a long -term viable strategy and so forth? How is this compatible with this very technocratic picture we have of the party? Well, so they're technocrats or people know a lot, but I guess yeah, generally speaking protecting the party, protecting the state apparatus and all the important tools of the Chinese government will almost always be a higher priority to any kind of technical considerations in a given decision -making.

1:18:28So it's like, well why protect all these pharmaceutical companies because they're state -of -land prices? They need to survive or deal, they need to have a national brand name and also of course pharmaceutical and new, what they call new biology is in one of these industrial plans in order to finance some of these future research in advanced biology, these companies need cash flows. What is the succession plan after Xi has gone? There are no plans right now. There are no plans. What's your sense of what would happen? Tomorrow he drops dead. What happens next? Okay. Yeah, I think that would be an issue.

1:19:09Yeah, if you were to drop that tomorrow. I mean, so what are this power? So what the biggest impact is this, right? So right now financial repression works because, so let's say you're a billionaire, you try to get your money out of China, you know, you make up some fake paperwork, you know, I'm importing a million Rolex watches from Singapore. I need to pay an invoice for a billion dollars. That order will go from your bank to the state administration of foreign exchange in Shenzhen and Shanghai and some bureaucrat will have to okay it by large denomination outflows. Right now that bureaucrat is like, if I approve this, someone in Beijing is going to notice it and I'm going to be in jail within a week.

1:19:52Yeah. So I will not approve it. But if that person was like, there's nobody in Beijing, no one's minding the store and this guy promises me a hundred million dollars if I approve it, I'll go ahead and approve it. So if there's any sense that there's no command structure in Beijing, even for like a week or two, I think we would have a financial crisis at least. That's interesting. How might you just say because there'd be tremendous capital outflows? So let's put it this way. The foreign exchange reserve recently, oh my god, so much money, $3 trillion. Right now it's like less than 5 % of money supply in China.

1:20:31So it doesn't take a panic. So even if people want to just rationally reallocate 10 % of their assets outside of China, foreign exchange has gone massive devaluation, etc., etc., huge. They would have to jack up interest rates to like 20 % to stop it. Then there's mass bankruptcy, etc. But they can stop it. If there's a command structure. If people believe that they're going to go to jail the week after even if they get $100 million in cryptocurrency in Hong Kong, whatever. And suppose it doesn't happen tomorrow, but in 2028, 2030, he just goes see Nile and over the course of months, it's clear that there needs to be a successor.

1:21:15What does then the succession process look like? Yeah. So there's historically a way that we know doesn't work. And then there's a way that could work. One way that we know historically doesn't work is to designate someone is like, you're going to be the successor. I mean that person's going to die for sure. In a horrible way. And we've seen this for Stalin. We've seen this for Mao. The other way is to have someone that everyone trusts to represent the leader's opinion, but cannot possibly become the number one person. And Mao had Jiang Qing, his wife. Xi Jinping can also do that for his wife.

1:21:58Or increasingly, we see his daughter taking a higher profile. And the reason why these individuals cannot be number one in the party is because of this ingrained sexism in the party that, you know, against women. And also they have never held like official positions in the party and so and so forth. So I think having a transition figure who can basically stabilize the whole situation while the different factions fight it out peacefully, hopefully. Yeah. We'll be a very important ingredient. But sometimes even like these transitional figures are two weeks. So Jiang Qing was purged within weeks of Chairman Mao dying.

1:22:36The long march veterans, they were so close to each other that they worked it out among themselves nonetheless. So that was a pretty peaceful transition. Yeah. Besides the purge of Jiang Qing and her colleagues in the gang of four. These days, the long march generation of officials who have spent decades with each other governing with each other, that doesn't exist anymore. There's very high turnover the people who are in the Palabrero. There are different elements in them. They, you know, some of them, a few of them have worked closely with each other over the decades, but many of them worked in such disparate bureaucracies that there is not a lot of trust between them.

1:23:15And that probably is by design. So you know, you don't want people in the Palabrero to trust each other to be friends with each other too much because they could get together and you serve your power. So given that there isn't this social capital that we saw back in 1976, I think this transition is going to be more ruthless, more brutal, and potentially more disruptive. What are the important factions in Chinese politics today? What is the equivalent of liberal or conservative in American politics? Historically, there's things like the Shanghai clique or whatever, but what do those still exist?

1:23:54And if they do, what do they stand for? I mean, they're all beholden to Xi Jinping in one way or another. But do they have different ideas about what should happen, which China or what should happen over the world? Generally speaking, you have some people who are more pro -market. These people tend to be people with more governing experience along the coastal provinces like Dredjean Province, Shanghai. And then you have the status. You know, people, most of the careers in state enterprises, so all the military industrialists, I would guess that they're more pro -state power. So during, well, but actually those figures, I think, will ultimately be somewhat stabilizing because you basically saw this in the Soviet Union.

1:24:33For those people, they just want to preserve their vested interests. So it's like, okay, whoever is in charge, as long as you subsidize the state sector, some more, I'll support you. So they, in the Soviet Union, after Stalin died, or even, you know, between the sort of Khrushchev and, you know, post -Khrushchev transition, they were stabilizing politically, even though they ended up damaging the Soviet economy by demanding so many subsidies for their own sector. So the fact that you have quite a number of these guys from the military industrial sector as Politburo member potentially could be stabilizing.

1:25:08What's your, what's your forecast on Chinese growth or the Chinese economy relative to the US? If AI is not a thing, led just forecast out everything else. In the year 2040, is it 2X as big as US economy? BPP, is it 3, 4X? Is it 1X? Yeah, no, I think it's 1X or sort of 1 .2X of US economy. Even PPP? Yeah, well, I don't quite believe in these PPP calculations. Interesting. Okay. Just because the quality is very different, you know, in China's, in some cases, still worse. In all the cases increasingly, it's better than US quality. Yeah. So I'm not a inflation. So real income overall size of the economy would be similar to the US, maybe slightly larger by 2040.

1:26:04But it's already 1 .1 .2, right? No, no, no, no, no, if it's not PPP, then if it's just real income, I think it's like 70 % of US economy, something like that. So this is quite a bearish forecast because usually people expected to be quite dominant by 2048. Because growth rates were slowing down anyway. Yeah. And then now you have this trade pressure and so on and so forth. It's going to slow down. There's no big consumption stimulus insight because of the high debt level. Yeah. So they can't possibly push growth rates up through that mechanism. So they have to double down on more investment, more supply side.

1:26:41But then at some point, is the world really going to switch to 100 % buying BYD as opposed to, you know, Volkswagen and all these other cars? I don't know. I think there'll be a pretty big pushback or at least some kind of limit. So let's say China takes over most of Latin America, most of Africa, most of Middle East, that's still not such big markets. You ultimately have to conquer Europe. You have to take North America. That's going to be really tough. Final question. Sure. What advice do you have for me on how to land? If not somebody on the Politburo, like one step away from the Politburo.

1:27:19Yeah. I think that's very tough. Anyone who's been a mid -level or higher official can no longer leave the People's Republic of China. There are some former vice ministers who can go to Hong Kong. So I think that's your best bet. It's reach out to one of these vice ministers type and to agree to meet with them in Hong Kong or Xinjiang, even better yet. That could be okay if they've been out of power. Do you think it could be an interesting area or would they not say anything? Yeah, it depends on the person. I mean, some people are willing to be a bit more open. But frankly, there is just atmosphere in China where people are afraid of deviating from the party line because they can really get in trouble.

1:28:04Yeah. Yeah. Okay. This is a super useful to get a very much more tangible sense of what is actually how the Chinese political system actually works. We talk about China so much and I just most of us have such a little understanding of even the basic like Congress president level Chinese political system. So and obviously a lot of it is obfuscated on purpose. So I appreciate you adding a lot more color to it. Great. Thank you for having me. Yeah. I hope you enjoyed this episode. If you did, the most helpful thing you can do is just share it with other people who you think might enjoy it. Send it to your friends, your group chats, Twitter, wherever else.

1:28:45Just let the word go forth. Other than that, super helpful if you can subscribe on YouTube and leave a five -star review on Apple podcasts and Spotify. Check out the sponsors in the description below. If you want to sponsor a future episode, go to doarkesh .com slash advertise. Thank you for tuning in. I'll see you on the next one.