Dan Wang on China's Breakneck Economic Growth

24:52It doesn't really have much by way of immigration. You have a state that enforces totally traditional gender roles, and you have a pretty minimal welfare safety net where taxes in China are not actually that high. It is pretty regressively funded on consumption taxes. This is a country that arrests union organizers and has busted up certain Marxist reading groups in universities. And I take a look at that. And I think, doesn't this look kind of like Eisenhower's America? You know, this is - It certainly doesn't sound liberal. It doesn't sound very liberal at all. And I'm not even sure if it sounds very socialist.

25:27There is absolutely a Leninist aspect in which state control of public enterprises, you know, public ownership of production is very much real. Many important sectors, telecommunications, aviation, energy are state owned. And you have some redistribution between the provinces. But kind of my handy snapshot is not to think of China as socialist or autocratic. I think these are pretty limited terms that don't really offer much anymore. My simple formulation of China is that it is a Leninist technocracy with grand opera characteristics, pretty rational most of the time, but then every so often will do something pretty preposterous and then kind of collapse in something really ridiculous.

26:07That said, We have seen recently China make some moves to boost social safety nets. So they've said they're going to, you know, do more for seniors and they're also going to try to boost consumer spending. One thing that I thought was kind of amusing was they basically rolled out a cash for clunkers equivalent. And again, I think of all those things, a focus on consumer spending, social safety nets, although arguably in the U.S. those are perhaps declining, cash for clunkers, that sort of thing. I think that is very American in many ways in terms of the political economy. And meanwhile, in the U.S., you know, Trump is talking about how he wants to be more efficient in terms of controlling the economy like China.

26:50We've also had some instances of the U.S. government taking stakes in companies recently. That seems very Chinese in certain respects. Is the U.S. starting to emulate China and China emulate the U.S.? Tracy, when I first heard of the tariffs on Liberation Day, I thought that liberation doesn't sound very much like an American word. It sounds much more like a Chinese word to my ears. The Five Liberations campaign. Yes, right. We're going to liberate Taiwan into socialism. This is what they're up to. And certainly there are a lot of aspects in which the U.S. and Trump in particular is copying China.

27:31We are making Intel a state-owned enterprise with American characteristics. There's a lot of questions now with data probity and whether the unemployment figures are going to be well reported. And there is kind of just this, you know, visiting stochastic terror on the downtrodden, especially undocumented immigrants. And all of these things are not very nice things that I think that Trump is learning from Xi. And right now, I think what we have is authoritarianism without the good stuff and the good stuff of actually building quite a lot of mass transit and clean technology generation, clean energy generation, rather.

28:11We don't really have the Port Authority bus terminal being built and renovated on time. We don't have California high-speed rail. We don't have smoothly functional cities that have a lot of public order. And I don't think that the U.S. should try to emulate a lot of these things. But I think there are better things to emulate because a lot of what Trump is building are gilded ballrooms and detention centers. And, you know, we're getting quite a lot of just, I think, many of the worst aspects of authoritarianism. You know, I'm curious. I said at the beginning, you've had this huge rise. Everyone is obsessed with this story right now.

28:44Everyone is just every every day I wake up. It's on social media. It's coming from D.C. It's etc. Everyone is sort of maybe miles agape at the capacity of China to build that damn world. You know, you open Instagram and it's some crazy drone show or something like that that shows the technical prowess there. You know, this wasn't the case, the sort of popularization of all this when you started your book or certainly not the first time we had you on the show. What do you make of that? Like, how has perception of China changed or maybe even your own perception of China changed since you started really focusing on this stuff?

29:23Well, Joe, maybe Chinese industrialism has been my white whale for quite a long time. I'm sorry. You're very good. I'm sorry. I'm sorry. I moved to Hong Kong at the start of 2017 from Silicon Valley, where I used to be working, in part because I was feeling that a lot of the technologies that was important in Silicon Valley at the time were not so interesting. It was a lot of cryptocurrencies. It was a lot of consumer platforms. we hadn't even gotten to SaaS for business yet. And so it was just not that interesting. And so when I had lunch with Arthur Kroeber and he told me about something called Made in China 2025, I thought that ultra high voltage transmission, electric vehicle batteries, memory chips, these were far more interesting.

30:09But I felt that it was actually making a distinctively unpopular decision among my Silicon Valley peers because they thought that they were the center of the universe, which is a view they still hold. and what are we doing if we're not being in San Francisco and not pursuing some aspect of tech. And so when I moved to China, it definitely didn't feel like the elitist, popular thing to do, but I was really glad to go take a look at what China was building. And I think that there is a broader sense in Silicon Valley that tech is important, but non-tech is also important. Right now, I feel like a lot of folks in Silicon Valley, where I spend a lot of time as a fellow at Hoover, you know, a lot of folks are trying to build God in a box and that attention has shifted to AI.

30:53And I feel like that has become a totalizing aspect once more. And I feel like part of my task is still to remind people that, you know, drones are important and bridges are important and we live in a material world and, you know, let's build up a manufacturing base as well.

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33:09That's public.com. to IT essentials and maintenance tools. Amazon Business takes the buying experience you know and love from Amazon, plus tools that help you save costs and make insights-based decisions. Ready to bring your visions to life? Learn how at amazonbusiness.com. So with the focus shifting to AI, you could make an argument that the US has the lead there still, even though we've seen moments of panic with the DeepSeek model earlier this year and things like that. But on the other hand, I suppose you could argue that AI also needs vast amounts of physical infrastructure, including data centers, energy, chips.

33:46Who has the upper hand when it comes to AI? I don't have a super strong view on this, but I could outline a potential scenario in which China is going to be leading on AI based on a few factors. First and most important, as you point out, Tracy, that China has a lot of electrical power. So the U.S. may have all of the computing because it has all of the advanced chips from NVIDIA. As Howard Letnick says, China has at best the fourth best chips in terms of AI, and that is a pretty substantial constraint. But what is a bigger U.S. constraint maybe right now going forward is that there just isn't enough electrical power, especially if Trump is taking wind turbines offline and being very discriminatory about certain types of energy.

34:31And China, I think, has organized itself as a civilization to deny nothing towards heavy industry. Whatever heavy industry wants, it is going to get. And that could be powered by solar, it could be powered by wind, it could be powered by coal, it could be powered by nuclear. But China will not have this issue that Meta faced earlier in the end of last year, in which a rare species of bee prevented Meta from building a giant new power facility. And China will definitely not do that. So China has a lot of electrical power. China may not have a lot of advanced chips, but it has a lot of mature chips, which are going to be necessary for inference.

35:07So if we do invent God in a box, we're going to be running queries all the time to figure out how to automate and shop and whatever else. And that is going to require a lot of processing power. And I think this is where China's mature chips are going to have a pretty good advantage. And China also has, I think, another unique advantage, which is that its training data might be more strategically valuable. China has most of the manufacturing capacity in the world, or about 30 % of manufacturing value add, but that is quite a large chunk. And, you know, what does the U.S. have? Well, we have a lot of consulting companies and a lot of healthcare companies.

35:45So maybe the U.S. will automate something on the scale of McKinsey. and China will automate something on the scale of Foxconn. And, you know, they're going to have a lot more manufacturing production and we're going to have a lot more better consultants. Yeah, I suppose there's a synergy here where you could use AI to make your manufacturing more efficient, right? No, totally. And we talked to Cameron Johnson about that, the diffusion of AI within it. And, right, like a factory that's monitored properly is brimming with fresh training data all the time. And that has a compounding effect and an accelerating effect and so forth, potentially widening that gap.

36:23I want to ask actually another question. It's not even about U.S., China per se. It may be a more U.S. question. Use the word totalizing. And I've been thinking about this exactly in a couple of different ways. One is, I wonder about whether people have lost interest in things like, say, drug discovery, in part because of this implicit assumption, well, once we achieve AGI in two years, that will do all the drug discovery. So why are we even bothering with working on that in the meantime? And also it feels like much of culture strikes me in the U.S. as sort of disappearing and other things like that people are just sort of losing interest in lots of things because AI is crowding out in the psychological space, everything else.

37:08And I'm curious if in your time in Bay Area, think about these things, whether that rings true or not. Definitely. I hear the craziest when I'm in California and I hear, you know, I think a lot of people are very smart Stanford kids who are very smart and yet they could be very narrow minded and not have a very broad view. I heard some things like people say, well, maybe we don't need to think so much about climate change, for example, anymore. And I say, oh, well, why don't we have to think about climate change? Because AI will figure out what we need to do with climate change and implement everything.

37:44Maybe we don't need to be so careful about teaching kids how to read the great books or maybe even to read at all because AI will just help us get there. And they're trying to manifest the eschaton in Silicon Valley. And there is also this bit of an apocalyptic era in which maybe the world will end in 2027 because AGI will be out there and it's not going to be aligned and all of our world will kind of just end. I really don't buy that view. I believe that we have to have a longer term view about everything. There is kind of this sense often in D.C. This is not consensus, but every so often one would hear that, oh, the Communist Party is so weak.

38:24Their legitimacy is so thin and that might topple over at any moment and we don't really have to treat it seriously. That feels very much like cope. And there is also a Silicon Valley variant, which is not really the same about China. But there is the sense that, well, you know, we're all going to ascend into utopia in 2027 when we, you know, invent all the AI and the superintelligence. I like how binary everything is. It's either utopia or, you know, the apocalypse. On the note of potential own goals, one of the things we've had now is years and years and years of U.S. export controls on semiconductors going into China.

39:01And I remember you were very early in describing this as a sort of Chinese Sputnik moment, this idea that this was the moment when China really realized that it actually had to produce these things itself and try to regain or get the lead over the U.S. when it comes to crucially strategic technology. technology. Now that the dust has kind of settled, although clearly things are happening on the tariff side, but now that we've had years and years and years of export controls, does it look like that spurred China's technological development? I think that it definitely spurred China's technology development.

39:37If we take a look at some of these sanctioned companies today, SMIC, which was on the entity list in 2020, now has double the revenues of that level. Huawei, which had the most severe export controls, it was kind of like a new export control invented specifically to hurt Huawei, has by now recovered its revenues back to the 2019 pre-sanctions levels. And being in China was just this really stark reminder that U.S. export controls really accelerated a lot of Chinese efforts to do better. Now, Beijing has always had this ambition to be a technology power. It's had this ambition for a very long time.

40:14But for the most part, it didn't have a lot of China's most dynamic companies willing to sign on because a lot of China's most dynamic companies, let's say Huawei, ByteDance, DJI, they were able to say to Beijing, well, we need to make the most efficient 5G equipment or the most efficient drones or the most efficient short form video, whatever it is, products that we should export around the world. And therefore, we need to be buying the best products in the world. And that was overwhelmingly things like Qualcomm chips or NVIDIA chips or whatever else. And what the U.S. government did was that it kneecapped their ability to access U.S.

40:50equipment at a stroke, and that fully aligned them into Beijing's goals of technology pursuit. And now you have Huawei being all sweetness and light to Chinese domestic vendors to say, well, why don't we work together? We really have a lot of common interests here. Huawei was not super big into semiconductors in 2019 in terms of their production. But now Huawei is one of the biggest spenders in semiconductors R &D. And I believe I just saw a Bloomberg piece saying that Huawei's chips are now rolling off the production line. And that was something I think entirely created by the US government that all of these fiercely competitive companies really were fighting for their lives, solving seven problems a day before breakfast because they had to solve all of these problems.

41:37And I think that probably wasn't necessary over the broader strokes. One of the things that causes alarm for D.C. regarding China, I mean, look, it's great that countries are getting richer and the technological frontier is being pushed and innovation anywhere theoretically can help anyone everywhere. But this question, and it's more sort of political or perhaps geopolitical than economic is, does China have ambitions outside of its borders, right? We know the U.S. has, We have military positions all over the place, and we clearly have ambitions outside of its borders. China has no formal alliances, I believe, with any country, et cetera, but there's always this concern.

42:18What do you think about China's interest in the rest of the world beyond sort of export destinations? I think that China is very deeply interested in Taiwan and the South China Sea, which it defines as within its own borders. And so that is a matter of dispute. I think that China is very keenly interested in dominating most of Southeast Asia. What does dominating mean? I think that they would really like for the leaders of Malaysia and Vietnam and the Philippines to come regularly to Beijing to kowtow for the emperor's pleasure. And maybe that is a pretty big threat to U.S. interests. I think that is something that we can debate.

42:59I would be skeptical that China has broader goals to seize Japan. I think that would be pretty fanciful. I think that China's success right now is building a lot of advanced manufacturing. You're right, I've been tracking this for a very long time. I remember my first appearance on OddLots in 2017 to talk about Made in China 2025. And I was pretty constructive that China was going to figure out a lot of these technologies. And I think that was fairly out of consensus at the time. And I think that was fairly, China has made incredible strides beyond my expectations. of, you know, and I was been pretty bullish about a lot of that.

43:38And something I worry about is that I think that China's success in advanced manufacturing will continue. I just wrote a piece with Arthur Kroeber in Foreign Affairs, pointing out that even though China's economy is slowing, and even though there's all sorts of problems with the economy and the political system, they're going to keep advancing on manufacturing and technology because they have the manufacturing process knowledge, and they have the investments really to push them forward. And I think that we're already seeing that China is de-industrializing Germany. Brad Setzer has great charts on this all the time, especially in the automotive sector.

44:11I think that China will continue to de-industrialize the rest of East Asia, Europe as well, and that will move on to the United States as well. And I don't have too many great views about the security threat or what is going to happen with military. But I think the clear and present danger is that China's technology keeps advancing and that will further de-industrialize parts of the Midwest as well as many parts of Europe. And I think that is going to create all sorts of political problems in the West as well. And that is the big danger that I'm nervous about. What does the U.S. need to do in order to preserve its own manufacturing capacity and I guess ideally build it out?

44:49I think there has to be a lot more investment in manufacturing process knowledge, which is all of the tacit knowledge that we can't really write down, that we have to be a lot better at producing things like not only semiconductors, but also electric vehicle batteries and broader sets of electronics as well. I think it would be a good idea for the US to invite more Chinese companies to build factories in Michigan, Ohio, Wisconsin. Fine, put some controls on them. But if China's forced technology program worked against, let's say, Apple and Tesla and all of these other American companies, why don't we do it to them and learn from the best in terms of manufacturing?

45:27I'm really skeptical that everything that the Trump administration right now is doing has been good for manufacturing. As best as we can tell, the U.S. has lost 40 ,000 manufacturing jobs since Liberation Day. And that was the last data reading that we have, 40 ,000 jobs lost. I think that it doesn't make sense to pursue technology while kneecapping the NSF and the NIH. It doesn't make sense to kneecap top universities. it doesn't make sense to deport a lot of lower skilled labor that are really important for construction as well as manufacturing. And it doesn't make sense to try to intimidate higher skilled people, researchers to be in the U.S.

46:04as well. Now, maybe there's something good to be said for energy production in the U.S. There's probably something good to be said for the deregulatory agenda under Trump to build a little bit more. But right now, I'm not seeing much energy and fervor to build more than, let's say, detention centers, coal plants, gilded ballrooms, not really the sort of advanced manufacturing that America needs. It's funny to think about coal-powered electric vehicles in the future, coal-powered AI data centers or whatever, but it seems like a plausible thing that we'll see at one point. One area where the U.S.

46:41is clearly dominant, and we've already touched on this, is global internet services. And obviously you have what I guess now we'd call the legacy ones like your Meta's and Microsoft's and Amazon, but also, you know, OpenAI is still, you know, it's the biggest in the world and it could be on scale and have a footprint as big as some of these other giants. It seems like the world is very happy to buy BYD cars and other built things, but we saw the UK Huawei itself several years ago. Will the rest of the world adopt Chinese core tech, or do you think there's still an anxiety about this, maybe because of perceptions of the influence that the party would have over these companies, et cetera?

47:25Does the U.S. still enjoy a relative advantage in the comfort that around the world people have with using sort of U.S. digital services? Certainly, I think there's a lot of governments that are really nervous about Chinese technologies. The UK, there's all sorts of restrictions on Huawei products kind of globally. And we've seen even countries really friendly towards China really complain about how much it is flooding their markets. We've seen Brazil complain about this. We've seen Russia complain about this. And so I think governments all over the world are trying to have some measure to block Chinese goods.

48:03On the other hand, I think consumers really don't care. That's what I mean. For a car, I'd like a Xiaomi phone. No, I don't know. Maybe. They look pretty cool. Or a ZTE phone or a Huawei phone. Careful, Joe. That's a national security threat. We are reporting you. But I think, yeah, definitely there's a lot of people who - The cameras seem great. The cameras seem great. And the BYD cars and the Xiaomi cars seem to be also really good as well. People want to buy these things. And I think the Chinese attitude is, okay, if you want to tariff us, we'll challenge you in WTO if that's still a thing, or we'll, you know, try to push back diplomatically.

48:38But we're not going to restrain our own exports. What we need to do is, you know, if you want to block our exports and make goods more expensive for your consumers, that's on you. So, you know, I think that's kind of its attitude. And I think there's also some nervousness now among European governments from buying American cloud. I don't know if that is going to necessarily lead to fewer purchases, but maybe. Tracy do you have the Xiaomi dog feeder no I don't have you seen that I wasn't even aware of this yeah that's the thing that's incredible about Xiaomi it's not just oh it's a phone company then when cars you know there's a Xiaomi rice cooker there's a Xiaomi toaster what does the dog feeder do I think it's like a smart dog feeder and it knows when to release more food into the bowl using all these sensors no I'm old school I just have a bowl that I fill that might be my Christmas present to you if I can acquire one oh thank you you're getting an autographed copy of Herman Melville's Moby Dick if I can find one Wait, I shouldn't say that because people will be like, oh, don't you know he's dead?

49:34You're getting a first edition of Moby Dick, if I can find one. At least with the Rockwell Kent illustration. Okay. All right. Noted. Noted. I just want to go back to what we were talking about in the intro for a second, which is the new Involution campaign. Again, it seems like China is trying to get a handle on some of these overcapacity issues. Is it going to work? And what are your general thoughts on this fresh attempt? I was living in China when China first announced this big supply-side reform effort back in 2017 when it tried to reduce a lot of its expansions in steel. And this was kind of the big effort.

50:15What's really different right now is that China's trying to control not really the activities of the state-owned enterprise sector. It's trying to control more of the activities of the private sector. And I think that is much more difficult as well. And I think it's going to be too early to say, but there may be a future in which China actually consolidates a lot of the solar production to bigger firms, but then all of them become much more capable and they become much bigger threats to foreign solar makers to the extent that there are any. But consolidation is probably going to help raise quality because there are going to be fewer firms earning more profit that are going to be able to reinvest more in expansion and R &D.

50:56So I think that overproduction is kind of endemic to China, which is partly why it's the engineering state. This is what they're really good at. They're just not thinking enough about services. And so I'm skeptical that they're going to be able to really tamp down overproduction over the longer run. All right. Dan Wong, the book is Breakneck. It's a fantastic read. Joe and I make a very brief appearance. So if anyone's interested in that as well, definitely pick it up. But Dan, thank you so much for coming back on. and for being on the pod repeatedly over almost a decade now. I want to be a friend of the pod for the next decade as well.

51:32Thank you both.

51:46Joe, always good to have Dan on. And I'm so glad he's sort of like synthesized and laid out all of his thoughts Because, again, like Dan has been watching Chinese technology and analyzing the Chinese economy for years and years and years. Before it was cool. Before it was cool. And really, in many respects, had a front row seat to some pretty big developments like the tech crackdown, like COVID zero policies in China. So it's really good to read his narrative and get his thoughts. No, Dan's the best. I love him. You know, it's interesting. I was thinking about and I saw some discussion of this online.

52:19I forget who. But one thing we didn't talk about is, you know, there is the persistent real estate slump, right, in China. There has not yet been a bottom. It's not the end of the world. And actually, cheaper housing, many people would say that would be a nice problem to have from the U.S. perspective right now. But if you think about the combination of consolidating the private sector, if you say, OK, there's overproduction in the private sector, What that means is that there's a lot of people employed who shouldn't be or who are it's unsustainable. If you think about that shrinking, that's going to be a contributor to a softening in the real estate.

52:55That's fewer people who have jobs. That's fewer people who can buy homes. See, when you think about the internal balances, there's some real tensions because it's like, yeah, of course, let's consolidate. But then you add to the woes of one of the biggest sectors of the economy. And I mean, we have seen the youth unemployment rate pick up recently. And I think that's where you start to get into some interesting questions around the social contract that the party has with people and this, you know, expectation that living standards are going to continue to improve forever. Like that is the pressure on the party.

53:25Right. And to some extent, as you point out, it's in tension with the idea of having very efficient companies that are operating at scale and at low cost. You know, one of the things, too, that comes up, I think, in a lot of the China conversations is the sort of uselessness of a lot of political terms that we use here. It came up with Joseph Trigian when we were talking about, oh, like, what is the right, you know, the ultra left within the party mean, the ultra right, et cetera. But even hearing Dan talk about, well, it's a sort of right wing Leninist country, etc. Like these words that we use to describe politics, I think they maybe they detract more than they clarify when we're talking about China.

54:06I don't believe in political labels, Joe. No, that's good. That's good. All right. I respect that. Shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway. And I'm Joe Wiesenthal. you can follow me at The Stalwart. Follow Dan Wong. He's at Dan W. Wong. And of course, check out his new book, Breakneck. Follow our producers, Carmen Rodriguez at Carmen Armand, Dashiell Bennett at Dashbot, and Kale Brooks at Kale Brooks. For more OddLots content, go to Bloomberg.com slash OddLots. We have a daily newsletter and all of our episodes.

54:37And you can chat about all of these topics 24-7 in our Discord, discord.gg slash OddLots. And if you enjoy OddLots, if you like it when we have Dan Wong on the show, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

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