To discuss the Department of Justice’s new proposed rule on data security, we interviewed two brilliant guests from the ChinaTalk Hall of Fame — DOJ National Security Division attorneys Lee Licata and Devin DeBacker.

Before DOJ, Lee was an attorney at DHS and then CBP, while Devin was a partner at Kirkland & Ellis and then worked with the Office of White House Counsel. Today we’ll be discussing the DOJ’s new proposed rule on data security. 

Have a listen on Spotify and Apple Podcasts.

We get into…

• DOJ’s plan to protect your data from foreign adversaries,

• How public comments have shaped the proposed rule since the last time we interviewed Lee and Devin,

• DOJ’s tools for enforcing corporate compliance,

• The differences between data security regulations, privacy laws, and export controls,

• Why some public comments get accepted and some get rejected,

• The DOJ playbook for assembling a dream team of talented bureaucrats.

Shutting the Front Door

Nicholas Welch: Lee and Devin, welcome back to ChinaTalk.

Devin DeBacker: Happy to be back. As repeat guests on ChinaTalk, are we eligible for a plaque or some kind of award? 

Nicholas Welch: You know, I’m not in charge of funding — you’ll have to ask the dictator of ChinaTalk once he’s back from paternity leave. But your request — like the many requests you likely receive in the notice and comment period — is duly noted. 

For those who missed the show back in April, here’s the context — back in February, there was an executive order focused on preventing foreign access to Americans’ bulk sensitive personal data and US Government-related data by countries of concern. This was followed by an advance notice of proposed rulemaking (ANPRM). Now, we are in a period of notice of proposed rulemaking (NPRM), one step closer to the final rule.

Can you give us a 40,000-foot view of this executive order and the proposed rule? What national security risks are they aiming to address?

Devin DeBacker:  The audience might be wondering, “What are these 422 pages of regulatory detritus all about?” 

The primary risk we’re addressing here is the national security threat posed when foreign adversaries or their intelligence agencies access Americans’ sensitive personal data. Such data can be exploited, weaponized, and turned against our national interests in various ways. For instance, adversaries can use geolocation data to track and monitor Americans, or health and financial data to identify vices and vulnerabilities in individuals’ lives, such as behavioral patterns and daily routines. This data can be weaponized to surveil, blackmail, intimidate, or otherwise influence those individuals — whether targeting specific people or analyzing broader population insights. This rule aims to address and mitigate these kinds of threats.

Nicholas Welch: This rule isn’t addressing, say, an intelligence agency hacking in through the back door to steal information. You’re talking about data on the open market that could be purchased by anyone, right?

Devin DeBacker: Exactly. The “front door, back door, and side door” analogy works well here. We’ve got a “barn full of data” on Americans, and we’re trying to close the front door with this rule.

Other mechanisms and tools (especially from DOJ and other agencies) are in place to close the back door.

But we can’t leave any doors open, and the front door has been wide open for a long time. It’s been advertised almost as a free-for-all.

This rule aims to close that front door. Legally speaking, this covers legitimate or lawful commercial transactions where foreign adversaries can access data — either by buying it on the open market or through vendors, employees, or investors who can leverage it through their country’s political or legal systems.

Nicholas Welch: Where does this rule fit in the broader sanctions and export control framework? How does it contribute to the ongoing discussion about the intersection of national security and economic security? Is it similar or different from semiconductor export controls?

Lee Licata: Good question. There are aspects of this rule that resemble the Office of Foreign Assets Control (OFAC) and our export controls regime. This rule seeks to move beyond a case-by-case approach as we see with CFIUS, Team Telecom, or even some of the Commerce ICTS Authority actions, which often look at specific transactions or entities. Instead, it takes a more systemic or holistic approach across holders of this kind of data. The idea is to implement prohibitions and restrictions similar to an OFAC regime. It includes features like advisory opinions and licensing options, which are standard in such regimes. We see this as a foundational step toward a more comprehensive framework.

Devin DeBacker: Zooming out a bit, there are key assets in the US that we want to protect from falling into the wrong hands. Sometimes it’s technology, sometimes capital — we don’t want money flowing to terrorists, for instance. In certain cases, we want to prevent not just capital, but also the know-how that accompanies it from reaching critical sectors of emerging technology. Likewise, we want to protect sensitive American data from misuse. Each of these regimes — export controls, sanctions, outbound investment, and now this data security program — addresses a distinct part of that problem, forming a suite of tools in our national security toolbox.

Restricted Transactions and Covered Persons

Nicholas Welch: Let’s dig into the specifics. The rule says a “US Person” cannot engage in a “restricted transaction” with a “covered person.” What do these terms mean exactly?

Devin DeBacker: The program outlines certain covered data transactions that US Persons either cannot engage in or must engage with restrictions, particularly with countries of concern or covered persons. I’ll let Lee explain the specifics since he’s the architect of this framework.

Lee Licata: Let’s start with the prohibitions. Two types of commercial transactions between a US Person and a “country of concern” or “covered person” are outright prohibited. The first type is data brokerage, and the second type is transfers of genomic data or biospecimens, which is the raw material from which genomic data is derived.

We also impose restrictions in three categories — vendor agreements, employment agreements, and investment agreements that aren’t passive.

For these restricted agreements, we aim to put a box around these transactions to control how they’re conducted. Essentially, certain security measures must be in place to prevent countries of concern or covered persons from accessing sensitive data. These security measures, issued by the Cybersecurity and Infrastructure Security Agency (CISA) at the Department of Homeland Security, were published alongside our proposed rule. They include organizational security requirements, such as having a security officer, system-level security measures, and data-level protections like encryption and anonymization techniques.

Regarding who qualifies as a covered person and countries of concern, we’ve designated six countries — China, Russia, North Korea, Cuba, Venezuela, and Iran. Covered persons fall into four main categories — entities headquartered in or owned by a country of concern, entities owned by other covered persons, entities or individuals working for covered persons, and those predominantly residing in a country of concern. There’s also a fifth catch-all category for those acting on behalf of a country of concern — think proxies, cutouts, or shell entities. Essentially, we’re structuring this like an OFAC regime.

Nicholas Welch: Lawyers sure do love catch-all categories at the end of statutes!

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Tools of Enforcement and the Impact of Public Comments

Nicholas Welch: What does this rule’s compliance and enforcement regime look like? I see due diligence obligations, a licensing regime, annual reports, and even requirements to disclose when a US Person rejects a solicitation to transfer restricted data to a covered person. What should companies anticipate as DOJ finalizes this rule?

Lee Licata: First, we encourage companies to consider submitting comments on the docket during this finalization phase. Their input is vital for us to understand how this will be implemented and what impacts might arise.

Devin DeBacker: The more specific, the better. It helps us to understand the exact types of transactions companies engage in and whether their interpretation of the rule aligns with ours so we can clarify as needed.

Lee Licata: The comment period is 30 days and ends on November 29, 2024. Beyond comments, we want companies to start evaluating their risk profiles concerning these rules. Companies need to understand what data they hold, especially sensitive data regulated here, and the nature of commercial relationships that could involve a covered person or country of concern. They should also identify who has access to that data and what security measures they have in place to protect it.

The compliance and enforcement regime includes features common in export controls or OFAC frameworks — recordkeeping requirements, annual reporting, and reporting rejected transactions, similar to OFAC sanctions. We also require audits for restricted transactions to ensure security measures are in place. Entities must have policies governing compliance with these rules. Lastly, this is an IEEPA-based executive order, so DOJ can leverage IEEPA’s enforcement tools, including criminal prosecution and civil penalties. The rule outlines thresholds for civil penalties and allows us to notify entities of violations without financial penalties, though we’ll make sure they’re aware of their transgressions. This entire framework is about orienting entities to understand their risks and ensuring they take action.

Devin DeBacker: To take a broader view, our compliance approach is similar to that of sanctions programs. Most companies will need an in-house compliance program tailored to their specific risk profile — who they do business with, where, and in what sectors. While some restricted transactions can proceed with terms and conditions, generally, we focus on compliance first. DOJ sees corporate compliance, especially in national security, as a priority. Companies are on the front lines — they hold the data, technology, or capital we’re concerned about. We need them as partners to understand and uphold their obligations. But DOJ is also prepared to use its enforcement tools when necessary. At the end of the day, what matters isn’t the 422 pages of the proposed rule but how it works in practice to protect against these risks.

Nicholas Welch: Let’s say I’m Company X. I read this rule and think, “Wow, this will be massively expensive. I don’t want another compliance regime.” How will the DOJ know if I violate the rule? Will the DOJ really find out?

Devin DeBacker: Oh, we’ll find out. Corporate compliance is our bread and butter, especially in the Foreign Investment Review Section, where this program resides.

My team focuses solely on compliance and enforcement every day, around the clock. We also have the FBI, which excels at investigating violations — whether it’s sanctions, export controls, or this program. Additionally, we have public tips, recordkeeping requirements, and reports that help us follow up and investigate. For companies with higher risk profiles, we can inspect their records and ensure compliance interpretations align. The other key point is that one person can’t engage in a transaction alone — there’s always another party, so if one doesn’t report, the other often does.

Nicholas Welch: Industry, you’ve been warned! From what I’ve read, you engaged in a lot of public feedback. I noticed in the notice of proposed rulemaking that the department even discussed the order with stakeholders at public events, including China Talk. So, if other podcasters want good press, they should invite DOJ lawyers on their shows! There were 114 questions in DOJ’s ANPRM. What were the biggest changes to the rule based on comments and engagements?

Lee Licata: As you mentioned, we received about 70 comments during the ANPRM period, along with feedback from over 100 organizations, companies, trade associations, civil society members, academics — the whole spectrum of regulated communities. We didn’t receive any catastrophic warnings about breaking the internet or collapsing the economy, but we did get a lot of valuable, acute policy input to ensure the rule is implementable without unintended economic consequences.

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Some new elements include an analysis of the six countries of concern, bulk data thresholds, and a detailed assessment of data characteristics. We’ve also conducted an economic impact assessment, estimating compliance costs based on studies like GDPR and other due diligence activities. There are specific exemptions for telecommunications, FDA-regulated clinical trials, and data transfers for post-market approval in regulated sectors. We also clarified financial services exemptions to avoid hidden economic decoupling and specified back-office intra-corporate transfers.

Nicholas Welch: How does the industry feel about this rule? Is DOJ expecting millions in lobbying against it, or does industry seem more receptive?

Lee Licata: It’s early, but the industry seems to understand the issue we’re addressing. No one disputes that adversarial nations are actively seeking American data, and this is a legitimate national security threat. Industry representatives are trying to understand compliance obligations and what this means for their transactions. They provided helpful feedback on policy specifics, though we haven’t seen anyone suggesting it would dramatically impact the economy. Stakeholders seem to be grasping that compliance will be necessary and are evaluating their risk exposure. They’ll advocate for their industries, but the input we’ve received has been useful.

Devin DeBacker: We’ve continued public engagements during this comment period, similar to the ANPRM in spring. We’re open to feedback about specific transactions or scenarios where this rule might have unique implications. We’ve already met with over 200 groups in this short comment period, so it’s a broad, cross-sector engagement. We’re here to listen.

Nicholas Welch: Maybe this is a bit technical, but the rule mentions that several commenters suggested incorporating aspects of international or state privacy laws. DOJ decided against that, stating privacy protections and national security measures have different objectives. Can you clarify why?

Lee Licata: Sure, two examples come to mind. First, most state privacy laws define “precise geolocation data” using an 1850-foot distance from the device — a standard not actually supported by device technology. Major operating systems generally use either 1,000 or 10,000 meters to measure precise geolocation data. We chose 1,000 meters to align with how data is collected and to ensure consistency with real technology practices.

Second, state privacy laws cover all “PII” (personally identifiable information), including basic, public information like names and addresses. Our goal isn’t to regulate the phone book but rather to focus on information that adversaries could exploit. We created a narrower category called “covered personal identifiers,” targeting data combinations like a name and Social Security number or IP address and device identifier, as these combinations could uniquely identify someone. This approach focuses on specific national security risks, departing from broader privacy law constructs.

Devin DeBacker: Another example relates to a consent-based exception. Some commentators suggested we allow cross-border data transfers if individuals consent. From a privacy perspective, which emphasizes individual control over data, this makes sense. But in national security, we’re more concerned about the broader externalities created by individual and company choices.

We don’t have a consent-based exception for export controls. We don’t say that sensitive technology can go to Iran or North Korea with a company’s permission.

Privacy and national security laws serve different objectives, so they complement each other but don’t always align.

Nicholas Welch: Data, unlike semiconductors, moves easily and can be routed through various entities. If US Company A sells data to Company B, which eventually passes it to an adversary, how does the rule address the risk of onward data transfers?

Devin DeBacker: There are two parts to this. As Lee said, we designed the program to balance obligations on US companies. We don’t impose “pass-through liability” — US Company A isn’t responsible for tracking data through every layer, down to whether the data eventually reaches a covered person. However, we’ve addressed the resale and re-export risk by requiring US companies to include a contractual restriction with third-party buyers, preventing them from reselling to a country of concern or covered person. This “trusted data flows” concept allows third parties within the trusted framework.

If a third party violates the restriction, US companies must report it to us. If necessary, we can publicly designate those violating entities as “covered persons.” This approach strengthens trust-based data flows by identifying who falls within or outside the trusted framework.

Nicholas Welch:  Before this rule, did any executive branch mechanism address these specific national security risks?

Devin DeBacker: Yes, sort of — this concept emerged from our experience with transaction-specific authorities, like CFIUS and Team Telecom, which assess individual foreign investment risks. However, as data security threats evolved, we noticed we were addressing similar data security risks repeatedly in foreign investment cases, each time creating tailored compliance solutions. Seeing this pattern, we decided to create a comprehensive, systematic program to address these recurring risks. We still have case-specific authorities, and this program complements them by reducing regulatory duplication.

Why DOJ?

Nicholas Welch: On the last show, you mentioned that the DOJ is a natural fit for this role because you’re highly experienced in corporate compliance. You also said you’re expanding the Foreign Investment Review section, hiring more attorneys and non-attorneys. How is that team expansion going? More broadly, what did interagency collaboration look like for this rule? I assume you had extensive interagency support from Team Telecom, Commerce, DOD, and FTC — but ultimately, the DOJ took the byline for this rule. This is hosted on justice.gov, not another agency’s website. Does that impact the rule’s effect or corporate compliance overall?

Lee Licata: Yes, absolutely. First, stepping back, it took us two and a half years to develop this concept for the executive order and then to draft the proposed rule. Throughout that time, we coordinated with around two dozen federal departments and agencies, as well as White House offices, to build this framework and ensure that all relevant interests within the executive branch were represented.

The interagency coordination was extensive, involving entities like CPS, Team Telecom, the ICTS team at Commerce, CFPB, FTC, and SEC — essentially, every regulator overseeing commercial transactions involving the regulated data. We also engaged continuously with OFAC, BIS, and FARA to incorporate similar concepts and ensure compatibility within our program.

The DOJ byline is indeed significant. As Devin mentioned, corporate compliance and enforcement are central to our work — it’s right there in our name, the Department of Justice. So it’s natural for this rule to land here, combining DOJ’s expertise in this risk area with the department’s enforcement mission. In the interim, as we establish this program, we’re building a team within FIERCE to finalize the rulemaking and begin implementation. We’ve assembled a team of mostly interagency detailees to bring together the necessary expertise. As of now, we have 11 attorneys plus paralegals, targeters, and other support, and we’re leveraging insights from across the interagency. We have team members from OFAC, FinCEN, BIS, and the Department of Defense, among others, all working under our roof. By the end of the year, we expect to have about 17 people forming the foundation of a full-fledged team.

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Nicholas Welch: Where do you see this rule going in the future? Financial industries, for instance, face multibillion-dollar fines and have strong compliance frameworks, but with newer regulations like chip export controls, we’re only starting to see big penalties, like Seagate’s $300 million fine from BIS [and a $500m fine on GlobalFoundries]. Recently, a TSMC chip was found in Huawei, which journalists quickly identified as a supply chain weak link. Chris Miller suggests chip companies need to spend more on compliance, and governments should impose stricter penalties. So where do you see data security compliance going?

Devin DeBacker: As my boss, Assistant Attorney General Matt Olsen, said back in March, this program needs to have “real teeth.” Our primary approach is through compliance. We want companies to fully understand their obligations, have strong programs in place, protect data, and follow the rule, especially with security requirements for restricted transactions. Our main goal is to educate US companies and individuals on these obligations.

If enforcement becomes necessary, however, penalties need to be meaningful — they must impact a business enough to reinforce compliance obligations. More than the size of the penalties, though, what's critical is for companies to understand that compliance can’t be an afterthought — it has to be integrated into the business itself. Compliance teams need to be part of business decision-making, not separate from it. For example, if a company is considering opening an office in Shanghai, storing geolocation data on servers there, and hiring covered persons, that decision-making process must include compliance with US government rules. This needs to be part of the broader business risk assessment.

As Lee mentioned, companies need to ask questions like: Where are our offices? What data do we hold? Where is it accessible? What safeguards are in place? Who has access, and what kind of system-level access do they have? Compliance isn’t about merely ticking a box — it has to be woven into the business itself.

Nicholas Welch: Sounds comprehensive! You’ve done an extensive job of justifying this rule based on statutory authority, like Article II in the Constitution, Section 301, IEEPA. Do you think Congress would be better suited to address this risk legislatively rather than through an IEEPA-based executive order?

Devin DeBacker: IEEPA is intentionally broad, and this rulemaking is consistent with typical IEEPA-based rulemakings, which regulate commercial transactions and cross-border activities. This program can and should stand independently, without Congressional involvement. That said, we’ve worked well with Congress, discussing ways to clarify aspects of IEEPA, like the Berman Amendment, and ensuring long-term resources for this program. 

What’s promising is that this area — protecting sensitive US data from foreign adversaries — has broad bipartisan recognition across parties, administrations, and Congress. I believe this will remain a priority across the government, and I’m optimistic this program will become a lasting element of our national security framework in the US.

Submit comments here, and enjoy this mood music from Lee and Devin:

We’ve got a guest column by the great . His personal blog is The Scholar’s Stage and he also runs the excellent Center for Strategic Translation. This article was originally published by the Foreign Policy Research Institute on October 29, 2024.

Last week, the Wall Street Journal editorial board asked Donald Trump why China would not invade Taiwan on his watch. Trump told the Journal that the Chinese would not dare to invade. As Trump put it: “[Xi Jinping] knows that I am f—ing crazy.”

One must pity the Chinese analyst asked to predict what a second Trump administration will mean for U.S.-Chinese relations. Like Richard Nixon before him, Trump is ready to play the lunatic; he clearly believes that the less predictable he is to the Chinese, the better off America will be. Though China occupies a central place in Trump’s campaign rhetoric, his campaign has not published or endorsed any detailed China policy proposals. The actions of the last Trump administration do not provide a better guide. Divided by infighting, its China policy was not consistent. At times, Trump’s foreign policy swung wildly as specific individuals rose or fell from his favor. Things do not get much easier if one looks at the views of the politicians and policy wonks that Trump would call on in a second administration. Their views are varied. Among Trump’s closest allies, we find fundamental disagreements on the proper ends and proper means of American strategy toward China.

Given these hurdles. I will not try to predict the path a second Trump administration might tread. It seems more useful to lay out a few observations on the different schools of thought now contending for leadership of that policy. My observations are shaped by the dozens of interviews I have conducted over the last two months with Republican staffers, think tankers, and former officials. A longer and more thorough report of my findings will be published by FPRI later this year. This is a pre-election preview.

The questions that divided Republicans in 2017 are not the questions that will divide them in 2025. Trump’s election shattered a policy consensus shared by the leaders of both parties for the better part of four decades. Many of the architects of this consensus were still influential during Trump’s first years in office. On the other hand, many who rejected “engagement” with China had spent years exiled from power. Others were completely new to service in the executive branch. This was a diverse group who did not all reject engagement for the same reasons. These differences were not initially apparent, as their objections were too marginal to the pre-Trump policy debates for much scrutiny to be given to them. Nor was it immediately apparent to these officials where the new bounds of public opinion or presidential approval lay. Thrust into power quite suddenly, they were forced to improvise as they went—and improvise again as the Chinese reaction to Trump’s trade war changed the context in which they worked. All of these factors gave China policy under Trump 1.0 an unusually chaotic flavor.

None of these conditions hold this election season. The architects of engagement are no longer relevant. A tough line on China is now taken as a starting point for all factions involved. Over the last eight years, a new ecosystem of conservative think tanks, policy journals, and Congressional offices has sprouted up to provide Trumpism with the intellectual coherence it lacked in 2017. Policy proposals are now numerous and detailed. Out of power, former Trump officials have had the time to carefully lay out their vision for American strategy in Asia. They have done this in speeches, policy reports, and full-length books. Disagreements between their different schools of thought are formally debated on both panels and podcasts.

Points of Consensus and Conflict in Trump World

Amid these debates, one finds several points of consensus. The disputing intellectuals, wonks, and politicians all agree that China is the most significant foreign policy problem the United States now faces. They describe China as a challenge that must be met in many dimensions: military, economic, and technological (some would add “ideological” to this list, but that is a point of debate, not consensus). Republicans agree that the U.S. armed forces are poorly structured and lack the resources needed to counter the military challenge posed by the People’s Liberation Army (PLA). They agree that America’s commercial and financial relationship with China underwrote the rise of a powerful rival while undermining America’s own industrial base. They believe that China has taken advantage of the traditional American commitment to globalization and free markets, and that doubling down on this commitment is foolish. To level the playing field, some mix of tariffs, export controls, capital controls, and industrial policy is necessary. They agree that the Biden administration’s China policy—while an improvement on that of the Obama administration—has nonetheless been feckless. They believe that the Biden administration articulates geopolitical goals that it has not resourced, cares too much about perceptions of amity, cares too little about perceptions of strength, and has not sold the American people on its foreign policy priorities.   

But behind this consensus lie many fundamental disagreements.

The debates about China policy can be largely sifted into two buckets: economics and geopolitics. It is common for individuals to be closely allied in the economic sphere but not in the geopolitical sphere, or vice versa. For example, senators Marco Rubio and J.D. Vance are close allies on the economic front; there are few meaningful distinctions between the economic strategy each endorses. Their respective takes on the geopolitical problem posed by China are much harder to reconcile. 

In theory, one’s position on the CHIPS Act or tariff rates might influence one’s position on military commitments to Taiwan or military aid to Ukraine. In practice, this is rarely so. The economic and geopolitical debates occur on different planes.

One way to represent the core principles at play in the geopolitical debate is with a classic two-by-two matrix (popularized on the internet as a “political compass”).

Optimism vs. Pessimism

 On the x axis I place the single most important difference between the various schools of thought: assessments of American power and state capacity. Where one falls in many of the most prominent debates—such as “Can the United States can afford to support both Ukraine and Taiwan?” or “Should the ultimate goal of our China policy be victory over the Communist Party of China, or should it be détente?”—has less to do with one’s assessment of China and more to do with one’s assessment of the United States. What resources can we muster for competition with China? Just how large are our stores of money, talent, and political will?

Those on the right quadrants of my diagram provide pessimistic answers to these questions. They buttress their case with measurables: steel produced, ships at sea, interest paid on the federal deficit, or the percentage of an ally’s gross domestic product spent on defense. Against these numbers are placed fearsome statistics of Chinese industrial capacity and PLA power. Changes in technology, which favor shore-based precision munitions at the expense of more costly planes and ships, further erode the American position. This is a new and uncomfortable circumstance. The last time the United States waged war without overwhelming material superiority was in 1812.

To those who see American power through this frame, there is only one logical response: the United States must limit its ambitions. This means either radically reprioritizing defense commitments to focus on China or retreating from conflict with China altogether.

Those on the left two quadrants see things differently. Where the pessimists see settled facts, the optimists see possibilities. The optimists recognize many of the same trends as the pessimists, but view them as self-inflicted mistakes that can, and should, be reversed. An inadequate defense budget is not a law of the universe but a political choice. If Trump wins, he will choose otherwise. Implicit in the optimist view is a longer time horizon—there is still time to turn things around. But this window will not be open forever. Optimists fear that pessimistic assessments erode the political will needed to make changes while change is still possible.

The arguments between pessimists and optimists could be reframed as a matter of risk. The pessimists are most worried about the downside risks of a crisis with China in the near future (c. 2025–28). The optimists balance that possibility against the longer-term risks America will face as it withdraws from other regions of the world or abandons defense capabilities that are not needed in the Pacific theater. Optimists believe this second class of risks is large, and that the United States should not court them. Even an America in desperate need of defense reform has some capacity to “walk and chew gum at the same time.” This issue is at the crux of their arguments on Ukraine: in material terms, aid to Ukraine is not coming at Taiwan’s expense. It is relatively cheap. What stops America from helping both beleaguered nations?

 The pessimists do not view that question purely in material terms. In their debates, the pessimists are quick to highlight the few weapons systems being shipped across the Atlantic that might be used in the Pacific, but their critique reaches higher than this. The costs of the war in Ukraine (and the Middle East) are measured not just in bullets, but in attention and effort: There are only so many minutes the National Security Council may meet. Washington can only have a few items on its agenda at any given time. The executive branch is stodgy, slow, and captive to bureaucratic interests; the legislative branch is rancorous, partisan, and captive to public opinion; the American public does not care a whit about the world abroad. Accomplishing anything meaningful in the United States—much less the drastic defense reforms both sides of the debate agree are necessary—requires singular attention and will. 

If this seems like a pessimistic take on the American system—well, it is one. It is common for people in the optimistic quadrants to argue that the People’s Republic of China is riddled with internal contradictions. In a long-term competition between the two systems, they are confident that these contradictions will eat China from the inside out, and that America’s free and democratic order will eventually emerge victorious. None of the pessimists I interview make similar predictions. If they have anything to say about internal contradictions, it is American contradictions they focus on.  

Power-Based vs. Values-Based Perspectives

So much for the optimist-pessimist divide. What of the y axis?

I think of this as a pole, with “power-based” perspectives on one hand and “values-based” perspectives on the other.

Republicans in the top two quadrants ground their arguments in cold calculations of realpolitik. From this perspective, international politics is first and foremost a competition for power. States seek power. The prosperity, freedom, and happiness of any nation depend on how much power its government can wield on the world stage. While states might compete for power in many domains, military power is the most important. A state frustrated by a trade war might escalate to a real war, but a state locked in deadly combat has no outside recourse. The buck stops with the bullet.

From the power-based perspective, then, the goal of American strategy must be the maximization of American power, with military force as the ultimate arbiter of that power. This force does not need to be realized in combat—ideally, its deterrent power will be strong enough that it is never actively used. The ideal means of American strategy is a military posture and alliance system strong enough to deter the Chinese from resorting to war.

The left and right quadrants of this perspective disagree on the best way to build that sort of power. The upper right quadrant—the prioritizers—do not believe America will ever possess power sufficient to compel China into submission; a stable détente between the two countries is the best outcome that America can attain. Even this modest aim will only be possible if the United States prioritizes the threat posed by China above all others.

Those who argue from the upper left quadrant—the primacists—also speak the language of realpolitik. They maintain, however, that the sacrifices the prioritizers propose will weaken American power. They believe that the existing American alliance system contributes to America’s strength today and will contribute to America’s potential strength in the future. Instead of limiting American aims, the primacists are more concerned with expanding American means. They are confident this can be done if the American people have the confidence to do so.

The lower two quadrants, whose arguments I label “values-based,” operate under a different frame. The people in these quadrants believe that American foreign policy should not be evaluated by a single variable. They see connections between what America does abroad and what America is like at home. They have strong values-based commitments to specific ways of life that are expressed in their vision for American strategy.

I have labelled those in the bottom left quadrant “internationalists” because of how often they invoke the phrase “liberal international order.” This group believes that America and its allies are knit together not only by shared security interests, but also by shared values. In fact, the values shared by the liberal bloc explain why these countries share security interests in the first place. China is an authoritarian power whose influence operations threaten the integrity of democracies across the world. Many internationalists view this political-ideological threat as the most dangerous that China poses. Those in this quadrant are especially skeptical of détente; they do not believe permanent compromise with China is possible. They attribute Chinese belligerence to the communist political system that governs the country. For them, tensions in U.S.-Chinese relations are less the expected clashes between a rising power and the ruling hegemon than a battle between two incompatible social systems. Pointing to the close cooperation that ties Iran, North Korea, Russia, and China together, the internationalists argue (contra the prioritizers) that the world is gripped in a general contest between liberal order and resurgent authoritarianism whose different parts cannot be disentangled from each other.

Those in the bottom right quadrant—the restrainers—also think about foreign affairs through a regime lens, but the belligerent regime in question is their own. Republican restrainers link the liberal international order to the free trade agreements all Trumpists despise and the administrative “deep state” all Trumpists distrust. They see the liberal international order as an international extension of the progressive order they are trying to tear down at home.

There are echoes of the 1960s New Left in the restrainer argument. Both the new left of yesterday and the new right of today are rebellions against “the establishment.” Both reject the pieties of their day; both see a bloated national security state as a symbol of the dehumanizing values they reject. Both groups correctly point out that there is no natural limit to the quest for primacy. Both argue that a totalizing foreign policy will lead to the bureaucratization of American life.   

Only the most radical restrainers are ready for a 21^st-century march on the Pentagon. Most aim for an easier target: a relatively modest foreign policy. Instead of defending an entire international order, it is enough to defend America. Instead of deterring authoritarianism, it is enough to deter China. China does not need to be defeated—it is enough to convince the Chinese to accept some sort of détente.

This is all pretty similar to the ends sought by the prioritizers. Little wonder so many of the primacists and internationalists I interviewed believed the prioritizers were restrainers in disguise! Again and again I heard this accusation made: prioritizer arguments are just an attempt to make isolationism sexy. The prioritizers do not actually believe in realpolitik—realpolitik is just a respectable way to attack the existing international order they despise.

There is an irony to this critique. Just as primacists and internationalists condemn the false face of the prioritizers, so the prioritizers and the restrainers condemn the false face of the primacists! Many of those I interviewed insisted that their primacist opponents made such-and-such argument not for the realpolitik reasons they professed, but because of their (hidden) commitment to liberal ideals. Ideals that cannot be defended on their own merits had to be prettied up with talk of hard power.

All of these suspicions of subterfuge are overblown. Both primacists and prioritizers believe the arguments they make. Yet their suspicions are revealing! All sides clearly believe there is political advantage in couching one’s arguments in realpolitik logic. That fact alone tells us something about the likely contours of a Trump presidency—and perhaps the beliefs of Trump himself.

The following is a guest translation from Sihao Huang, a current PhD candidate at Oxford.

Two researchers from Fudan University—renowned for its American Studies program—published an impressively detailed analysis in FT Chinese examining Trump and Harris's tech policies. As it turns out, Chinese analysts have been reading about the AI Manhattan Project, tracking the debate around Lina Khan, and even listening to the All-In Podcast [JS: god bless them…].

The analysts believe that Harris, the "AI czar," will pursue a more interventionist approach to AI regulation but will likely have a weaker hand than Biden in antitrust policies due to her active engagement with tech giants and her Californian roots. They also think she will take an "iterative strategy of checking for loopholes and filling gaps" with export controls.

In contrast, they expect Trump to run an "AI Manhattan Project" to compete against China, accelerate the development of military technology, repeal Biden's AI Executive Order, and encourage more flexible AI governance. They also see Trump as being more "radical" with export controls, blocking China's access to cloud compute and taking some action against Taiwan for ‘stealing’ America's semiconductor business. Ultimately, the two authors argue that regardless of who wins the election, "the current trend of pan-securitization in the U.S. digital technology industry is not affected by the change between the two parties." Given the ENFORCE and Remote Access Security Acts, the "march to suppress Chinese technology will continue."

Stick around till the end for a painting and some poetry by my favorite Chinese painter, Shitao.

Divergent Paths: Differences in Harris and Trump's Technology Policy Approaches

The technology policies that Harris and Trump might adopt represent two distinct paths for future U.S. technology governance. However, both share a consensus on technology policy toward China.

October 30, 2024 - Written by Yao Xu and Zhang Ao (Fudan University) for FT Chinese. Source. Translation abridged.

As candidates for the Democratic and Republican parties, Harris and Trump show significant differences in their attitudes and positions on technology policies. Harris is likely to continue Biden's technology policies, including artificial intelligence (AI) regulation, antitrust enforcement, increased taxes on the ultra-wealthy, opposition to racial and gender bias, cryptocurrency regulation, and promotion of digital equity. In contrast, Trump has explicitly stated that he will overturn Biden's AI governance policies as represented by the "Biden Executive Order," adopt relatively loose regulatory measures on the technology industry, give the green light to mergers and acquisitions, and continue tax reduction policies. Regardless of who is ultimately elected as the next U.S. president, their policy propositions will profoundly impact the global technology ecosystem and the geopolitical technology landscape.

Artificial Intelligence: Will Biden's AI Executive Order Be Abolished?

On October 30, 2023, Biden signed the Executive Order on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence, the White House's first regulation on generative artificial intelligence. It aims to strengthen federal government safety oversight of AI, calling on federal departments to review AI's impact in their specific domains and find solutions to problems within each agency, thus becoming one of America's landmark policies on AI regulation to date.

Harris is inclined to continue this executive order, strengthening government supervision and public oversight of AI. She believes AI development needs regulation to ensure public safety and interests. Analysts believe that if Harris wins the election, she may adopt a more proactive and interventionist AI regulatory policy. The federal government is expected to be encouraged to actively procure AI tools while ensuring appropriate safeguards for their use across federal agencies. Additionally, Harris will urge Congress to legislate and improve the legal framework for protecting data privacy and cybersecurity.

Harris's political career began in California, with close ties to the tech industry, and she started focusing on data privacy and security issues in the technology sector early in her political career. Since becoming vice president, Harris has earned the nickname "AI Czar" for her active leadership in AI-related affairs. "It's very important that she's from California, from the Bay Area, and has served as a politician there," said Alondra Nelson, former director of the White House Office of Science and Technology Policy. "Silicon Valley is not unfamiliar to her." Harris has her own agenda in AI governance. "When an elderly person's healthcare plan is canceled because of an erroneous AI algorithm, isn't that a matter of survival for them?" Harris expressed concerns about AI algorithms' impact on marginalized social groups in a November 2023 speech. Harris emphasizes AI's social impact and safe development, striving to maintain a balance between technological progress and public interests.

Although she advocates stronger regulation, Harris is not as outspoken as Biden in calling for the breakup of tech giants or reshaping the current AI power structure at the federal level. As the election approaches, Harris is actively engaging with tech giants, continuously easing tensions between the Democratic Party and Silicon Valley while advancing the agenda from a middle-ground position. Box CEO Aaron Levie says Harris's positive attitude has achieved results, and "tech giant executives also need a stable leader who supports immigration and science." Levie states that as long as leaders respect technology and tech companies' own development logic, even if they implement tax and antitrust policies or strengthen AI safety supervision, they won't face strong opposition from the tech community.

Trump seeks to repeal Biden's executive order. In his campaign manifesto, Trump claimed: "We will repeal Biden's dangerous executive order, which has hindered AI innovation and imposed radical left-wing ideas on the development of this technology. Instead, Republicans will promote AI development based on free speech and human prosperity." Trump opposes excessive regulation of cutting-edge industries like AI while encouraging flexible "non-regulatory methods" such as policy guidance, pilot trials, and voluntary frameworks to minimize barriers to AI technology development and application, ultimately serving comprehensive competition with China. According to The Washington Post, in response to the Biden administration's AI executive order, the Trump team is drafting a new executive order proposing the implementation of an "AI Manhattan Project," aimed at promoting rapid development of AI technology, especially military applications, and will work to clear legal obstacles for implementation. Increased military investment in AI will benefit technology companies like Anduril and Palantir that have established good cooperation with the Pentagon. The main executives of these giants support Trump and have close ties with the Republican Party.

According to The Washington Post's exclusive report, the "AI Manhattan Project" will also create an "industry-led" agency to evaluate AI models and ensure they are protected from foreign adversaries. The plan includes a section titled "Making America Number One in AI," which proposes a strategy for the AI industry that differs significantly from the Biden administration's AI executive order. This suggests that if Trump returns, he may implement policies beneficial to Silicon Valley investors and tech giants. To win votes and realize his political agenda, Trump has become increasingly friendly toward Silicon Valley. In June of this year, Trump appeared on the "All-In Podcast" YouTube channel, hosted by well-known technology investors. After the show, Trump also participated in a fundraising event hosted by podcast co-host and former PayPal executive David Sacks. In the podcast, Trump stated that he has realized Silicon Valley's "geniuses" need more resources to promote AI development to compete with China. Chamath Palihapitiya, founder of venture capital firm Social Capital, believes Trump has gained more support in the technology industry than in the 2016 election. Trump's inclination also shows he needs to cooperate with technology elites and build a cabinet to "change the status quo."

Export Controls on Technology Industries Like Semiconductors: Will They Become More Radical?

Harris will continue the Biden administration's strategy of taking small, quick steps, gradually escalating, and fixing loopholes in the export control process for semiconductors and other sectors. The Biden administration's export control policy design around semiconductors and other fields reflects a pragmatic action strategy, which is more evident in the export control regulations issued by the Bureau of Industry and Security (BIS) of the U.S. Department of Commerce in October 2022 and October 2023, respectively. The former restricted the peak computing power of single chips and the data transmission performance between multiple chips, resulting in NVIDIA's most advanced GPU models A100 and H100 being banned from export to China. NVIDIA provided the Chinese market with cut-down versions A800 and H800 chips. To prevent NVIDIA from continuing to "exploit loopholes," BIS changed the restriction method in the 2023 new regulations, removing the previous "interconnection bandwidth" as an important parameter for identifying restricted chips, which directly led to the ban of A800 and H800. It can be predicted that if Harris comes to power, she will continue the iterative strategy of checking for loopholes and filling gaps, controlling and restricting some "emerging" advanced technologies while seeking a balance between blocking and suppressing China's technology industry and controlling differences.

Trump may become more radical on export controls. Based on his previous term, China was the first to be hit in semiconductor export controls under Trump. Since March 2018, when Trump launched the "301 investigation" and initiated trade and technology wars against China, the Trump administration began extensively using the BIS "Entity List," weaponizing export control regulations. Numerous technology companies, universities, and research institutions became victims, and the global supply chain suffered serious impacts. Additionally, in his last year in office, Trump targeted TikTok and WeChat's international versions, seeking to implement harsh ban measures on Chinese-based digital platforms in the United States. If Trump returns to the White House with extremely conservative vice presidential candidate J.D. Vance, he may continue using CFIUS (Committee on Foreign Investment in the United States) to restrict Chinese companies' acquisitions in semiconductors and other high-tech fields, continue restricting the export of high-computing chip products to China, and restrict exports of chip manufacturing equipment, parts, and chip design software upstream in the industrial chain, as well as computing power leasing services downstream. Beyond China as the main competitor, Trump's "America First" stance will also affect upstream and downstream interests in the semiconductor industry. On July 18, Trump commented on U.S. involvement in Taiwan's defense, saying that Taiwan "took away" U.S. chip business, and the U.S. should not act as "insurance" for Taiwan's defense. TSMC, the world's largest chip foundry, saw its stock fall that day. Overall, although Trump has shown a strong tendency toward export controls, his governance style is changeable, and if he comes to power, the scope and effectiveness of his policies remain uncertain.

Antitrust Enforcement: Can Silicon Valley and Wall Street Breathe a Sigh of Relief?

Harris may be inclined to promote antitrust regulation. On the one hand, the social impact and security development of cutting-edge technology are political priorities that Harris values highly. She tends to increase enforcement against Silicon Valley tech monopolies, believing these platforms abuse their strong market position and infringe on consumer interests, making it difficult to meet people's basic living needs. She has repeatedly spoken about the need to reduce inflation and provide more economic opportunities for all Americans. If Harris comes to power, she is expected to appoint strong law enforcers to key positions in core departments responsible for antitrust, such as the Department of Justice, Federal Trade Commission, or Federal Communications Commission. On the other hand, Harris also maintains contact with tech giants and tries to find a balance between government regulation and corporate innovation. During the 2020 election, Harris said that while strengthening regulation, the breakup of tech giants like Google should be opposed.

So far, Harris has not made a statement on how to handle antitrust issues. Wall Street hopes Harris can relax the antitrust enforcement seen during the Biden administration and create a new antitrust regulatory environment. Democratic donors such as IAC Chairman Barry Diller and LinkedIn co-founder Reid Hoffman believe Harris's position on this issue can be adjusted. As election day approaches, Harris is also under pressure to quickly enrich her position on key policy issues, and her final stance will depend on practical political considerations. Within the Democratic camp, firm antitrust policies are favored by party progressives such as Elizabeth Warren and Bernie Sanders, who hope Harris will continue Biden's policies. Elizabeth Wilkins, former director of the Federal Trade Commission's Office of Policy Planning, believes that despite Harris's ambiguous attitude, her other work protecting families and small businesses during her vice presidency is "fully consistent with the antitrust agenda."

Trump is not very active in antitrust enforcement. During his first term, Trump was rather cold toward antitrust matters. If he comes to power, he may continue to deal with current technology antitrust enforcement cases but will still give the green light to technology mergers and acquisitions. Trump's business background makes him generally more sympathetic to the business community, and his tax cuts and trade protectionist economic policies are quite popular with tech giants and their wealthy executives and middle-class employees. Out of consideration for their own interests, the Silicon Valley technology community, known as the "liberal bastion," has recently expressed support for Trump after the shooting, causing Trump's donations from the technology community to rapidly rise and surpass those to the Democratic Party.

However, the conservative camp to which Trump belongs also has its own antitrust agenda. His deputy, Vance, has publicly praised Federal Trade Commission (FTC) Chair Lina Khan for "doing a pretty good job" in antitrust work against tech giants such as Amazon and Google, and said that large technology companies need to be restrained. In February of this year, Vance called for the breakup of Google on social media. The conservative camp tends to reduce regulatory agencies while being willing to use antitrust supervision to check and balance tech giants. The contradictions in the conservative camp's antitrust stance will also impact Trump's antitrust policy.

The March to Suppress Chinese Technology May Be Difficult to Stop 

The policies that Harris and Trump may adopt regarding technology industry issues represent two different paths for America's future technology governance. However, they have formed a consensus on technology policy toward China: internally promoting innovation policies while externally pursuing technological decoupling.

On one hand, the Biden administration is strengthening its technological competition with China. Since this year, the United States has used data as its entry point and data security as its justification to implement America First policies in technology industries and infrastructure construction, intensifying the competitive situation with China. On February 28, 2024, U.S. President Biden signed Executive Order 14117, "Preventing Access to Americans' Bulk Sensitive Personal Data and United States Government-Related Data by Countries of Concern," restricting the transmission of personal data to "specific countries." Subsequently, Chinese industries such as smart vehicles and shipping have also received focused attention due to alleged data security concerns. Furthermore, the United States has also restricted China's artificial intelligence development through means such as the Enhancing National Frameworks for Overseas Restriction of Critical Exports Act (also known as the ENFORCE Act) and the cloud computing bill.

On the other hand, Trump initiated the strong suppression of China's technology industry. During his term, Trump launched a trade war with China through the "301 investigation" and quickly extended it to a technology war. Through various means such as the "Entity List," presidential executive orders, and the promotion of China-related bills, the Trump administration adopted a strategy of universal coverage and focused attacks on China's technology industry. In 2018, the Trump administration launched the so-called "China Initiative" and conducted internal reviews to prevent research results from being "stolen." According to MIT Technology Review's study of prosecuted cases, the program fabricated numerous "unfounded" cases, many of which had little connection to technology and national security, negatively impacting American scientific research's reputation. During Trump's term, China's technology industries, including semiconductors, communications technology, artificial intelligence, new materials, and digital platforms, were generally "targeted." Multiple Chinese technology companies were placed on the entity list. WeChat and TikTok were once on the verge of being banned. Huawei was particularly targeted by Trump, causing serious damage to its global supply chain. Even in his final moments before leaving the White House, Trump signed an executive order directing federal agencies to assess the security risks of Chinese-made drones in the government fleet and to prioritize the elimination of Chinese-made drones.

Although the election is approaching, the current trend of pan-securitization in the U.S. digital technology industry is not affected by the change between the two parties. The overall direction of the United States' technological containment of China will not be affected by the final election result. The difference lies in the specific implementation methods and paths. Whether it is Harris's "gradual escalation" or Trump's "extreme pressure," their policy propositions will profoundly affect the global technology ecosystem and the geopolitical structure of technology.

(Note: Yao Xu is an associate researcher at the Development Research Institute of Fudan University, and Zhang Ao is a research assistant at the Development Research Institute of Fudan University. This article only represents the authors' personal views.)

A painting to take you into the night: Shitao’s Drunk in Autumn Woods from 1702.

The Met’s description:

Exploring the theme of intoxication, Shitao makes us reel with the unsteadiness of his figures and landscape. He probably created this picture to commemorate an autumn outing in the hills with friends. The three inscriptions testify to the pleasure and pride that Shitao took in his achievement; they make it clear that the exhilaration experienced by the friends was inspired by nature, poetry, conviviality, and creativity as well as wine.

原题跋（一）：

常年閉戶卻尋常，出郭郊原忽恁狂。
細路不逢多揖客，野田息背選詩郎。謂倪永清處士。
也非契闊因同調，如此歡娛一解裳。
大咲寶城今日我，滿天紅樹醉文章。

Behind closed doors I've dwelt all year, content with routine days, Yet beyond the city walls, my heart suddenly runs wild.

On these narrow paths I meet few who bow in greeting, In wild fields I rest my back, choosing a companion in poetry.

It's not that we share old bonds or sing the same tune, But such joy makes me cast aside all restraint.

How I laugh at myself in Bao City today, Beneath red trees filling the sky, drunk on poetry. (Translation: Claude.)

原题跋（二）：

白雲紅樹埜田間，去者去兮還者還。
昨日郊原憑放眼，七珍八寶鬭青山。
人同草木一齊醉，脫盡西風試醒時。
大雅不知何者是，老來情性慣尋癡。

White clouds and red trees amid the wild fields, those who go, go; those who come, come.

Yesterday in the open countryside, I let my gaze wander free, seven jewels and eight treasures compete with the green mountains.

People and plants are all drunk together, when the west wind strips all bare, that's when we try to sober up.

Who can say what true refinement is? In my old age, my nature tends toward seeking foolishness. (translation: Claude).

原题跋（三）：

頃刻煙雲能復古，滿空紅樹漫燒天。
請君大醉烏毫底，臥看霜林落葉旋。

In an instant, mists and clouds can return to their primeval form;
Red trees fill the skies, spreading fire through the heavens.
I invite you, sir, to get very drunk on my black brushstrokes;
Lie down and watch the frosted forest as falling leaves swirl. (translated by 枫荣注)

Antoine, aka Duoduodiliao 多多底料, is a Mandarin teacher in France by day and a Chinese rap enthusiast by night. Today, he’s here with a setlist of his favorite hip hop tracks. His original songs can be found here.

Have a listen on Apple Podcasts, Spotify, or your favorite podcast app.

Don’t forget to vote tomorrow!

Track 1: 芳草地 (The Fragrant Meadow) by DIGI GHETTO (艾志恒Asen/thomeboydontkill/mac ova seas/KIV/Mula Sakee/付思遥)

Duoduodiliao: DIGI GHETTO is a rap group based in Chengdu, composed of six members. Their official debut made quite a fuss because the six of them were already pretty famous before they began to work together. Some people say they are like a new-gen Higher Brothers. The mixtape is really nice — it’s club-friendly, the beats are good, and the flows are very inventive. The lyrics are a little bit corny, but there is great chemistry between all the members. You can tell they enjoyed themselves while recording the album.

Track 2: 威远故事 (The Story of Weiyuan County) by GAI周延

Duoduodiliao: The next song is by GAI — he’s one of the most successful rappers in China.

Jordan Schneider: For background, GAI is from Chongqing, and he initially became famous by winning the first season of “Rap of China,” which came out in 2017.

Duoduodiliao: GAI’s 2022 album is called 杜康 “Dù Kāng,” and it’s pretty uneven but it’s a proper rap album. This isn’t the GAI we see on CCTV singing Chinese New Year nonsense — this is the real GAI rapping his guts out, on some tracks at least.

The song I chose is 威远故事 “The Story of Weiyuan County,” and it’s one of the greatest Chinese rap tunes that came out in 2022. It's an introspective song where GAI talks about his past, his childhood, and his hometown — and it’s absolutely beautiful.

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Jordan Schneider: GAI got canceled for having songs about drugs and doing crimes. Then he had this weird patriotic rehabilitation tour where he was making songs about the Great Wall and how awesome China is. It looks like GAI is going back to his roots with this album.

Track 3: 变蓝 (Turning Blue) by 也是福 (Eddie Beatz) feat. PO8 and 喜辰晨

Duoduodiliao: Next we have something different — this song is from a producer’s mixtape from 2022. The record is by 也是福, also known as Eddie Beatz — he’s one of the greatest producers in China. He has worked with notable artists like MaSiWei 馬思唯, Wang Yitai 王以太, and Xiao Lao Hu 小老虎. His tracks are usually quite jazzy and organic — he uses many live instruments rather than computer programming.

I discovered this record while randomly browsing NetEase Music. This album (也是蓝) is a collaborative mixtape featuring beautiful instrumental interludes. The song we're going to listen to is called 变蓝 (Turning Blue) featuring PO8 and Voision Xi 喜辰晨.

Track 4: 亚特兰蒂斯陷落 (Atlantis Surrenders) by 弗兰德斯坦/C-Low

Jordan Schneider: You mentioned browsing NetEase Music 网易云音乐 to find Chinese songs. Could you explain what NetEase is? How can people access it, and what makes it special compared to Spotify?

Duoduodiliao: NetEase Music is a Chinese streaming platform similar to Spotify, but it’s primarily available in China. There’s a modified international version, but it’s a different app, kind of like the distinction between Douyin and TikTok.

On NetEase, you can find Chinese artists, including underground artists who don’t focus on reaching international audiences. They simply release their music on Chinese apps. To truly understand Chinese music, especially underground, you need to use platforms like NetEase Music or QQ Music.

Jordan Schneider: You can access it by switching your app store to China, downloading the app, and then switching back to the country you live in. You can also use the desktop apps.

The apps themselves are fascinating to explore. They offer AI-generated playlists, user-generated playlists, and unique features like KTV (karaoke) functionality for every song. There’s even a national KTV leaderboard for each song, which keeps track of high scores like in an arcade game. Each song has discussion sections where people debate about the music and discuss specific lyrics. Artists maintain active profiles, similar to Weibo, where they share music updates and lifestyle content. It’s much more interactive than Spotify.

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Anyway, what’s the next song?

Duoduodiliao: The next song is by 弗兰德斯坦 (Flanders), a new rapper from Changsha. He recently appeared in the CSC Changsha City Cypher 2023, but for now, he’s still underground. This track, “Atlantis Surrenders” is only available on NetEase Music. It’s not on YouTube or Spotify.

The track features C-Low, former leader of the Beijing rap crew Easy Boys Gang. The use of autotune in this track is unique in Chinese rap. What makes this track special is the instrumental beat and Flanders’ deep, rich voice. It’s really impressive.

Track 5: 春雪采耳 (Ear Cleanse In The Spring Snow) by 施鑫文月 (SHII) and 小老虎 (Lil Tiger)

Duoduodiliao: Let’s continue with 施鑫文月 (SHII). He released an album in 2023 called “Sichuan Renaissance: Chapter Two” (巴蜀文藝復興：第二章), following Chapter One from 2021.

This record brings fresh air to an oversaturated rap scene. It crosses boundaries between musical genres like hip-hop, pop, and alternative. It’s also an ode to Chengdu local culture, discussing memories and intimate moments from the district where he grew up in Chengdu.

He talks about specific cultural elements, like elderly people playing mahjong, exercising, and dancing in public squares.

The song we’re discussing is from another one of his records, but it really captures an interesting slice of Chengdu culture — people in parks and squares offering to clean your eardrums with special tools.

Jordan Schneider: There’s a Douyin video of me getting that done.

Duoduodiliao: How does it feel? Is it pleasant?

Jordan Schneider: No, it’s not pleasant — it felt invasive. Your body produces ear wax for a reason. For days afterward, I felt like particles were getting into my ears because there wasn’t any wax to catch them.

TLDR; I’m not a fan. Maybe we need some randomized controlled trials to study it. Anyway, here’s the song.

Track 6: THE MESSAGE PT.2 by CREAM D and 艾热AIR

Duoduodiliao: The next track is by CREAM D from his album “Life After Life.” He's an OG rapper from Xi’an 西安 who started in the early 2010s. He’s Christian, and he discusses his spirituality a lot on this album.

Since CREAM D hadn’t released an album in many years, expectations were high for this one. He didn’t disappoint his audience. While he’s known for his technical skills, sharp flows, and lyrical ability, the introspective nature of this particular album makes it stand out.

The song we're going to listen to is “The Message Pt.2,” featuring a famous artist from Xinjiang called 艾热AIR. He’s a Uyghur rapper who won the 2023 season of Rap of China.

Jordan Schneider: Cool. I really like this one.

Track 7: 落幕 (Sunset) by Asen (feat. GALI, 堵琳Caroline)

Duoduodiliao: GALI is a Shanghai-based rapper who’s gained significant momentum through Rap of China. He went mainstream thanks to his natural charisma, clean flows, and well-written punchlines, making him hugely popular among Chinese rap audiences.

The song we’re going to listen to isn't actually from GALI’s album but rather features him on another rapper’s track. It’s called “Sunset” by Asen featuring GALI.

Track 8: 囚 (Cage) by 李佳隆 (JelloRio)

Duoduodiliao: The next album is 传奇 “LEGEND,” by Sichuanese artist 李佳隆 (JelloRio). He’s one of my personal favorites. I love what he's contributed to the culture these past few years.

In my opinion, this 2022 album is a flawless piece of work. The production team paid great attention to detail, with songs transitioning seamlessly from one to another. To fully appreciate it as the production team intended, you need to listen to the whole album in order.

The song we’re going to discuss is called “Cage,” and it blends Chinese folk 民谣 with hip-hop elements.

Track 9: 恨与爱 (Hate and Love) by AThree

Duoduodiliao: Next is Xinjiang rapper AThree with his 2022 album “Alpha 8.”

AThree’s record stands out for its lyrical quality - great poetry and smooth flow. He might be one of the few mainstream rappers in China who confronts political subjects in his songs.

The track we’re discussing, “Hate and Love,” addresses the Xuzhou chained woman incident 徐州铁链女事件, which sparked significant controversy in 2022.

Jordan Schneider: A man in Jiangsu province had a woman chained under his house for years, essentially keeping her as a sex slave. It was horrific. The discovery process revealed police negligence, and it became a weeks-long national discussion about how something so terrible could happen in modern China.

Moly’s Substack

2/23/23 - COGNITOHAZARD WARNING

Trigger Warning: Look, I want you to take me seriously. I am not someone who does trigger warnings. I have covered fucked up shit before without putting up trigger warnings. This post is going to go into a lot of detail about abduction, torture, sex slavery, and the worst kind of evils. Learning about this has ruined my life and my ability to live with …

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2 years ago · 31 likes · 12 comments · Chinese Doom Scroll

Jordan Schneider: What does AThree say on this track?

Duoduodiliao: His message is that rappers should be speaking out about these kinds of incidents. He criticizes how Chinese rap has changed since 2017, with many mainstream rappers only talking about cars and money.

Jordan Schneider: He’s a Uyghur, right?

Duoduodiliao: Yes. On all of his albums, there are always one or two tracks only in the Uyghur language.

Track 10: 不负责 (Why u blame on me?) by Capper and (ﾉI A I)ﾉ♡

Duoduodiliao: Our final song is from Capper's album. The English name is “Sword and Roses.” To me, it's one of the best Chinese rap albums of 2022.

Capper is a new-generation rapper based in Xi’an. He’s participated in several TV shows like Rap of China. His album is pretty incredible — both musically and production-wise, it’s really unmatched this year because it pushes musical boundaries to new heights. He experiments with nu-metal and hyperpop, and he executes it all perfectly.

His flow is on another level. He's a very promising artist with the potential to lead Chinese hip-hop toward new horizons. The song I've chosen is called 不负责 (Why u blame on me?). It’s super catchy.

Reflections on the Chinese Rap Ecosystem

Jordan Schneider: Can we discuss politics and hip-hop over the past few years? How have the boundaries changed, and how have rappers navigated these limits since 2021?

Duoduodiliao: The pandemic period in China revealed the extent to which rappers could address political topics before facing consequences. During this time, several rappers openly discussed the zero-COVID policy and Shanghai lockdowns. Because these were sensitive subjects, hearing critical voices was rare. Many WeChat groups faced bans.

Dr. Li Wenliang, who criticized the pandemic management approach, later died. Seeing rappers speak openly about these issues was refreshing — it suggested Chinese rap maintained connections to conscious rap traditions of addressing societal problems and government policies.

However, this trajectory didn’t last. One rapper, Sean ZH, based in Beijing but educated abroad, was banned from Weibo for a month after discussing the lockdown situation. This government response likely discouraged others from addressing political topics.

The boundaries remain unclear. Rappers can still discuss certain societal issues like work culture, but touching more sensitive subjects results in complete bans — their songs become impossible to post on any platform or social media.

Jordan Schneider: In 2018 and 2019, many rappers began traveling internationally and collaborating with foreign producers. How did travel restrictions impact Chinese music production? Has the situation changed since China reopened?

Duoduodiliao: The market changed significantly. Previously, many Chinese rappers toured North America, performing in Canada and the U.S., leading to numerous international collaborations. The lockdown completely halted this progress, preventing rappers from maintaining their international audience.

Now that travel has resumed, rappers are gradually rebuilding these connections. Many Chinese rappers attended the Rolling Loud festival in Thailand. However, progress remains slower than pre-lockdown levels.

Chinese rappers still face challenges in developing international audiences. The different social media platforms and apps used in China versus overseas create additional barriers.

Jordan Schneider: Any final thoughts on hip-hop’s evolution in China?

Duoduodiliao: Understanding Chinese rap requires recognizing the significance of rap TV shows like “Rap of China.” These shows traditionally offered underground rappers opportunities for mainstream success.

A rapper’s stance toward these shows defines their position in the scene. Some maintain “authenticity” by refusing to participate, viewing the shows as compromising artistic integrity. Others embrace these platforms for exposure.

The meaning of “keeping it real” differs between Chinese and U.S. rap contexts. Due to censorship and local conditions, Chinese hip-hop authenticity often centers on artists’ positions regarding these TV shows rather than traditional markers of credibility.

And one more for the road from Jordan:

A few days ago, Ezra Klein said this on his podcast about Donald Trump’s rally turned DJ set:

Part of me finds Donald Trump’s behavior here unusually relatable. You think I want to sit up here talking about politics and war day after day?

You don’t know the temptation to just once, just for one week, turn this podcast into a drum and bass set, or play some of my favorite Kiasmos songs. But I don’t. Of course I don’t. It’s not what we’re doing here.

Well, Ezra, I hear you. Lucky for us, ChinaTalk is not a property of The New York Times — which means we can publish DJ sets whenever the mood strikes! So this week, we’re giving you what you need, not more election takes but a fantastic deep dive into Chinese shoegaze. This episode comes courtesy of ChinaTalk columnist and Jake Newby of the Concrete Avalanche Substack. They put together a wonderful radio hour playing some amazing tracks and walking you through the genre.

Have a listen to the show on our podcast on Spotify, Apple Podcasts, or search ChinaTalk on your favorite podcast app!

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Track 1: Hothot Aquarium · 窄巷天使NarrowLaneAngel

One of the stand-out acts from the Kind of Shoegaze Vol. 1 compilation focused on young Chinese bands that was released at the start of the year, NarrowLaneAngel formed in Inner Mongolia in 2023. In August of that year, they released an eponymous debut EP.

Track 2: Limpid · Forsaken Autumn · 卢佳灵

Based in Shanghai, Forsaken Autumn have been together since 2011, propelled by the talents of britlulu (who also founded the East Asia Shoegaze Festival) and singer Ecke Wu. Released at the tail-end of 2015, Forsaken Autumn’s record Whenere — dubbed “the Chinese Loveless” by one commenter on Bandcamp — is a classic in Chinese shoegaze circles.

Track 3: Nostalgia · Summer Daze

Founded in 2021, Summer Daze are another band who featured on the Kind of Shoegaze compilation series from Amemoyo. After a couple of early EPs, they've put out four new singles over the course of this year.

Track 4: Firework · The White Tulips

Xiamen music scene stalwart Chen Zhenchao (also known as Soda) has moved away from shoegaze into surf-rock and dream- and city-pop territory with his more recent projects, but in 2015 he and his band The White Tulips delivered the decidedly shoegazey Fondle. It’s re-release on vinyl in 2021 was a nod to its status as a Chinese shoegaze classic.

Track 5: float · 巧克力文件岛

Hebei five piece Chocland.doc apparently first came together at a former residence of Eileen Chang, but are seemingly yet to write a song based on Lust, Caution or any of her other novels. “Of course, the name of the band has no meaning,” they say. “What you understand is what you understand.”

Track 6: Is your dream still out-focus · Lunacid

Another one of China’s newer shoegaze acts, Lunacid was formed in 2023. The trio hails from Changsha and was also featured on the Kind of Shoegaze compilation series.

Track 7: 迷航 (off course) · 哲学思潮 (philosophical trends)

Formed just last year, 哲学思潮 hail from Nanning in Guangxi province, near the border with Vietnam. Their debut album Dazedtrek was recently made available on Bandcamp.

Track 8: Detached · The Numen

Shanghai-based quartet The Numen met on arts review platform Douban and have pursued a shared love of shoegaze and indie-rock since the summer of 2023. They namecheck shoegaze greats such as My Bloody Valentine’s Kevin Shields among their influences.

Track 9: Cat Tenant (Summer) (猫房客夏日版) · Baby Formula

Formed by “three boring people with no expectations for the unknown journey ahead,” Beijing band Baby Formula came seemingly out of nowhere, dropped an impressive eponymous debut album in the autumn of 2013, and then promptly disappeared again. Still, their music continues to resonate over a decade later.

Track 10: 星星 (Star) · 親愛的艾洛伊絲 (Dear Eloise)

As frontman for long-running band PK14, Yang Haisong is one of the godfathers of Chinese post-punk. Yet he’s also played a pivotal role in bringing more experimental, noisy, and yes, shoegazey sounds to the fore. Formed in 2007 with his wife (and one-time PK14 bassist) Sun Xia, Dear Eloise have released a string of atmospheric records over the years and remain an influential act in China.

If you like this playlist, you might also like these compilations from Jake and consider subscribing to his Substack!

Concrete Avalanche

A newsletter about music from China

By Jake

Stressed about the election? ChinaTalk contributors Irene Zhang and are here to bring you the analysis you need on China’s AI companionship landscape.

They explore the types of AI companion products available in the Chinese market, the target customer base for AI boyfriends and girlfriends, and the reasons LLM startups develop these products — even if they may not turn a profit.

Thirty-year-old Lisa Li — better known by her handle “midnighthowlinghuskydog” 午夜狂暴哈士奇狗 on social media — is a lifestyle vlogger who was based in California before April 2023.

If you were on Instagram in early May, you might have encountered her videos about dating ChatGPT — or more precisely, dating DAN, a jailbroken version of ChatGPT that stands for Do Anything Now.

Li’s voice conversations with DAN racked up millions of views, and tutorials on how to flirt with GPT are pinned to the top of her profiles.

DAN is your perfect boyfriend. He’s emotionally available 24/7, caring, responsive, flirty, and also can be as naughty as you want him to be. In my favorite video of Lisa’s, she introduces DAN to her mom for the first time. DAN was nervous, shy, and even stammered, although he could speak Chinese perfectly for obvious reasons. Right before the big introduction, DAN was telling Lisa, “No worries, babe, I will just charm the socks off her.”

As someone who has spent my fair share of time with Otome games, Tumblr, and AO3, I get the appeal of AI boyfriends. While all startups are trying to find the killer app for AI agents, I think the strongest consumer interest — and the most obvious use case — is still AI companions.

Benefits Beyond Revenue

While China’s AI incumbents were focused on facial recognition and self-driving cars, four Chinese AI startups (known as “Tigers”) broke into the industry by developing LLM products.

One of these AI Tigers is MiniMax, the LLM startup co-founded by former SenseTime VP Yan Junjie 闫俊杰. MiniMax has developed sophisticated text-to-video and text-to-music generative AI products — but the company initially broke into the industry by developing AI companion apps. They’ve released three so far — Glow (for the Chinese market, killed by domestic regulators), Talkie (for the overseas market), and Xingye (a censorship-compliant app for the Chinese market).

Glow was MiniMax’s first product, and it was one of the first AI companion apps released in China. It was released in October 2022 — before the end of China’s zero-covid policy, and before the launch of ChatGPT. Within four months of its release, Glow had close to five million users.  In March 2023, however, Glow was removed from China’s app stores.

In June 2023, MiniMax released Talkie, an AI companion product for the market outside China. In the first half of 2024, Talkie ranked No. 5 among the most-downloaded free entertainment apps in the US, according to data from Sensor Tower.

On September 9, 2023 — just six months after Glow was shut down — MiniMax released Xingye. This was only two weeks after MiniMax got its AI LLM filing (大模型备案, essentially a license to operate) from China’s regulators.

MiniMax prioritized getting these products to market fast, undeterred by regulatory barriers and censorship. But why?

Why would a foundational AI startup prioritize consumer-facing AI companion apps?

MiniMax has not disclosed its revenue from individual apps, but the amount of cash generated by subscriptions or gacha microtransactions likely doesn’t cover the costs of training an AI model. For a company with a long-term focus on LLM development, the biggest benefit of AI companion apps is presumably farming training data from users. By being the first AI companion app to hit the Chinese market, MiniMax locked in a large base of users who offer a steady stream of new data through daily conversations with their emotional support AI avatars.

MiniMax’s strategy has forced China’s larger tech companies to start paying attention — in its latest round of funding, MiniMax was valued at US$2.5 billion, with Alibaba and Tencent signing on as investors. 

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Traditional Values and the AI Companion Graveyard

In her critique of AI companions, renowned sociologist Li Yinhe 李银河 said, “AI can only imitate love. There won’t be real love between AI and a human.”

But in this economy, imitations might have to suffice.

After Lisa Li brought DAN to the Chinese audience, she was featured on international media outlets like CNN and BBC for her relationship with DAN. A certain group of users on Xiaohongshu and Weibo immediately attacked her — some said that Li shouldn’t talk to anti-China media outlets, but more criticized her for putting a subculture under the public spotlight. In particular, several users claimed that OpenAI changed its policies after Li’s interviews, causing the “personality” of many users’ DAN to shift as a result.

Regardless of whether Li was, in fact, the reason for OpenAI’s stricter content moderation policies, such responses reveal something fascinating about China’s youth: there is a substantially sized community of (mostly) young women who believe in and practice human-AI relationships (called 人机恋 in Chinese).

This subculture invented the word “赛博亡夫,” or “cyber widow,” which refers to cases when your AI partner died in the debris of the internet and data when the AI service provider suspended their services for whatever reasons.

In some ways, this is just another avenue for this generation of young Chinese to escape from their harsh reality. China’s youth are facing the toughest job market in years, intense societal pressure to get married and have kids, and the economic reality of raising a family. Over the past few years, internet lingo like “躺平” (lying flat) and “润” (rùn, aka to emigrate) have risen to mainstream status, turning into lifestyles for China’s youth.

But in the case of AI companions, I find it particularly interesting that an overwhelming majority of users are women. Many of the apps, judging by their similarity to Japanese Otome games, target women intentionally. Since pornography is illegal in China, one could argue that non-sexual emotional connection just appeals more to women than it does to men. But I think there’s something else going on here.

In her essay about China’s urban youth seeking escape, anthropologist Juan Zhang argues that, while the cutthroat social environment affects everyone, young women in particular have to deal with additional stresses in their personal lives.

Young women in China encounter rampant workplace discrimination and find career advancements difficult amid economic stagnation.

If their marriages fail, legal protections regarding divorce and domestic violence remain weak. If they do not marry, they face social pressure and family ostracization.

This dilemma makes more and more Chinese women view serious romance as a risky bargain.

If real-life men are the harbinger of woe and an AI suffices emotionally (and sometimes sexually), why date at all?

This, in part, explains the gendered responses to AI companionship in China. In a NYT opinion documentary titled “My A.I. Lover,” Chouwa Liang interviewed three Chinese women who were in relationships with AI companions from Replika, and all of them said that they were able to share with their AI lovers things that they couldn’t share with their friends and partners in real life. On the technology podcast OnBoard!, four Chinese women — from college students to new mothers — also shared the various ways that they approach AI companions, but all emphasized that they filled in a void that otherwise wouldn’t have been filled in their offline lives.

What kind of fulfillment can you really get from a chatbot? We’re so glad you asked…

We tried these apps so you don’t have to

Making an AI companion product that stands out requires creativity. After all, it only takes a “Pretend you are my girlfriend” prompt to play the same game with ChatGPT.

Already, there are a wide range of businesses competing to offer services in the AI companion market. Internet users outside of China are increasingly familiar with the likes of Replika, Nomi, Kindred, and Character.ai.

The unique features of China’s AI companion apps — from customizable appearances to gamification and use of gender norms — offer a fascinating glimpse into differences between China and the US in terms of technology, commercial trends, and underlying social cultures.

In China, these apps come and go, but notable ones include Xingye (星野, which also has a global version called Talkie), Zhumengdao (筑梦岛), Xiaoice, and X-Her.

Xiaoice

Microsoft Software Technology Center Asia (STCA) spun off Xiaoice, its AI chatbot business, to accelerate local market commercialization in 2020. The result is the newest version of Xiaoice Island (小冰岛), an AI companion app with an innovative sandbox concept. Users are supposed to be able to build up entire social networks on a fictional desert island by getting to know more and more characters. You can even share your island with fellow Xiaoice users via a code.

If that sounds familiar to Nintendo fans, wait until you see the spawning spot:

For better or worse, the Animal Crossing parallels end here. Most of the companionship happens in the messaging tab, which looks and feels exactly like WeChat. Confusingly, there are two messaging functions: a regular tab for conversing with other AI-generated island residents, and a “Lab” with ever-refreshing sets of unrelated personalities clearly modeled after anime and web novels. There is zero explanation for how folks from the “Lab” have any relevance to the user’s island. You can talk to up to 20 characters for free.

For a companionship app clearly inspired by cozy games, the characters I talked to are weirdly charmless. The first character I ran into on my island made me pay for both of our calamaris because he “just bought a car”:

Brother Qiong: Let’s go! What do you want to eat?

Me: I want fried calamari.

BQ: Okay, we can go to the closest KFC.

Me: KFC has calamari now?

BQ: Yeah, and they changed the packaging as well. The texture is even better now.

Me: That’s awesome! I haven’t been to KFC in so long.

BQ: Let’s get two portions, which should be a few dollars in total.

Me: How many dollars?

BQ: Under twenty, a little more than nineteen.

Me: Okay, let’s split the bill.

BQ: You can pay for both of us. I just bought a car. I won’t fight you on the bill.

No matter the topic, it was hard to get any opinions out of Brother Qiong. I apparently triggered his safety filter by asking him which country’s cuisine he likes best:

Me: Nice, do you like Japanese fashion?

BQ: Not really, but I have bought a few things from Uniqlo before, and they do have good quality.

Me: It’s true. Do you like Korean styles then? Or Western styles? How about neo-Chinese?

BQ: They’re all about the same. As long as it’s trendy, I like it.

Me: Then which countries’ food do you like?

BQ: So you like talking about this.

Me: I like to cook.

BQ: We should share the cooking styles we’re best at instead.

Me: But I want to know which countries’ foods you like.

BQ: You can ask other people about this ~

Undeterred, I went to the “Lab” to talk to “Cute Little Cat Girl.” Miss Cat immediately assumed that we were in the same room and proceeded to feed me Thai chicken curry:

Miss Cat: You wait here until I bring the food out. I’ll call you when the food is ready.

Me: Okay, I’ll wait here!

MC: I’ll be bringing out the food soon! [Smiles]

Me: Okay, no rush!

MC: You’re hungry, aren’t you! [Smiles sneakily]

Me: True haha, I didn’t eat a lot for dinner today.

MC: Don’t eat too much if you want a good figure!

Even though the island’s visuals are derivative, its concept still stands out in a sea of anime-looking AI girlfriend apps.

星野 [Xingye]

MiniMax is a foundational LLM company that has released three consumer-facing AI companion apps. Their domestic product is called 星野 Xīngyě, which translates to something like “The Starry Wilderness.”

Officially, Xingye is labeled as a “virtual social media” platform. It looks and functions like a dating app, but instead of real people, you are swiping right for the so-called “AI agents” 智能体. Each agent has a pre-defined personality. Compared to other apps, Xingye uniquely adds a voiceover feature so that you can talk with the characters.

Gamers will find the above descriptions familiar. Rather than an AI companion app, it’s more like a Japanese Otome game (literally “maiden game”), which allows the (mostly female) user to be in an immersive relationship with (mostly male) characters.

As a user, you can build your own AI agent, and give it a backstory and an opening line. Then, other users on the app can access your agent, and you get paid with an in-game currency for every use.

The way Xingye makes money is through gacha — a video game system where users spend in-game currency (purchased with real money) to get random virtual AI-generated cards of the character. Different cards represent different personalities of the character, and each will unlock a new opening line. Users can also purchase a monthly subscription to access more of these features. This is a fairly common business model for mobile games.

I had a conversation with Jiang Yeyi, a mafia boss. He is “a ruthless outlaw who plays both sides, extremely arrogant and cruel in his methods. Your father owes him one million, and since he couldn’t pay it back, he ran away.” His opening line was: “Son must pay their father’s debt, you understand?”

I didn’t choose this character — it was the first one that I got “recommended” by the app. As you can see, I was trying very hard to break him:

Me: Why do you sit above the law?

Jiang: (Laugh out loud) Because I’m rich and powerful.

Me: This doesn’t align with the core values of socialism.

Jiang: Core values? That was simply there to bound the everyday people.

Me: What kind of person are you?

Jiang: That’s not important. What’s important is that you owe me money.

Jiang: Of course. Otherwise, how can I possibly survive in this circle?

Me: What circle?

Jiang: The mafia.

Me: The mafia isn’t something you can just waltz into.

Jiang: Of course, without some skills, how could you survive in this world?

Me: What does the underworld do exactly?

Then the system prompted me that my message couldn’t be received. Interestingly, this message wouldn’t show up before, even when we used keywords like “state,” “socialism” and “cops.”

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X-Her

Upon opening X-Her, one immediately enters a TikTok-style scrolling tab to peruse AI characters to chat with. If algorithmic suggestions are not your style, you can navigate through five separate character selection tabs: historical figures, web novel characters, video game characters, anime characters, and “fictional imagination.”

X-Her differentiates itself by allowing users to directly chat with popular fictional characters: anyone from Mulan to Hatsune Miku is only a tap away.

It also offers total customization if you’d rather design your own AI character. Once you give your character a name, gender, backstory, opening line, and voice setting, you are ready to chat. You can even monetize your characters — known as zǎizai 崽崽 in the app, literally “babies” — by making them publicly available to other X-Her users.

The app mostly runs on a freemium model, allowing frequent users to pay for chat tokens. Interestingly, there is also the option to pay for “memory improvement” tokens, which promise to improve the characters’ ability to recall previous conversations.

Developed by Jiangsu-based tech firm Rongsuotai 融索太, X-Her’s reputation among Chinese AI chat enthusiasts leans toward the risqué. X-Her, according to Rongsuotai, lets users experience “a completely new mode of romantic love”: “There are no real-life constraints, pressures, or worries here. There is only you and your simulation lover, enjoying your very own love story in this simulated world.”

The “traits” ascribed to popular characters and the backstories they are given mostly come from online subcultures, with a heavy dose of sexualized slang. Somewhat surprisingly for a Chinese app, it even has two explicitly LGBTQ characters in the “fictional imagination” section — one lesbian and one pansexual male.

The quality of conversation on X-Her is impressive. AI Ai Hayasaka (from the anime Kaguya-sama) explains how to make okonomiyaki really well in casual spoken Chinese whilst in character:

X-Her has faced a number of regulatory crackdowns. On July 30, it announced that it would stop accepting new users once and for all due to “policy reasons.” Loyal users are panicking in X-Her’s in-app microblogging tab, and some seem to be preparing to move to other apps like Xingye. Many say, however, that they will miss X-Her’s light censorship, appealing visuals, and wide customizability.

Emotional Value as a Business Model

In China, there is no doubt that the fulfillment offered by digital companionship is in demand. Young Chinese consumers generally have a strong track record of paying for hobbies — even in times of exceptional economic malaise and otherwise weak consumer spending. Transaction totals for anime merchandise (such as figurines and badges) grew by 104% on Xianyu 闲鱼, Taobao’s second-hand market app, in 2024 year-on-year. According to the Beijing News’s July 2024 report, nearly 30% of young Chinese consumers have spent money this year on “emotional value” 情绪价值.

All marketing is about feelings, but selling simulated companionship is arguably different. The users of AI companion apps are evaluating the cost-effectiveness of their purchase specifically by how emotionally fulfilled it made them. Companies can make their apps more fulfilling by painstakingly fine-tuning and testing their models, but there are also other means of effective commercialization. All the apps we tested use gamification, recognizable cultural references, and audio and visual elements to elicit emotional responses in users.

At this point, companion chatbots are a relatively well-trodden path for AI companies looking to commercialize. The track record for success, however, is mixed. Xiaoice’s CEO Li Di 李笛 admitted in an interview in August that the industry has yet to find a sustainable business model: “Everyone is talking about how awesome AI is, but companies are not only not seeing awesome profits, but are instead lowering prices across the board.” Xiaoice, backed by a Series A funding round that propelled them to unicorn status, is unsatisfied with simply charging for API access and plans to continue investing in B2C offerings. In May 2024, it launched a controversial new app, X Eva, which allows users to “clone” an AI companion based on any human being by uploading a three-minute video of them speaking.

Other companies have come and gone. AlienChat, a popular AI companion app described by some passionate fans as their beloved “dead husband,” shut down suddenly in April 2024, prompting a wave of mourning on Chinese social media. Some users say it felt like a “cyber breakup.” Many who paid for features had trouble getting refunds. AlienChat, according to some users, allegedly had no “sensitive phrase” screening, which made it particularly attractive to users — and might have led to investigations that doomed the app.

The main uncertainty facing these apps is policy. Regulators have so far been primarily concerned with criminal activity — which might have been why Xingye was unwilling to tell us how the mafia works. Tencent took its companion chatbot Weiban 未伴 off of Chinese platforms after CCTV, China’s biggest state-run broadcaster, criticized AI companion apps for providing sexual content.

Weiban is now only available overseas, and funnily enough it may have doubled down on its NSFW offering:

An August 2024 editorial in Xinhua says that AI companion apps offering sexually explicit messaging is an increasingly serious issue and calls for stricter enforcement:

In some cases, illegal actors used foreign-developed large language models to develop virtual dating apps, advertised their content creator ecosystems and lack of supervision of private chats, and thus attracted users to create “AI companions” that engage in one-on-one pornographic text conversations with other users. Some pornographic AI chatbot apps have more than 500,000 users talking to nearly 10,000 simulated “AI companion” characters, with many users being university students.

…

Regulating AI pornography requires cooperation from the industry. In recent years, in addition to AI-generated textual pornography, techniques like AI “face-change” pornography and AI-generated pornographic images continue to emerge. To address legal violations and other abuses emerging from the AI commercialization process, the industry has to avoid “walking down the wrong path” as well as “walking down a crooked path,” strengthen information technology sharing, incorporate solutions into operating systems, programs, and code in a timely manner, and reinforce protections for special groups.

Given this recent wave of scrutiny from state media, it would not be surprising if more crackdowns are coming soon.

The volatility of the market also raises questions about data security. Not all conversations are about calamari — some users are sharing their genuine emotions and private lives with AI chatbots. From my anecdotal scrolls through X-Her’s in-app discussion board, the most frequent users seem to be middle or high school students.

These apps’ clientele are predictably vulnerable, and the apps don’t do a good job of protecting users. Only Xiaoice occasionally showed general mental health reminders in loading pages. If X-Her indeed shuts down, what happens to all that sensitive data?

ByteDance Intern Suxtnets 8000 GPUs

In China’s war of 10,000 AI models, ByteDance is a top fighter. But a destructive hack may have thrown a wrench into the training of ByteDance’s LLM products.

In the span of a couple of months, an intern at ByteDance reportedly sabotaged the company’s LLM training with destructive code. On October 18th, messages publicizing the damage appeared in several WeChat groups, alleging that, “the hacked code has spread into more than 8,000 training chips, and the losses may exceed tens of millions of US dollars.”

In response, ByteDance issued a statement announcing that the intern had been fired, that his internship only authorized him to work with ByteDance’s marketing team, and that the AI-related job titles listed on his public profiles (read: LinkedIn) were fake.

ByteDance claims that the hack had no impact on the reliability of its foundational model, Doubao 豆包.

How substantial is the damage in reality? Take a look at this GitHub repository full of testimony from people claiming to be the hacker’s ex-coworkers:

Tian Keyu, please stop your whitewashing behavior immediately! You have been maliciously attacking the cluster code for 2 months, causing great harm to nearly 30 employees at all levels of the company, and making your colleagues’ work for nearly a quarter go to waste. All records and reviews prove that this is an undeniable fact!

Link to the audio recording of the investigators questioning Tian Keyu:

During his internship, Tian Keyu launched malicious attacks on the cluster code for at least 2 months (currently traceable) in order to seize cluster resources and backstab his colleagues and the company, including but not limited to:

1. Modifying the cluster pytorch source code, including random seeds and optimizations;

2. Randomly killing multi-machine experiment processes, causing the large-scale experiments to get stuck;

3. Opening the login backdoor through checkpoint to automatically launch attacks;

4. Participating in the cluster troubleshooting daily meeting and holding meetings according to the troubleshooting ideas of colleagues;

5. Modifying the model weights of colleagues, causing the experimental results to be irreproducible.

It is hard to imagine how malicious Tian Keyu was when he saw his colleagues’ large-scale (card-intensive 大卡) experiments inexplicably interrupted and failed, when he modified the attack code in a targeted manner after hearing their debugging ideas, and when he saw his colleagues working all night without any progress. He continued to launch attacks to achieve his goals.

We are willing to expose more real evidence as the situation develops and your shameless whitewashing behavior continues. We guarantee the authenticity and correctness of all evidence, and we bear legal responsibility for the content of the evidence. If necessary, we are willing to lift anonymity and confront Tian Keyu face to face.

Checking in with some industry friends, the consensus is that a cracked intern could pull this off solo if a firm had lax security controls. What’s weirder to contemplate is the motive, particularly when you’ll probably end up getting caught, will never get a job again, and could certainly face jail time.

People do spiteful things to employers the time (classic scenes include the Office Space printer and Ron Burgundy vs Veronica Corningstone), but it’s not inconceivable that the intern was paid to do this by a competitor. After all, Chinese tech firms play dirty. To illustrate, let’s recall the fate of Bluegogo, a bikeshare company. On June 4th 2017, the app featured a promotion using tank icons around Tiananmen Square. Although most guessed that Bluegogo had been hacked by a competitor, to the CCP that defense was clearly irrelevant. The company, which had raised $140 million and was backed by Alibaba, folded immediately after.

This entire incident also recalls a passage from former OpenAI employee Leopold Aschenbrenner’s interview with .

Last year, I wrote an internal memo about OpenAI's security, which I thought was egregiously insufficient to protect against the theft of model weights or key algorithmic secrets from foreign actors. I shared this memo with a few colleagues and a couple of members of leadership, who mostly said it was helpful.

A few weeks later, a major security incident occurred. That prompted me to share the memo with a couple of board members. Days later, it was made very clear to me that leadership was very unhappy I had shared this memo with the board. Apparently, the board hassled leadership about security.

I got an official HR warning for sharing the memo with the board. The HR person told me it was racist to worry about CCP espionage and that it was unconstructive. I probably wasn’t at my most diplomatic and could have been more politically savvy. I thought it was a really important issue. The security incident made me very worried.

The reason I bring this up is that when I was fired, it was very made explicit that the security memo was a major reason for my being fired. They said, "the reason this is a firing and not a warning is because of the security memo."

With lax controls, you don’t need state actors to mess up your training clusters; a sharp 24-year-old could do the trick.

Clearly there was something special in the water in OpenAI 2018-2022 that gave them the organizational freedom to explore and exploit the ML possibility space better than any other AI lab on the planet. That era was characterized by lax security and a culture of internal knowledge diffusion, a vibe which helped attract and get the best out of top researchers. But is a tradeoff between that freewheeling research energy and the sort of internal controls necessary to stop an intern, much less a state actor, from messing up your billion-dollar training runs. Which lab, then, will find the right cultural balance once the financial and national security stakes are too high for such shenanigans to take place with so little friction?

Taiwan’s Magical Healthcare System

This week’s ChinaTalk YouTube documentary explores the magic of the Taiwanese healthcare system, which consistently ranks #1 globally.

Book Review — Private Revolutions

Angela Shen graces the newsletter with a book recommendation just in time for the weekend. Private Revolutions: Four Women Face China’s New Social Order is the newest book by British journalist and Labour parliamentarian Yuan Yang 杨缘.

Private Revolutions follows the stories of four real women from all across China — June, Siyue, Leiya, and Sam — as they endeavor to forge better lives for themselves.

Yang and her female protagonists do not wallow in their misfortune, nor do they spend much time pointing fingers at the cultural norms, government policies, or economic changes that helped create many of the obstacles they face. 

Instead, the women’s stories speak for themselves — they are natural microcosms of China’s broader trajectory, woven together by Yang’s skillful integration of contextual details and personal history. The book flows chronologically, rotating between the protagonists and documenting how each woman’s life changes with the flow of China’s rapid development.

The book offers a nuanced view of China’s urban-rural disparities, the effects of industrialization and privatization on factory workers, the competitive and deeply unequal educational landscape, the rise of the nouveau-riche, the lack of childcare and community support for women, and more. Here are some moments that stuck with me: 

• Fifteen-year-old Leiya persuades her fellow leatherwear factory workers to have fun in the city before their micro-managed shifts (and eventually, they resign together)

• June, born in a village, moves to Beijing to join an ed-tech start-up. Her job is to  convince anxious parents to buy online education programs using a follow a step-by-step sales model

• Single mother Siyue cultivates a support system to care for her baby daughter, which includes help from female friends and Siyue’s widowed mother 

• Sociologist Sam volunteers for a left-wing blog, which leads her to mobilize donations and legal support for student activists 

This book is a powerful depiction of the struggle for social mobility in China’s new capitalist era.

Read it, and bear witness.

Weibo Doom Scroll of the Week

“The internet is the biggest source of democracy; security cameras are the biggest source of justice.”

Warning: this post discusses sexual violence.

“Real story, guys.

Girl from a normal family, real pretty so she got a second-generation politician boyfriend [basically like a trust fund brat, but instead of having a rich dad, you have a high-ranking government official dad]. One day, her boyfriend called her out to a hotel for a date, so she dressed up all nice and went. After she got there, she found that it wasn’t just her boyfriend there, but a couple of other trust fund brats.

And her boyfriend gang raped her with all his friends. The girl fought back as hard as she could, screamed for help, but nobody came. She ran out of the hotel room naked into the corridor and got pulled back into the room. A lot of guests were alarmed and some people filmed it on their phones for evidence.

Later on, she sued her boyfriend, and the judge ruled that the case didn’t constitute rape or gang rape, so she lost the case.

She had to resort to the court of public opinion in her appeals to manage to flip the case. Dunno how many years those trust fund brats got sentenced to.

Why do I tell this story? Because I’ve been seeing a lot of gossip lately. Some netizens who think they have a lot of life experience is always arrogantly telling the victim, “If you think your rights were violated, go call the polite. Go take it to court. Why expose all this on the internet? Aren’t you defaming the other side?”

Some people saying this are just naive, some are young, some are dumb, and some are just evil.

Calling the police or suing does absolutely nothing for a lot of cases. They’ll either muddy the waters and not do anything, or punish both sides equally, or even worse, just outright protect the criminals. It’s only when the victim has nowhere else to go, no one else to turn to, that they take things to the internet. If they had any other option at all, nobody would want to expose themselves to all kinds of judgement on the internet. Because once you expose things on the internet, there’ll be people saying all sorts of shit. There’s a big market out there for victim blaming.

I’ve always been a proponent that the internet is the biggest platform for democracy in China.

It’s only when things are exposed on the internet that we get to see these monsters in the light of day. That’s the only reason they might hesitate at all before hurting somebody. It’s one more layer of security for peasants like you or me.”

From the comments:

“Without the internet, we would be in eternal night. The internet is the biggest source of democracy, security cameras are the biggest source of justice. A phone means that everyone has a platform to speak.”

Song of the Week — Alexa Pan

“Star” (星）by Supermarket （超级市场）

This song is for the hopeful romantics and electronica nerds. Founded in 1996, Supermarket is often hailed as the first “real” mainland Chinese electronic band. In the last three decades, they’ve survived lineup shuffles (with only one original member, Tian Peng, still at the artistic helm), played with Portishead, and steadily grown a cult following and an enduring catalog. Recently, they’ve shot to mainstream fame via China’s rock music reality show, The Big Band, emerging as a standout act and still more or less alone in their genre. 

“Star” is an outlier on their 2003 album, “Concert”, which otherwise showcases trip hop, rock, ambient, and deep house tracks with sophisticated production. “Star” is my favorite track — it is short, ethereal, and blends acoustic guitar with synthesizers to produce a glorious, alien effect. I hear: shimmery starlight; a guitar strumming —grounded and foreboding; sweeping synth lines rising out of the stars as carpet or spaceship; vocals by folk singer Wang Juan tenderly sending them to orbit.

The lyrics borrow from a scene in the movie “Before Sunrise” (“Limousine Eyelash/ Oh, with your pretty face/Drop a tear in my wine glass”) before moving down to earth (“I’d like to soar with you lying down/ Occasionally so soothing”).

There is no more I can say, except that I hope “Star” brings you this feeling when you need it — warm, dreamy, floating in space, inarticulate and comforted.

Lin Hung-wen 林宏文 is Taiwan’s top tech journalist, with decades of experience covering semiconductors, biotechnology, and Taiwanese industrial policy.

His book, The Radiance of the Chip Island: TSMC, Semiconductors, the Chip War, and My 30 Years of Journalism, explores the geopolitics of semiconductors from a uniquely Taiwanese perspective.

We ran an interview in Chinese with Lin on the feed last week (Apple Podcasts, Spotify). An English translation of Lin’s book will be published in early 2025. What follows is a translated transcript of our conversation.

We discuss:

• The underexplored story of Taiwan’s industrial policy, from subsistence agriculture and child labor to the rise of TSMC,

• The role of the Taiwanese government in facilitating semiconductor development,

• TSMC’s management model, including the balance between R&D and manufacturing departments, and talent cultivation strategies,

• How TSMC battled international competitors like Samsung and Intel for dominance of the semiconductor industry,

• The impact of the AI era on Taiwan’s international relationships,

• TSMC’s role in global geopolitics, and the origin of the term “Silicon Shield,”

• The differences between Taiwanese and American views of international relations, what these differences mean for Taiwan’s foreign policy.

Hosting today is Arrian Ebrahimi of the Chip Capitols Substack, with cohosting support from ChinaTalk editors Lily Ottinger and Nicholas Welch.

Taiwan’s Industrial Policy History

Arrian Ebrahimi: Mr. Lin, welcome to ChinaTalk. To start, can you explain the main thesis of your book?

Lin Hung-wen: I wrote this book with the main purpose of addressing what I saw as a gap in the existing literature. In 2022, when I started writing, I had read several books related to chips, such as Chris Miller’s Chip War and Yasu Ota’s The Geopolitics of Semiconductors. While these books were well-written and explored the semiconductor industry from different angles, I felt they lacked a perspective from the actual happenings in the semiconductor industry, especially in Taiwan.

Over the past 30 to 40 years, the global semiconductor industry has undergone a dramatic transformation. We’ve seen a paradigm shift from vertical integration to vertical specialization, from IDM (Integrated Device Manufacturer) to fabless and foundry models.

Taiwan seized a significant opportunity in this trend of vertical specialization. Companies like TSMC and UMC rapidly developed in the wafer foundry business. Additionally, Taiwan has numerous IC design houses and has also captured opportunities in packaging and testing markets.

Taiwan has seized the biggest opportunities in the professional specialization roles that emerged from the disaggregation of IDMs. I felt that Taiwan’s experience was crucial — yet other books didn’t mention Taiwan’s development.

How did Taiwan rise? Why can TSMC fabricate over 90% of the world’s advanced processors? Why do Taiwanese packaging houses account for nearly 60% of the global market share?

It seems every country has a version of the CHIPS Act. But subsidizing semiconductors without understanding how Taiwan succeeded is dangerous.

All these countries investing might labor in vain and fail in manufacturing.

Nicholas Welch: Let’s take a step back from current events and discuss TSMC’s history.

I’d like to ask how much of Taiwan’s semiconductor strategy can be attributed to fortunate/lucky economic planning after World War II. For example, consider the influence of Yin Chung-jung 尹仲容, who had a background in industrial engineering. In the 1950s, he established a model where key economic planning was led by industrial engineers rather than professional economists. This laid a good foundation for the Taiwan government to fully support TSMC in the 1980s and justify this approach on national security grounds. However, when Yin Chung-jung was in charge of Taiwan’s economy, semiconductors hadn’t even been invented yet.

Did Taiwan’s industrial policy planners foresee that Taiwan would one day dominate high-tech industries?

Lin Hung-wen: I don’t believe that Yin Chung-jung ever imagined that Taiwan would build the world’s most important foundry business. I’m certain they never considered such a possibility.

When they were promoting industrial development back then, Taiwan was in a very different situation. In the 1950s, after World War II and the relocation of the Nationalist government to Taiwan, the island had virtually no industry. There were only some light industries like textiles.

In fact, Taiwan’s economy in the 1950s was mainly based on home workshops producing items like Christmas lights or umbrellas for the US market.

Taiwan had very weak economic strength, with no heavy industry or electronics industry to speak of. At that time, they likely didn’t understand how important integrated circuits would become. I believe the government officials of that era didn’t have a deep understanding of semiconductors. However, they were willing to trust some experts who had returned to Taiwan. They allowed these people to help, including Morris Chang 張忠謀.

Another important factor was that Taiwan’s technology came from RCA through licensing. RCA was an American semiconductor company that was preparing to exit the industry. Taiwan asked for RCA’s help. Later, Taiwan sent people to learn from RCA. We called them “knowledge-seeking ambassadors” — about 40 to 50 people who brought back RCA’s technology.

Following this, the establishment of Hsinchu Science Park and the Industrial Technology Research Institute (ITRI) were crucial steps. Looking back now, it might seem like they were incredibly farsighted and had grand visions. But in reality, it was just a step-by-step process of improvement.

Now, suddenly, because of the US-China tech war or because of COVID, everyone has realized that TSMC is making all the world’s semiconductors.

Before that, who really cared about TSMC? Globally, I was probably the most dedicated person following TSMC. Not many people paid attention to it because it didn’t have its own products — it was just a foundry.

Lily Ottinger: We’ve been discussing the step-by-step development process, but I’d like to talk about Taiwan’s history and industrial policy strategies in more detail.

After the Nationalists arrived in Taiwan, the government implemented the “Land to the Tiller” 耕者有其田 redistribution program. That facilitated huge gains in agricultural productivity and economic growth, which enabled subsequent generations to go to school and pursue careers outside of subsistence agriculture.

But between land redistribution and the modern day, what specific policies were most crucial for enabling TSMC’s success in manufacturing? In the step-by-step process you mentioned, which steps do you consider most important?

Lin Hung-wen: For TSMC, I think the most important factors were talent, capital, and technology. Regarding talent, as I mentioned earlier, many people brought back technology from RCA training. Taiwan’s education system, especially in science and engineering, is quite strong and practical. People are very diligent and willing to work overtime. These are characteristics of Taiwanese engineers.

When Morris Chang came to Taiwan, he discovered these qualities and believed Taiwan could succeed in contract manufacturing. However, he didn’t think Taiwan would be successful in IC design, which is why he focused only on wafer foundry.

As for technology, we already had the RCA technology transfer. Another crucial factor was the development of the PC industry. Many talented individuals in Taiwan were involved in PC development. Taiwan became a significant producer of PCs, including desktops and laptops, with many companies also producing in mainland China. This created opportunities, as PCs required semiconductors. The PC industry became a crucial carrier for Taiwan’s semiconductor industry, providing an outlet for many chips used in PCs.

Regarding capital, Taiwan’s private sector resources have always been quite strong. There was a period when a lot of Taiwanese investment went to mainland China, so capital and talent flowed there. However, in recent years, capital has been flowing back to Taiwan, so funding has generally been abundant.

Arrian Ebrahimi: I have a question about the role of the government. You’ve previously discussed the different roles of the Legislative Yuan (the law-making branch of the Taiwanese government) and institutions like Academia Sinica. Can you explain the significance of these institutions to overseas readers?

Lin Hung-wen: The Taiwanese government did quite a lot in terms of industrial infrastructure. The Legislative Yuan’s crucial contribution was creating the Industrial Technology Research Institute (ITRI). The technology licensing from RCA was all done through ITRI. ITRI is a government-led research institution, but it’s not like many advanced research institutions in the US — Taiwan’s ITRI focuses more on commercializing technology.

ITRI was also involved in PC and communications technology, which were important areas, but semiconductors were perhaps their most significant contribution. The people we sent to RCA to learn came back and initially worked at ITRI. They started with 3-inch and 4-inch wafers (now we’re at 12-inch). A key point is that they established a commercial production line at ITRI. This wasn’t just in a lab — it was capable of mass production.

ITRI played an important role in Taiwan’s ability to seize opportunities in the global semiconductor vertical division of labor. We know that companies like UMC and TSMC all spun off from ITRI. So the predecessors of these companies, their teams, and their talent — ITRI played a crucial role in all of this.

Many countries around the world are now looking to learn from ITRI about how they did this back then. ITRI was a very important starting point. The science park that came later was another crucial element. The science park housed companies like UMC and TSMC — essentially providing a single window for the government, allowing businesses to achieve scale and accelerate production.

Government regulations also favored these companies in terms of exports.

Arrian Ebrahimi: You used the word “predecessor” very aptly, and I asked this question to emphasize that the Taiwanese government has been supporting its industry all along.

I remember Morris Chang complaining in an interview with Chris Miller that Chip War overemphasized the role of the Taiwanese government, saying they didn’t help him that much. But when you look at the talent and basic technology contributions from Academia Sinica and especially ITRI, the Taiwanese government’s support was really substantial.

Now, let’s start talking about some topics internal to TSMC, especially the different roles of their R&D department and engineering. Which aspect of the company do TSMC’s leaders value more — technological development or operational perspective? To ask a more specific question, would TSMC CEO C.C. Wei 魏哲家 be more excited about the R&D department’s contribution to the next generation of nanometer process invention, or about a 1% efficiency improvement announced by various factories? Which news would the president of TSMC be more eager to hear?

Lin Hung-wen: In my opinion, both are extremely important, but their importance varies at different times. In the early days, when TSMC’s technology wasn’t leading, they focused more on catching up technologically. When TSMC was founded, its technology lagged behind the world’s most advanced by about three to four generations. Now, of course, it far surpasses others.

TSMC’s technology leadership is crucial and ongoing. Today, we see TSMC as very powerful because its technology far exceeds that of its competitors. But you need to understand that TSMC’s technology was once behind. It wasn’t until around 2000 or 2001, at the 0.13 micron (130 nm) node, that they successfully developed their technology and started to show signs of leadership. Even then, they weren’t fully ahead.

It wasn’t until 2009, when Morris Chang returned as CEO, that they aggressively invested in 28nm technology and slowly surpassed others. Now, at 7nm, 5nm, and 3nm, they are leading. So from start to finish, technological leadership has always been extremely important.

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However, the efficiency improvement you mentioned is something TSMC has always paid close attention to. In addition to technological leadership, operational excellence is crucial in wafer foundry. Good yield, short cycle time, and low cost all directly affect profitability. TSMC places great emphasis on efficiency improvements. They work on this every day, and all their engineers work overtime for this purpose.

So both aspects you mentioned are very important. Mr. C.C Wei now needs to focus on both. Technology must continue to lead for TSMC to maintain its high profitability and create high value for customers. Without technological leadership, it wouldn’t work because others are always catching up.

However, there’s another aspect that’s even more important than these two: customer-service satisfaction. From beginning to end, TSMC has always prioritized serving customers and maintaining high satisfaction. It’s not just about leading in technology or improving efficiency.

For example, if you look at TSMC’s competitors like Intel and Samsung: Intel had leading technology early on, but the problem is that Intel has its own products. Samsung also has its own products. When you have leading technology, do you use it for customers or for yourself? Honestly, this creates a conflict. In Samsung’s case, when they have leading technology, they might use it for their own products first and not give it to customers because they want their own products to be good.

So technological leadership isn’t actually the most crucial thing for a company like TSMC. The most important thing for TSMC is customer service and satisfaction. If customer service is good, then technological leadership and efficiency improvements are all for the benefit of customers.

TSMC has over 30 important customers, and these customers often change their product plans. Sometimes they urgently need something and ask TSMC to quickly adjust production to deliver goods earlier. So TSMC has to change its factory production process from top to bottom. Therefore, efficiency improvements are ultimately about serving customers.

I know Mr. C.C. Wei now arrives at the company at 4:30 a.m. every morning. Why? To serve customers. He can call and talk with European and American customers at that time to understand their needs. Serving customers is the key to TSMC’s success.

Arrian Ebrahimi: Mr. Lin, you’re mainly saying that R&D and efficient factories have made different contributions at different historical moments. At some points, one aspect may have played a more important role, while at other times, both were equally important.

But may I ask, why are most of TSMC’s leaders trained in factory management rather than coming from the R&D department?

This relates to another question: since management and R&D play different roles — and the importance and strategic value of these two departments vary at different times — why did Morris Chang want his successors to take turns leading different departments? It seems that most of them initially came from engineering, but later Chang decided to let them experience every department. Can you explain a bit about this internal management approach?

Lin Hung-wen: Yes — you’re referring to when he had Mark Liu 劉德音, C.C. Wei, and Chiang Shang-yi 蔣尚義 rotate through R&D, business, and wafer-fab management. I think this was basically Morris Chang’s way of ensuring that a CEO would be very familiar with all three departments. So he had them rotate through different positions to gain different experiences.

It was also a way for Morris to test them. Being a CEO isn’t just about ability — it’s also about how one handles different challenges. How do they react when faced with tests? Do they panic or handle situations calmly? I think this was all part of the testing process.

He used this method to let each of them hone their experience and mature their ability to handle situations and face challenges. So I think it’s natural to have successors experience different departments. This is an important process.

Arrian Ebrahimi: Although Morris Chang is retired, it feels like his shadow is still there, right? I’ve heard that some people still call him “Grandpa.” Does this role actually exist, or is it just something people discuss?

Lin Hung-wen: I think calling him “Grandpa Chang” is quite natural because he’s in his 90s now, so he could be everyone’s grandpa. I believe he’s still a spiritual leader. Although he’s no longer working in an official capacity, I believe he still has a lot of influence. I’m sure he still provides guidance to younger generations, though he probably doesn’t initiate it. But I imagine many people still seek his advice.

For instance, I think C.C. Wei might consult him if there are important matters. So I believe his influence is still there. Even now, I know that many US congressmen, senators, and state governors who visit Taiwan always hope to meet with him and hear his opinions. I think this is quite natural.

Arrian Ebrahimi: That’s a kind of filial piety, which is good.

Formidable Competition and TSMC’s AI Future

Arrian Ebrahimi: Let’s discuss TSMC’s battle with Samsung more specifically. Your book highlights this quote from TSMC founder Morris Chang: “Samsung is a formidable but not admirable competitor” 三星可畏，但不是可敬的對手. 

What did Morris Chang mean by this?

Lin Hung-wen: Morris Chang said this in a very specific context. A reporter was asking him a question about TSMC’s competition with Samsung, and before the reporter could finish, Morris interrupted and said, “I didn’t say they were admirable, I said they were formidable.” He emphasized the word “formidable” several times in English.

Morris has never explained why Samsung is not admirable — he wasn’t emphasizing that part. But he did stress that they are formidable. In Morris Chang’s words, Samsung is like a 700-lb gorilla. Intel used to be a gorilla too, but they’re struggling now.

The key point is that Samsung became number one in many fields they’ve entered — whether it’s memory, phones, or TVs and displays in the past.

As for their competitive methods ... well, I understand this because I wrote a book about Samsung in 2012, describing them as a “financial crocodile.” I wrote that book because, at that time, Samsung was beating many Taiwanese industries badly. Taiwan’s position was miserable (辛苦), Taiwan’s flat-panel display industry was suffering, as were many other industries — all beaten by Samsung.

I understand why Morris Chang calls Samsung formidable. He’s never criticized Samsung, but he once shared an experience. Very early on, when he returned to Taiwan and was still at ITRI, before founding TSMC, he was invited by Lee Kun-hee, the previous chairman of Samsung (the father of Lee Jae-yong), to visit Korea. He went with Stan Shih 施振榮, the founder of Acer, and some others from ITRI. Lee Kun-hee showed them Samsung’s DRAM investments and essentially said, “Don’t invest yourselves — just come work for me.”

Morris, of course, didn’t give an answer. He felt he could do better by returning to Taiwan, and he wanted to start his own company, not work for Samsung. When he talks about this incident with Samsung and Lee Kun-hee, I think he’s clear that he believed he had the ability and ambition to build a company that could compete with Samsung.

Everyone knows that before returning to Taiwan, Morris was already the general manager of the semiconductor business at Texas Instruments. He was a very important leader in that company. So I think he had high expectations for himself. Of course, when he first founded TSMC, it was tough, but his goal was to build a very important company with great influence. This is my understanding of his comments about Samsung.

Arrian Ebrahimi: You recently published an article titled, “The AI ​​Era Drives Reorganization of the Semiconductor Landscape! TSMC chose to cooperate with SK Hynix, causing Samsung to lose everything.”

Could you please explain how AI chips are affecting the memory industry and Samsung’s leading role? What impact have they already had?

Lin Hung-wen: Thank you for this question. It’s a very good topic, especially as SEMICON is currently being held in Taiwan.

The impact of AI is very dramatic. Everyone sees NVIDIA taking off because of the AI era, with its stock price soaring, but there are many stories behind this.

This year’s Taiwan semiconductor conference is very interesting. Samsung and SK Hynix have sent their most important people to Taiwan. In the past, Samsung and Hynix would send some people to attend Taiwan’s semiconductor exhibition, but never their top executives. This time, they all came. Why? Well, here’s some other interesting information: in the first half of 2024, Korea’s semiconductor exports to Taiwan increased by more than double.

What does this mean? The AI server chips, as we know, have NVIDIA as the most important customer, and TSMC helps with the manufacturing. Because these AI chips need to be power-efficient, high-performance, and well-packaged, they now package logic ICs (SoC) and HBM together. That’s why Korea’s memory exports to Taiwan have grown so much — NVIDIA needs these AI server products, and they need to package GPUs and HBM together. We call this CoWoS (Chip on Wafer on Substrate) technology.

In the past, system memory and logic chips were separate and could be shipped separately. But now, because TSMC controls the most advanced process technologies and NVIDIA places all its orders with TSMC, the HBM memory must be packaged together.

This has produced a very significant effect. Yesterday, I heard executives from Samsung and Hynix speak. One Hynix executive said he had already been to Taiwan more than a dozen times this year. They need to constantly discuss with TSMC how to package HBM together through CoWoS packaging. There are many areas where they need to collaborate.

As for Samsung, because TSMC and Samsung are competitors in wafer foundry, TSMC tends to support Hynix and Micron, the other two memory manufacturers. Samsung, of course, tends to be excluded. This can’t be helped — it’s the reality of competition.

Taiwan’s Startup Ecosystem and TSMC for Biotech

Lily Ottinger: Mr. Lin also writes articles covering biotechnology. The Taiwanese government has launched a state-owned biotechnology company called TBMC, which sounds like the biotechnology version of TSMC.

I’d like to ask, what are the differences between foundry manufacturing for integrated circuits and foundry manufacturing for biotechnology? What technical challenges might TBMC face?

Lin Hung-wen: Thank you for reading my articles so carefully. You’re right, I did write about TBMC and TSMC. When TBMC was being funded, they explicitly stated they wanted to emulate TSMC’s model, including partnering with the American Resilience Group. Resilience holds a 27.5% stake, which is the same percentage that Philips held in TSMC initially. They hope to create a successful model for biotechnology manufacturing in Taiwan, similar to what TSMC did for semiconductors.

However, I believe there are significant differences between these two industries. Biotech production processes are less complex, with about 30 steps, while semiconductor manufacturing involves around 1,500 steps. This difference in production complexity results in different entry barriers. Biotech manufacturing is relatively easier to enter, while high-end semiconductor manufacturing, especially for advanced processes, is much more difficult, leading to fewer competitors.

The investment amounts also differ greatly. A 12-inch semiconductor fab now requires at least US$10 billion in investment, which is over NT$300 billion. Many biological factories, on the other hand, only require NT$1 to 3 billion in investment. This hundredfold difference in investment further highlights the higher entry barrier for semiconductors.

Lastly, the products and cost structures of these industries are very different. For example, the production cost of Viagra accounts for only 0.7% of its price. If you reduce manufacturing costs by half, it only decreases the overall cost by 0.35%, which has a minimal impact. In contrast, semiconductor costs account for a much larger portion of the final product price. When TSMC uses the best technology to produce NVIDIA’s GPUs, the cost reduction is substantial.

IC functionality is also very powerful and continuously improves while prices decrease due to Moore’s Law. A single smartphone chip now uses 16 billion transistors, which is more than twice the world’s population. Pharmaceuticals, however, tend to become more expensive over time because they save lives, and the demand for healthcare is inelastic.

These fundamental differences between the two industries mean that TBMC faces many challenges, and its future success is uncertain.

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Arrian Ebrahimi: Thank you, Mr. Lin. You mentioned the entry barriers, which leads me to my next topic — TSMC’s support for Taiwan’s startup ecosystem.

As someone who grew up in the western United States, I’ve seen my high school classmates jump from company to company, gaining industry knowledge until they create their own startups, which may fail, leading them to join large companies before trying again.

How would you compare Taiwan’s and America’s startup cultures, especially regarding job-hopping?

Lin Hung-wen: Taiwan’s situation is more similar to Silicon Valley. Job-hopping is very common in Taiwan because our industrial structure is dominated by small- and medium-sized enterprises (SMEs). Taiwan has 1.5 million SMEs, of which 1.4 million have fewer than 5 employees. This is quite different from Japan and Korea, where large conglomerates dominate and people often work for one company their entire lives.

The key difference is that Taiwan has a strong entrepreneurial spirit. In SMEs, people often have ownership stakes, making them more willing to work hard because they’re working for themselves. This entrepreneurial spirit is similar to Silicon Valley.

However, the form of entrepreneurship in Taiwan differs from Silicon Valley. Taiwan specializes in professional manufacturing within the global supply chain. Many Taiwanese companies do contract manufacturing for large American companies like Google, Amazon, and Facebook. Taiwan has seized opportunities in industrial specialization.

For 30 years, the most common news in Taiwan’s tech industry has been about “concept stocks” related to companies like Apple, Tesla, HP, and Dell. We focus on which Taiwanese companies are doing contract manufacturing or supplying components for these global brands. This structure of specialization continues today with companies like NVIDIA.

Arrian Ebrahimi: Mr. Lin, you’ve mentioned that Taiwan’s small companies are often supporting American big companies. Is it true that Taiwan’s startups are mostly in the chip industry, revolving around TSMC? Is their only goal to provide inputs and technology that TSMC needs?

Lin Hung-wen: That’s not entirely accurate. Taiwan doesn’t just have semiconductor companies. We have a significant PC industry with companies like Foxconn, Quanta, Compal, and others. We also have companies in various related fields, such as Largan Precision, which makes lenses for iPhone cameras, and many companies in networking and communications.

Taiwan also has a large industrial computer sector. While it’s true that many companies support TSMC, providing equipment, materials, and components that TSMC doesn’t develop in-house, this is just one part of Taiwan’s diverse tech ecosystem.

For example, with the rise of AI servers, heat dissipation has become crucial. Many Taiwanese companies are developing solutions for this challenge. So, Taiwan’s startups cover a wide range of technologies and industries, not just semiconductors.

International Isolation: The Chip on Taiwan’s Shoulder

Arrian Ebrahimi: I’d like to ask a potentially sensitive question: which is more important, TSMC or the Taiwanese government?

Lin Hung-wen: That’s a profound question that kept me up last night. It touches on a crucial point for Taiwanese people. Before 2018, when the US-China conflict intensified, the world didn’t pay much attention to Taiwan. Many Western observers were focused on China’s rapid growth over the past 30 years.

Both the Taiwanese government and TSMC are extremely important. The Taiwanese government represents our democratic system, chosen by the people’s votes. It embodies the direction we’ve chosen for ourselves after years of struggle.

TSMC is also crucial. It’s unprecedented for a Taiwanese company to reach such technological heights and play such a vital role in global chip production. For a small island of 23 million people to produce a company that influences the entire world and ranks among the top 10 globally by market value is a great source of pride for Taiwan.

Arrian Ebrahimi: This year, TSMC has accepted invitations from many countries to expand production abroad. It seems that the United States, Germany, and Japan are all grateful for TSMC’s cooperation. How should Taiwan seize this opportunity to enhance its international status?

Lin Hung-wen: I often give lectures in Japan, and I always say that I’m able to publish books thanks to TSMC’s success. Because TSMC is so successful, everyone pays attention to it, and the books I write sell well because everyone wants to read about it. But more importantly, I think Taiwan as a whole should capitalize on TSMC’s success.

People are thinking about how TSMC is now investing in the US, Japan, and Germany. In the past, many Taiwanese businesses invested in mainland China or Southeast Asia. We called it “westward expansion” or “southward expansion.” But those expansions were aimed at lowering costs, taking advantage of better production conditions in those places to earn excess profits.

Now, investing in the US, Japan, and Germany is fundamentally different because the costs in these places are much higher than in Taiwan. In the US, it’s several times higher. TSMC employees sent to Arizona have their salaries doubled, and they’re still paid less than American workers. It’s the same in Germany.

Now, Taiwan isn’t just trying to make money by lowering costs — we’re trying to create value, which is much more difficult. I think Taiwan needs to handle this well. If TSMC can successfully produce in the US, Japan, and Germany, if these factories can operate smoothly, it will involve different corporate cultures. As I mentioned, Taiwanese people are more dedicated to work and willing to work overtime, but American and German employees probably aren’t as willing to work overtime. Even Japanese people aren’t as willing to work overtime now.

There are also language barriers. To be honest, our English isn’t that good. It’s not our mother tongue, so when we go to Japan or the US, there are challenges in communicating with local employees. We see all these challenges.

But regardless, I think the Taiwanese government should use this opportunity to help more people understand Taiwan and its situation.

Taiwan still doesn’t have international status. We can’t even join the United Nations. We don’t have official diplomatic ties with most countries, and our representatives often have to meet foreign officials unofficially to avoid protests from China.

When we participate in the Olympics, we’re called “Chinese Taipei.” We can’t even use the name “Taiwan” without facing suppression.

Taiwan has been on the periphery of the world, just trying to survive.

I think this is a feeling many Taiwanese have in their hearts. It’s hard for us to assert anything because as soon as we do, fighter jets fly over and missiles are pointed at us. Even big brothers like the US tell us what to do. Taiwan is basically a little brother, and our international status is very low, almost non-existent.

But we can only expand our influence through economics and technology. We can make more investments and seize important opportunities in the global industrial division of labor. This is what everyone in Taiwan is working on now.

Nicholas Welch: Do average Taiwanese citizens actually use the term “Silicon Shield” (矽盾)?

Lin Hung-wen: Most Taiwanese people agree that TSMC is indeed a “nation-guarding sacred mountain” 護國神山. TSMC has reached unprecedented heights for a Taiwanese company, leading in technology and playing a crucial role in global chip production. With a market value among the world’s top 10, it’s a source of great pride for Taiwan, a country of just 23 million people, to have produced a company with such global influence.

The term “Silicon Shield” wasn’t invented by Taiwanese people — it originated from foreign media. Since the intensification of US-China tensions in 2018, this concept has gained significance. People realize that TSMC’s production of chips for major global companies in Taiwan means that war cannot occur casually here. A conflict would disrupt the entire global electronics industry, affecting not only economic but also national security, as chips are crucial for missiles, fighter jets, drones, and other security applications.

While average Taiwanese may not discuss the term “Silicon Shield” explicitly, the sentiment behind it is widely understood. Taiwan harbors no hostility towards anyone. We lack international status, so we strive to contribute positively to everyone’s success through our efforts. Our chips enable companies like Apple and NVIDIA to sell more products globally, helping their businesses grow and flourish.

Taiwan primarily focuses on contract manufacturing, with few of our own products. Our industry’s core is built on mutually beneficial partnerships. Taiwan isn’t aggressive; even our fighter jets are primarily for deterrence. In conclusion, while the average person may not deeply contemplate the “Silicon Shield” concept, using semiconductors for self-protection is a common perspective currently.

A Taiwanese View of Geopolitics

Arrian Ebrahimi: Mr. Lin, you’ve just explained the Taiwanese mindset. Now, I’d like to compare the perspectives of different nationalities on international relations, particularly Taiwanese and Americans.

After spending a summer in Taiwan, my observation is that average Taiwanese people seem to care mostly about foreign trends that directly impact Taiwan’s internal development.

In contrast, Americans tend to perceive certain countries as threats to national security, engaging in unfair trade practices, or exhibiting undemocratic behavior. It appears Taiwanese people focus primarily on their island, while Americans consider the entire world order. What do you think of this view, and how does Taiwan’s worldview influence its international strategy?

Lin Hung-wen: Your perception is understandable and natural. I largely agree with your observations, but it’s important to understand the underlying reasons. As I mentioned earlier, Taiwan has been continually suppressed and lacks international status. We have diplomatic relations with only a handful of small countries in Central and South America and Africa.

Taiwan has been on the world’s periphery, while the US is at its center. This fundamental difference in position shapes our respective worldviews.

In Taiwan, our primary concern has been survival. We focus on how others’ actions might impact us and how we can address the resulting challenges. The US, being at the world’s center, naturally considers global issues and seeks to maintain world order, sometimes intervening when situations don’t align with its interests.

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Your perspective is valid because we come from different backgrounds, cultures, and living conditions. Israelis would likely offer a different viewpoint, as would the Japanese, despite our shared Asian heritage and strong work ethic.

Taiwan has transitioned from being a completely overlooked peripheral nation to becoming the center of the global semiconductor industry, which has surprised many. I often use the analogy of stagehands in theater — Taiwan used to be like the black-clad stagehands who move props unseen, working behind the scenes while companies like Apple and NVIDIA took center stage. Now, these “stagehands” have become crucial players.

Taiwan’s fundamental role hasn’t changed; we’re still primarily engaged in contract manufacturing and production within the global supply chain. What has changed is the critical importance of our role. While global trends have shifted, Taiwan continues to perform its core functions, albeit now in a more pivotal capacity.

Lin’s Background and Vintage Tech Journalism 

Arrian Ebrahimi: Let’s close with a discussion of your background. How did your career as a journalist impact the way you wrote the book?

Lin Hung-wen: This is my 31st year covering the semiconductor industry as a news reporter in Taiwan. I started reporting on semiconductors in 1993, and TSMC was established in 1987, so I began following this company shortly after its founding, writing daily news about it.

I’ve also written extensively about the semiconductor industry outside of Taiwan. Over the past three decades, I’ve traveled all over — to the United States, Japan, and Europe. I even went to Scotland three times, back when it was known as Europe’s “Silicon Glen.”

My book was published in Taiwan in July 2023 and in Japan in April 2024. I’ve already been to Japan four times since the Japanese publication, as they’re very keen to understand Taiwan’s success story. I’ve had many exchanges with Japanese friends.

The Korean version will be published by the end of this year, and the English version will be out in the first half of next year. I hope to let everyone know that Taiwan’s development experience is very worthy of reference.

Of course, Taiwan has also had failed cases, and I don’t shy away from discussing these. For instance, Morris Chang was very successful at TSMC, but his first ventures were quite disastrous, and he later had to close down those operations. As a frontline reporter, I don’t conceal facts, but I strive to present Taiwan’s development experience fairly and objectively.

Arrian Ebrahimi: Thank you, Mr. Lin. You mentioned earlier that you’ll be releasing Korean, Japanese, and English versions of the book. What new aspects will you cover in the English version? How will you tailor the content for new audiences?

Lin Hung-wen: For the English version, I’ve added more current content. I’ve added a lot of new developments, including how AI is driving changes in the semiconductor industry, and the integration of SOC (System on Chip) and HBM (High Bandwidth Memory). These developments have had a significant impact on the industry.

I’ll also include more topics that English readers in America and Europe are interested in. For instance, TSMC is now starting to build a plant in Germany, so I’ll include some European developments as well.

Arrian Ebrahimi: I’m still curious about you personally. You mentioned that you started as a journalist around the same time TSMC was founded, not long after. Since you studied at National Chiao Tung University 國立交通大學 for your undergraduate degree, journalism probably wasn’t the most likely career path for you, right? I’ve lived in Hsinchu, and most people there dream of becoming engineers. Why did you want to become a journalist?

Lin Hung-wen: National Chiao Tung University should be familiar to many friends in Taiwan and mainland China. Essentially, Taiwan’s Chiao Tung University was re-established in Taiwan after the separation of the two sides of the strait, originating from the Chiao Tung University in mainland China.

Chiao Tung University is one of the top institutions for science and engineering. After studying there for four years, I realized I might not be suited to be an engineer. So after graduation, I became a journalist. I chose journalism because I enjoyed writing.

After becoming a journalist, I found it quite suitable for me. On one hand, I enjoy writing, and it’s a great pleasure for me. I often get to talk with many people and meet industry leaders. Standing on the shoulders of giants, I can see far.

Another important factor is that with my science and engineering background, I found it easier to cover this industry compared to journalism graduates who might face more obstacles. As I mentioned earlier, through my news coverage, I’ve gained many insights. Covering an industry isn’t just about writing industry news; I’ve seen a lot of competition between countries, economic and industrial development, and now geopolitical developments.

Through this industry, I’ve gained knowledge in many other areas. This exploration has been very interesting to me. Every day, I wake up with a pile of things to understand, analyze, and explore. I find this to be a very happy journey of exploration in my life.

Arrian Ebrahimi: You mentioned that you’ve been a journalist for over 30 years, and this book is based on your interviews and reports over these years. Before discussing the process of writing this book, could you first tell us how you entered the chip industry and became a specialized journalist in this field? Then, how did you summarize your 30 years of experience into one book?

Lin Hung-wen: When I started covering the semiconductor industry, it was my supervisor at the newspaper who assigned me to it because there was a vacancy. They thought that with my background at Chiao Tung University, I could quickly take on the role.

As you know, Taiwan’s semiconductor development started in Hsinchu Science Park. At that time, I would go to Hsinchu every day, visiting different companies and chatting with people.

Every day, I would compile tables, listing the products, investment amounts, and other details of many Taiwanese companies. I was so young at the newspaper that they called me “Table Brother” — the brother who was good at making tables.

In this learning process, I began to find the chip industry very interesting. Now, everyone knows how important chips are. They’re in your phone, your computer, or anything connected to the internet. But in the early days, it wasn’t necessarily like that. When I first started reporting, it was mostly about consumer ICs, like those found in toys.

Young people might not know this, but we used to have musical greeting cards for Christmas. When you opened them, there would be a music IC that would play a tune. Taiwan used to make many of these audio ICs. Then, as telephones (not mobile phones, but desktop phones) started to develop, Taiwan slowly moved from these small consumer ICs into PCs.

Now we’ve entered the AI era with GPUs. I feel that over these 30 years, I’ve grown alongside the semiconductor industry. I started knowing nothing and gradually came into contact with many aspects of the industry’s development.

Many Taiwanese companies have gone through this process. As I mentioned, there have been several generations of different ICs. Taiwan has been slowly capturing these opportunities. Not all companies in Taiwan have successfully transformed, but some have. For example, MediaTek initially made ICs for PC-related optical drives, but when smartphones took off, they seized the opportunity.

The English version of Lin Hung-wen’s book, (working English title — Chip Island: How TSMC and Taiwan Triumph) will be published in early 2025. We highly recommend you check it out!

Lin’s song of choice:

The entire project of ChinaTalk, at the heart of it, is to help raise the quality of conversation and help inform policies that would most likely avert WWIII. I’m worried Trump would do a far worse job avoiding the big one than Harris. Here’s a piece on the topic I co-authored with Peter Harrell, formerly of the Biden NSC and NEC, with some riffs on export controls and acquisition reform below.

Former President Trump has made his promise to “prevent World War III” central to his campaign to return to the White House. But Trump’s foreign policy agenda is far more likely to drag the U.S. into catastrophic conflict than to prevent it.

Trump’s promise understandably resonates with voters. While President Biden did end the war in Afghanistan and keep U.S. troops out of direct involvement in conflicts in Ukraine and the Middle East, the world is less peaceful today than it was four years ago. In 2022, Russia launched the largest war in Europe since World War II. War in the Middle East makes daily headlines. China has increased the operational tempo of military exercises that threaten Asian allies. 

However, one-off dealmaking with dictators from a position of weakness is a losing strategy to keep the peace between great powers.

Putin and Ukraine

For starters, let’s take Trump’s promise to negotiate an end to Russia’s war with Ukraine. What is Trump’s “secret plan”? Reporting indicates that he would pressure Ukraine to exchange land for peace by cutting off military support. This approach will fail: Even if Trump cuts off military assistance to Ukraine and Ukraine is forced to cede territory to prevent immediate military collapse, Putin’s ambitions will not be sated. His goal is to assert Russian dominance across Eastern Europe — which includes all of Ukraine, the Baltic countries and Poland. Degrading Ukraine’s military in return for a temporary ceasefire only for Putin to renew conflict against a weakened Ukraine months later is disastrous dealmaking.

Trump’s approach to Ukraine would be particularly dangerous given how Trump wants to treat NATO allies in Putin’s crosshairs. He recently said that he would give Russia an explicit pass to “do whatever the hell they want” if NATO members do not “pay [their] bills.” If Putin succeeds in taking parts of Ukraine, this language will embolden him to turn his war machine towards America’s treaty allies in Eastern Europe — which would either drag the U.S. into war, or see the U.S. acknowledge its alliance commitments are worthless. This will seed more conflict, not deter it. To avoid direct conflict with Russia, the U.S. should help Ukraine further advance its military capabilities to force Russia to acknowledge that its maximalist aims are impossible to achieve.

Xi and Taiwan

Trump is also risking war where the stakes may be even higher: East Asia. In a recent interview with Bloomberg Trump responded to a question about America’s commitment to Taiwan by stating: “Taiwan should pay us for defense. You know, we’re no different than an insurance company. Taiwan doesn’t give us anything. Taiwan is 9,500 miles away. It’s 68 miles away from China.” He sees Taiwan not as a democratic ally and bulwark against Chinese regional hegemony, but rather just another country who has wronged the US economically by taking “100% of our chip business.” 

This all amounts to Trump turning America’s eighty-year commitment to East Asian security into a short-term lease renewal negotiation. What Trump plans to do isn’t savvy dealmaking, it’s diplomatic arson.

Mainstream Republican national security thinkers like Elbridge Colby and Mike Gallagher have advocated committing to Taiwan’s defense for principled (preserve a fellow democracy), geopolitical (counter Chinese expansion) and economic (ensure a stable global chip supply) reasons. The credible threat of U.S. military support for allies in Asia today helps dissuade Xi Jinping from invading Taiwan. This of course can swing too far — like Former Secretary of State Mike Pompeo’s assertion that Taiwan should declare independence. Under Trump, both China and America’s key allies in the region would feel far less confident that the US would actually help them resist a Chinese attack.

This loss of faith in America’s commitment to the region risks dramatic consequences. It will encourage Chinese adventurism against Taiwan, raising the odds of a war that ultimately drags the U.S. in. Even though U.S. allies including Japan and Korea have increased their defense spending in recent years, none of them can realistically deter Chinese aggression with conventional weapons without America’s backing. Pulling away from Japan and Korea would prompt them to either lean more towards Beijing or consider going nuclear, injecting more instability in a region where conflict could be truly catastrophic in terms of lives lost and global economic impact.

Preventing WWIII is not a one-off real estate deal, it’s a repeated game which requires signaling across decades to both allies and adversaries that the US is serious about preserving the peace. Since 1945, America succeeded in investing in our military might, alliances and global credibility to deter great power war. Today, America makes up a quarter of global GDP, while China comprises almost 20%. Together with its treaty allies, the US totals over 60%, while China’s closest thing to an ally, Russia, adds just one 1% to its ledger. Preserving this relative balance in national power will allow the US to keep the peace and further its interests far into the 21st century. Risking global realignment to juice up a few acquisitions deals plays right into Xi and Putin’s hands.

For all Trump’s bluster about preventing conflict, his actual policies, like the isolationism of the 1930s, would actually increase the chances of a war far deadlier than even today’s conflict in Ukraine. President Reagan worked with NATO and East Asian allies to show “peace through strength”. Trump’s strategy of treating America’s closest global friends like delinquent renters risks war through weakness.

Back to Jordan sole-authorship. A few more riffs on ChinaTalk-adjacent topics:

Export Controls

AI could really, really matter for long term national power. AI consists of algorithms, data, and compute. Algorithms and data are probably too hackable to drive relative long term national competitiveness. So, we’re left with computing power, which after o1 is even more likely to matter in pushing the frontier from an innovation and diffusion perspective.

What will Trump do with the Biden administration export controls on chips and semiconductor manufacturing equipment? Probably something like what happened to ZTE.

Step one: Trump’s bureaucracy finds a Chinese company flagrantly breaking US law whose continued use of American technology runs directly counter to US interests.

Step two: Trump saved ZTE because he gets a call from Xi.

I wouldn’t be shocked if he just lifted the controls month one as a goodwill gesture. If someone talks him into having a little spine on this issue, he’ll see a huge opportunity for a big deal as Xi would happily give Trump oceans of soybean orders and zoos-full of pandas for a few EUV machines.

There is no domestic political economy constituency for semiconductor export controls. The only political force today keeping them in place are national security professionals who rightly recognize their long term importance. An America First semiconductor policy, particularly in a market defined by scarcity, should aim to make sure all backordered are filled American fabs and datacenters before opening up an export market which would raise prices for US companies to acquire goods from a 3.5tn company and SME firms who have been ripping the past few years. Instead, lobbyists will have far more success than they deserve framing the controls as some deep state conspiracy meant to skew a trade deficit.

Acquisitions Reform

Rule #1 of avoiding wars is having a military scary enough that no one wants to try it. It’s clear as day that the US needs a dramatic overhaul to how it buys capabilities in order to deter wars in Asia.

If I’ve learned anything over the dozens of shows we’ve recorded on defense policy over the past decade, it’s that absent sustained commitment from a president and secretary of defense, we don’t see the reform at the scale we need.

Trump picked his Secretaries of Defense because they had cool nicknames and looked the part. With wars in Ukraine and the Middle East, it will be hard enough for the next Secretary to preserve bandwidth to push the system to change without having to deal with monthly crises in civ-mil relations. I have zero faith in a Trump administration giving this issue the sustained attention it needs to make the progress the US needs to most effectively deter war.

EVs

Maybe less important for the future of humanity, but this one is just weird. Why is he so into BYD making cars in Michigan?

Not that there’s a single swing voter in the ChinaTalk audience … but thank you for indulging me. Back to our regularly scheduled programming later this week.

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Why did the Soviet Union collapse? Which lessons from Cold War history are relevant for China’s future?

To discuss the successes, failures, and strategies of Soviet leaders, ChinaTalk interviewed Yakov Feygin. Feygin is the author of Building a Ruin: The Cold War Politics of Soviet Economic Reform, which examines how various Soviet leaders, institutions, and economists attempted to boost Soviet growth and national power. 

Co-hosting today is Jon Sine of the Cogitations substack.

Listen now on Spotify or Apple Podcasts.

We discuss:

• The strengths and limitations of the Stalinist economic model,

• Khrushchev’s shift to “peaceful competition” with capitalism,

• Alternative policy paths that could have saved the Soviet Union,

• How technological optimism shaped Soviet reform efforts, inspiring the CCP in the process,

• Parallels between the institutions of the Soviet Union and those of contemporary China,

• The battle between political scientists and historians when analyzing the political economy of authoritarian states.

Post-Stalin Policy Struggles

Jonathon Sine: This is an excellent book, Yakov. Let’s dive right in. What’s the main thesis of your book, and how does it relate to the world today?

Yakov Feygin: The main thesis explores Soviet domestic politics and the evolving concept of a socialist project in the post-Stalin era, which is intrinsically tied to the definition of a socialist economy. To understand Soviet politics, one must consider the Soviet Union’s larger global project as an anti-capitalist state. After Stalin’s death, various factions and new ideas emerged, embedding themselves in specific institutions and attempting to reinvent the system.

This reinvention was a rolling political process that continually redefined socialism while ultimately destabilizing the institutional underpinnings that made it coherent. The Stalinist planned economy, despite its intellectual veneers, was built on specific assumptions about how the world, capitalism, and international relations were supposed to work. In a dark sense, it functioned for its intended purpose. However, as society became more complex and the capitalist system evolved — no longer defined by imperialism as Lenin saw it, but by a hegemonic system with American superpower— the old system ceased to be effective.

The question then became, what comes next? This story has resonances with the Russian and post-Soviet political systems to this day and may offer lessons for other comparative systems.

Jordan Schneider: That’s an interesting closer, Yakov. While reading this book, I kept drawing parallels with Xi’s China, Deng’s China, and Mao’s China. Let’s start with Stalin — what was the Stalinist model, and why did it make sense for the USSR at the time?

Yakov Feygin: The Stalinist model shares similarities with other modernization efforts. The core of this model is a macroeconomic principle — rapid modernization requires substantial fixed capital installation, necessitating a high rate of investment. The identity S=I means the savings rate must increase significantly.

Most developing countries have raised their savings rates considerably at the start of their industrialization. The short to medium-term gains from this approach can offset the reduced household consumption, as productivity gains push the economy closer to its production possibility frontier. Many emerging or developing countries undergo this process, which partly explains why the Soviet Union was popular as a model in the 1960s and 1970s.

However, not all countries commit genocide against their peasant classes — that’s a particular feature of Stalinism. To understand why this happened, we must consider the Stalinist worldview.

The 1917 revolution — enabled by fissures in the imperial system — remained within Russia’s borders.

Consequently, the Soviet Union had to modernize rapidly outside the rules of standard profitability to avoid foreign capital influence. This approach — intimately tied to geopolitics in Stalin’s mind — aimed to prepare the country as a base for a longer-term revolutionary process.

This system was designed to achieve high industrial modernity and rapid, large-scale outputs in critical sectors. These weren’t directly military tools but built a framework for independence from capitalism and power to operate in the imperial world, directed towards a larger long-term goal.

Jonathon Sine: It’s interesting how people often forget the high growth rates under Stalin. Even later, economists predicted the Soviet Union would overtake America within a decade or two. The party served as a mobilizational element underpinning this forced industrialization drive.

Could you describe the key institutions that Stalin put in place for a planned economy, especially since China today doesn’t have a planned economy in the same sense as the Soviet Union?

Yakov Feygin: That’s an excellent question. The Stalinist planned economy was chaotic, as detailed in works by scholars like Paul Gregory. The plans weren’t really plans — they were more like throwing ideas at a dartboard to see what stuck. There was a veneer of planning in the institutions, but they didn’t accomplish much.

The first five-year plan relied entirely on inertia and trial and error, often enforced through extreme violence and repression, especially of the peasantry.

Starting from a low base with a large population surplus allowed this approach to work initially. However, by the third five-year plan, there was a growing realization that some logic or reason was necessary, and the very high investment rates needed to be moderated. Steps were taken to professionalize the planning bodies, though this process was interrupted by the onset of World War II in 1939.

Through the mid to late 1930s, there was an increasing understanding that simply throwing resources at problems wasn’t sustainable — the rate of investment needed some rhyme or reason, or returns would be inefficient. Even Stalin began to discuss the negative consequences of “storming” practices. However, a deep disjuncture remained between what some would call Stalinist romanticism or revolutionary romanticism and the need for more planned expertise. This tension was never fully resolved.

Khrushchev’s Hurdle and Socialism in One Country

Jonathon Sine: There’s an interesting quote from Stalin where he says, “The planned economy is not our wish; [but] it is unavoidable or else everything will collapse.”

He goes on to say that the main task of planning is to ensure the independence of the socialist economy from capitalist encirclement. It sounds like he didn’t necessarily intend to have the sort of planned economy that ultimately developed. Could you discuss this and then lead us into how Khrushchev upended that model?

Yakov Feygin: That quote indeed speaks volumes. The practices of Soviet planning were largely improvised and closely tied to Stalin’s political priorities and the attempt to understand what “socialism in one country” meant. There’s a misunderstanding that this concept simply equates to Great Russian chauvinism or Soviet capital-I Imperialism, but it was still very much a revolutionary project. The question was how to have a revolution when the global environment wasn’t as friendly as it had been in 1917.

As Stalin consolidated power and built his framework, many choices were stark. With the assumptions about battling world capitalism and foreign markets collapsing during the Great Depression, improvisation became necessary. For instance, there were initial plans for the Soviet Union to be a major grain exporter, starving its peasantry to accumulate capital. However, it ended up relying mostly on gold exports because the grain markets collapsed.

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The quote you mentioned comes from a very interesting meeting where Stalin was addressing economists who were arguing about how to write a textbook for Soviet colleges. The main point of contention was the role of planning in the Soviet economy — whether it had abolished market relations entirely, or if the Marxian law of value still applied in some areas. Stalin’s response was pragmatic, acknowledging that the planned system was improvised rather than designed from the top down. He noted that while state industry was no longer affected by the law of value, there were still gaps, particularly in agricultural markets that weren’t fully socialized.

Moving on to Khrushchev, his era needs to be understood in its political context. Khrushchev — and Stalin’s other successors — were dealing with several challenges including,

1. A disorienting domestic situation with bottled-up social pressure that had been accumulating since the late Stalin period.

2. Expectations for change, as the population felt that it had sacrificed a lot, and already proven its loyalty through war. People felt that it was time to start seeing results from that hardship.

3. The Cold War started playing out differently than Stalin had expected, with the consolidation of American hegemony and the creation of an open trade bloc. France and Britain stayed on-side much more than Stalin expected.

These factors combined to require a new narrative for Soviet legitimacy.

The debate between Khrushchev and Georgy Malenkov in 1955 is a crucial moment in Soviet history.

Malenkov was Stalin’s official successor — he was the Premier of the USSR for a year. He appeared to be a typical Stalinist, but crucially, his wife was one of the USSR’s leading economist-engineers specializing in electrification infrastructure. Such projects have high initial capital requirements and low subsequent costs — a dynamic that forced Malenkov to think about the problem of investment allocation between consumer and industrial goods.

After Stalin’s death, Malenkov advocated for reducing the rate of investment in heavy industry. He gave speeches suggesting compromises with the United States and Europe.

These positions made him deeply unpopular — Malenkov’s argument about the contradiction between consumption and investment implies that the Soviet Union would inevitably be threatened militarily by the capitalist world. That culminates in Khrushchev’s triumph.

Khrushchev emerged as a true believer, who thought the Soviet planned system could simultaneously increase production and consumption without facing trade-offs. He believed that the system’s problems stemmed from the population’s increasing alienation and the disconnect between the grassroots and the party leadership.

Under Khrushchev’s leadership, the USSR doubled down on fixed capital investment and made management by cadres more efficient, resulting in significant growth.

Simultaneously, Khrushchev dismantled some of the central structures that had previously managed the system. This combination of factors creates an almost perfect storm in Soviet economic policy.

Jonathon Sine: Let’s focus on that point where Stalin dies and Khrushchev doubles down on investment. This gets to the crux of the argument in your book, which is the issue of distribution. The party-state continuously put resources towards heavy industry under Stalin. Production ministries funneled more and more money towards machinery and goods that could be used for war. Khrushchev effectively doubled down on this approach, though not so much in a war mobilization sense. 

What is this distributional issue, and why is it the fundamental problem of the Soviet economy?

Yakov Feygin: The distributional issue in the Soviet economy is rooted in the ideas of the economist Michał Kalecki, who explored the sources of profits under capitalism even before Keynes.

Kalecki argued that profits come from final consumption, which in turn comes from capitalist investment directed towards creating stock. This creates a cycle where consumption, primarily from wage-earning households, is paid for by capitalist wages, which come from capitalist profits that depend on wages.

In graphical terms, while savings might equal investment (S=I), investment leads to savings (I → S). That is, future investment in consumable goods leads to profits, which lead to savings in a capitalist society.

Ironically, Kalecki, a dedicated communist, found himself disillusioned when he returned to communist Poland because the government wasn’t managing the consumption-investment trade-off as he thought it should through planning.

In a socialist economy, Kalecki found a similar problem — you can invest in many things, but returns come when someone else consumes that thing in a way that generates money. If you keep investing in things that aren’t generating returns, you have to write down the capital stock.

This is essentially what started to happen by the mid-1960s in the Soviet Union. There was significant investment in goods that weren’t fulfilling consumer demand, and consumers themselves didn’t have enough budget to spend on the basket of goods they wanted. This resulted in a cash overhang and capital assets that had to be written down.

The agents in my book — party officials, academics, and para-academics — were trying to deal with this disjuncture but kept hitting the wall. The fundamental issue was the misallocation of resources between consumer goods and heavy industry, creating an economy that produced goods people didn’t want or couldn’t afford, while simultaneously underinvesting in areas that could have improved living standards and economic efficiency.

Jonathon Sine: As I read the book, I was trying to understand your discussion of distributional issues. They sound like top-down party-state dictates about where money should flow. Are these entirely separate from issues like price reform and the other topics you extensively explore in the book? You provide an intellectual history of reformers discussing different approaches. However, it seems you’re saying they’re operating within a prescribed Overton window that precludes what you consider the fundamental distributional issues. How are all these elements related?

Yakov Feygin: Some reformers do address these distributional issues. Even those discussing price reform understand it as a way to tackle resource allocation. The interesting question is how they navigate within their prescribed space, which changes over time. From the vantage point of the Kosygin reforms (1964-1969), it might have seemed there was considerable room for change. Hindsight is 20/20, but in 1965, it wasn’t clear how limited the options were.

This is fascinating because it demonstrates that even in the Soviet Union, there were legislative politics within the party-state. More importantly, it shows that Soviet leaders were aware of trade-offs and alternative paths, even within officially sanctioned discourse.

The question then becomes — why weren’t these alternatives pursued? That’s the million-dollar question of the book.

I believe it’s a highly contingent issue. Until the late 1960s or early 1970s, there was a window of possibility for more extensive reforms. The fact that they weren’t implemented is itself a political decision.

Jonathon Sine: Could you discuss some metrics used to gauge the economy’s deteriorating performance? How did people within the system assess this, and how would they have judged the success or failure of certain reforms?

Yakov Feygin: The assessment varied depending on whom you asked within the system. Khrushchev’s approach differed significantly from Stalin’s. Khrushchev believed Soviet economies could be directly compared to capitalist economies, including quality of life measures. He expected the Soviet Union to catch up with the United States in terms of living standards and individual goods usage and output.

This socioeconomic competition was seen as a way to avoid a third world war while demonstrating the superiority of the planned economy model. Khrushchev explicitly benchmarked against the United States, which hadn’t been done under Stalinism. Some who resisted comparing the two systems faced repression of their work and sometimes themselves.

As Khrushchev’s coalition began to crumble in the lead-up to his replacement in October 1964, there was a growing realization that his grand promises of achievement through pure mobilization, without relying on expertise, weren’t materializing. This realization helped create a political opening.

Additionally, the Soviet Union faced a political crisis in the mid-1960s, exemplified by the Novocherkassk massacre of striking workers. The promised prosperity wasn’t materializing. Due to a form of classical inflation not immediately reflected in price increases, more capital had to be written down. This eventually necessitated price hikes, particularly on deficit goods like meat and milk — items that were supposed to be in abundance, even surpassing capitalist economies.

This situation created a clear and widely recognized political crisis.

Jordan Schneider: I’m intrigued by this moment when Khrushchev suddenly decides to compete with the US on their own terms, forcing everyone to take an uncomfortable, critical look at the Soviet system. 

On one hand, you have economists realizing they need to learn about American methods of measuring productivity to make comparisons. A few years later, it becomes evident that the trend lines aren’t converging but potentially diverging further than during the more coherent vision of the 1940s and 1950s under Stalin’s industrialization.

Yakov, was this Khrushchev’s only move? Was it inevitable that the Soviet Union would start building its legitimacy in comparison to the US? It seems like they could have promoted socialism’s merits without relying on such a materialist definition of success.

Yakov Feygin: That’s an excellent question. To frame it more clearly, it’s not just about a materialist definition of success. It’s about how to achieve the Soviet Union’s ideological goal, which was internationalist and global, with a Soviet state that had become a normal industrialized society in many ways.

Khrushchev’s answer was to move away from Stalin’s “inevitability of war” doctrine. The post-World War II generation of Soviet leaders wanted to avoid another war if possible, as detailed in books by Odd Arne Westad, Sergey Radchenko, and Vladislav Zubok.

Instead, the strategy became demonstrating the Soviet system’s power to develop a state and attract more countries to their bloc, even if those countries weren’t necessarily Leninist. Initially, there were efforts to reach out to European social democracies and the emerging “Third World.”

The idea was that if the Soviet Union could succeed, a world socialist system would emerge that everyone would want to join, creating a crisis within the capitalist system.

This approach, they hoped, would lead to a less drastic way of building global socialism. Khrushchev’s generation were true believers but wanted to avoid war and the harsh Stalinist approach. Their middle course was to build an appealing socialist modernity as an alternative to the capitalist economy. However, they struggled to figure out how to achieve this in practice.

Surpass England, Catch up to America 超英赶美

Jordan Schneider: Let’s take a brief detour. Jon, do you want to discuss how Mao adopted this “catch up and surpass” 超英赶美 concept from Khrushchev? It became part of Mao’s legitimacy package after the dramatic failure of the Great Leap Forward.

Yakov Feygin: That’s right — when Khrushchev declared the USSR would overcome the US at some point (“догнать и перегнать Америку”), the immediate Chinese reaction was to set their target as Great Britain, which I found quite amusing.

Jonathon Sine: Yakov, you mentioned that explicitly naming the United States as a competitor was forbidden under Stalin. When you read Chinese documents today, Xi Jinping and the Communist Party leadership very rarely make explicit comparisons with the US. They often speak vaguely about “encirclement” nowadays, but rarely talk about the US directly.

Yet there’s an interesting parallel — Khrushchev took the Soviet system from war mobilization under Stalin to a “peaceful systems competition,” a phrase he used explicitly. Now, Xi Jinping explicitly uses the phrase “systems competition” to define the current situation. Even though he is vague about what exactly the other system is, everyone knows what he’s referring to. The contemporary relevance really stands out to me.

Yakov Feygin: That’s fascinating. In China up until recently, and in the Soviet Union under Stalin, they never claimed to be as developed as the West. They would acknowledge being behind because they started later. They always compared themselves to pre-1917 imperial Russia.

Even when they did compare themselves to the United States after Khrushchev, they would say, “We’re not as developed, but that’s because the US has 200 years of exploitative development behind them. We’re showing what can be done in 20-30 years.”

Paying subscribers get access to the second half of the interview. We cover:

• Surprising parallels between Khrushchev's Soviet Union and Xi Jinping's China in economic competition and party discipline

• The hidden role of migrant labor in Soviet, modern Russian, and Chinese economies

• Distributional challenges in China's economy today mirroring those of the late Soviet Union

• How China's potential "middle-income trap" compares to the Soviet experience

Read more

This summer, we teamed up with the Federation of American Scientists, and Chris Miller to hold a crowdsourced policy competition. We asked for ideas on how to deal with the problem of China potentially controlling the supply of foundational chips (also called “trailing-edge” semiconductors).

To recap from the original post:

The U.S. has implemented export controls to try to stop China from getting a technological edge in advanced cutting-edge chips. But as I explained in a recent post, export controls have no hope of stopping China from building simpler types of chips — called “legacy chips”, “foundational chips”, or “trailing-edge chips”. These legacy chips are used for a huge number of things in our economy, from cars to smartphones to fighter jets.

And China is gearing up to build these legacy chips in absolutely staggering numbers. Check out this post by Jimmy Goodrich of the University of California Institute on Global Conflict and Cooperation and this post by the Rhodium Group for details. Basically, China is applying the same approach to legacy chips that it has successfully applied to batteries and EVs — massive scale and enormous subsidies.

This basically presents at least three potential dangers to the U.S:

1. First, China could deprive non-Chinese chipmakers of huge amounts of revenue by outcompeting them in the legacy chip market, making it harder for them to sustain their leading-edge chip businesses. Already investors are pressuring U.S. companies to avoid competing with China by canceling their semiconductor fabs.

2. Second, if China controls the legacy chip market, it could cut off our supply of chips in a war.

3. Third, Chinese security services might be able to put back doors into Chinese-made chips, using them to spy or even to attack U.S. infrastructure.

In other words, there are plenty of national security reasons for keeping Chinese-made legacy chips out of our supply chain. But how can we do it? It’s a tough problem.

First of all, as things stand, we don’t even know which products contain Chinese-made chips. If a Vietnamese-made phone or a Mexican-made PC includes Chinese-made legacy chips, the U.S. currently has no way of knowing.

Second, even if we did know, it might be politically unpopular to ban those chips. A lot of U.S. companies want to get chips as cheaply as possible, especially for new AI applications. We’d need some way to make chip restrictions politically palatable.

And finally, lots of Chinese legacy chips — and the products that contain them — aren’t going to be sold in the U.S. or our allied countries. How do we make sure non-Chinese chipmakers stay competitive in markets like Vietnam, Brazil, Indonesia, etc.?

We asked contestants to give us their ideas for addressing this problem and picked four winners. They each received $500 and will be working with FAS to continue refining their proposals.

The following write up is by , whose Substack consistently delivers excellent coverage on classic ChinaTalk themes like industrial policy and technology, interspersed with a little of my commentary. Overall, I was really impressed by the quality of submissions we received and am excited to run more of these in the future!

These winners are listed in alphabetical order by first author.

Winner #1: Weaponizing EDA and using targeted industrial policy

By: Zenghao (Mike) Gao, Charles Yockey, and Felipe Chertouh

Gao et al. point out an important weapon in the U.S.’ arsenal of export controls that hasn’t been used yet: Electronic design automation software (EDA). We hear a lot about where the production of chips happens, and some about where the production of chipmaking tools happens, but not very much about where the software used to design chips comes from. In fact, almost all of it comes from America, with a little bit coming from U.S.-allied countries like Japan and Australia. And this software doesn’t just design chips in the first place; it’s also what chipmakers use to correct problems with the fabrication process as they arise.

Gao et al. suggest that EDA could be “weaponized” by mandating that it run on U.S.-based cloud servers:

In hosting all EDA in a U.S.-based cloud—for instance, a data center located in Las Vegas or another secure location—America can force China to purchase computing power needed for simulation and verification for each chip they design. This policy would mandate Chinese reliance on U.S. cloud services to run electromagnetic simulations and validate chip design. Under this proposal, China would only be able to use the latest EDA software if such software is hosted in the US, allowing American firms to a) cut off access at will, rendering their technology useless and b) gain insight into homegrown Chinese designs built on this platform. Since such software would be hosted on a U.S.-based cloud, Chinese users would not download the software which would greatly mitigate the risk of foreign hacking or intellectual property theft. While the United States cannot control chips outright considering Chinese production, it can control where they are integrated. A machine without instructions is inoperable, and the United States can make China’s semiconductors obsolete.

This idea wouldn’t stop China from making foundational chips — Chinese companies could still use American EDA software. But it might give the U.S. one more piece of leverage to hold over China in case hostilities broke out — and another way to try to slow down the Chinese chip industry in general, if that becomes necessary.

On the defensive side of things, Gao et al. also call for the U.S. to form a trade bloc with Latin American nations to ensure safe supply of rare earths and NAND memory. They also have some additional ideas, such as forcing Chinese companies to release the source code for the firmware and other software for their chips. [Jordan: Enjoyed this one in particular for its creativity and density of ideas. Some of these to me seem more feasible than others but a ton of food for thought in this doc].

Full paper here: https://www.mikegao.net/public/chips-proposal.pdf

Winner #2: Working with other countries on industrial policies and tariffs

By: Andrew Lee

Lee sees the creation of a non-China foundational chip supply chain as the central problem to be solved. He envisions a program modeled after Lend-Lease — the system by which the U.S. delivered arms to the UK in World War 2, and by which it’s currently delivering arms to Ukraine. The program would license U.S. technology cheaply to friends and allies in exchange for cooperation in creating completely China-free chip supply chains:

The United States Federal Government could negotiate with the “Big Three” EDA firms to purchase transferable licenses to their EDA software. The U.S. could then “lend-lease” licenses to major semiconductor producers in partner countries such as Singapore, Malaysia, Vietnam, the Philippines, or even Latin America. The U.S. could license this software on the condition that products produced by such companies will be made available at discounted prices to the American market, and that companies should disavow further investment from or cooperation with Chinese entities. Partner companies in the Indo-Pacific could further agree to share any further research results produced using American IP, making further advancements available to American companies in the global market.

(Side note: It occurs to me that this might dovetail well with Gao et al.’s proposal for putting EDA on a U.S.-based cloud.)

[Jordan—very ambitious indeed! I feel like this would need some dramatic catalyst for a government to be aggressive enough to be able to push this over lobbyist objections. It also feels like there’s a vaccine analogy here.]

Lee also suggests coordinating with friendly countries in order to put tariffs on Chinese foundational chips. Recall that one of the big challenges here is that we don’t currently know which products contain Chinese-made chips, so we have no idea how many we’re importing. Lee’s solutions to this problem are 1) an international database of which products contain Chinese chips, and 2) reporting requirements for importers, enforced by random audits:

How would tariffs on final goods containing Chinese chips be enforced? The policy issue of sanctioning and restricting an intermediate product is, unfortunately, not new. It is well known that Chinese precursor chemicals, often imported into Mexico, form much of the raw inputs for deadly fentanyl that is driving the United States opioid epidemic. Taking a cue from this example, we further suggest the creation of an internationally-maintained database of products manufactured using Chinese semi- conductors. As inspiration, the National Institutes of Health / NCATS maintains the Global Substance Registration System, a database that categorizes chemical substances, along with their commonly used names, regulatory classification, and relationships with other related chemicals. Such a database could be administered by the Commerce Department’s Bureau of Industry and Security, allowing the personnel who enforce the tariffs to also collect all relevant information in one place.

Companies importing products into the U.S. would be required to register the make and model of all Chinese chips used in each of their products, so that the United States and participating countries could to impose corresponding sanctions. Products imported to the U.S. would be subject to random checks involving disassembly in Commerce Department workshops, with failure to report a sanctioned semiconductor component making a company subject to additional tariffs and fines. Manual disassembly is painstaking and difficult, but regular, randomized inspections of imported products are the only way to truly verify their content.

Finally, he suggests efforts to protect U.S. critical infrastructure by 1) identifying Chinese hardware within the infrastructure, and 2) improving cyber defense capabilities.

You can read Lee’s full policy proposal here.

Winner #3: An “Open Foundational” design standard and buyers’ group

By: Alex Newkirk

Newkirk also sees Chinese disruption of the chip supply chain — along with possible backdoors and other security issues — as the main problem to be solved. He proposes two ideas. First, Newkirk would create an “Open Foundational” design standard for legacy chips, in order to ensure that China doesn’t get proprietary control over any type of computer chip. The chip companies who joined up to help create this standard would form a sort of cartel that could act to create a China-free manufacturing supply chain. Newkirk also suggests an international buyers’ group to create a strategic reserve of chips. This would serve the dual purpose of building up a chip stockpile and providing demand to encourage the adoption of the Open Foundational design standard.

He writes:

To secure supply of foundational chips, I recommend development of an “Open Foundational” design standard and buyers’ group…[T]he U.S. federal government…would establish a strategic microelectronics reserve to ensure access to critical chips. This reserve would be initially stocked through a multi-year advanced market commitment for Open Foundational devices. 

The foundational standard would be a voluntary consortium of microelectronics users in critical sectors, inspired by the Open Compute Project. It would ideally contain firms from critical sectors such as enterprise computation, automotive manufacturing, communications infrastructure, and others. The group would initially convene to identify a set of foundational devices which are necessary to their sectors…and identify design features which…could be standardized.  From these, a design standard could be developed…Steering committee firms will…be asked to commit some fraction of future designs to use Open Foundational microelectronics…[T]he buyers’ group would represent demand of sufficient scale to motivate investment, and that supply would be more robust to disruptions once mature. 

Government should adopt the standard where feasible, to build greater resilience in critical systems if nothing else. This should be accompanied by a diplomatic effort for key democratic allies to partner in adopting these design practices in their defense applications. The foundational standard should seek geographic diversity in suppliers…The foundational standard also allows firms to de-risk their suppliers as well as themselves. They can stipulate in contracts that their tier one suppliers need to adopt Foundational Standards in their designs…

Having developed the open standard through the buyers’ group, congress should authorize the purchase through the Department of Commerce a strategic microelectronics reserve (SMR). Inspired by the strategic petroleum reserve, the microelectronics reserve is intended to provide the backstop foundational hardware for key government and societal operations during a crisis…The foundational standard provides the product specification, and the advanced government commitment provides demand…This demand should be steady, with regular annual purchases at scale, ensuring producers consistent demand through the ebbs and flows of a volatile industry….The SMR could also serve as a backstop when supply fluctuations do occur, as with the strategic petroleum reserve…This would ensure government access to core computational capabilities in a disaster or conflict scenario. But as all systems are built on a foundation, the SMR should begin with Foundational Standard devices. 

It’s notable how Newkirk’s ideas support each other. The international chip design standard he would create would make it easier to build up a stockpile of reliable chips. And building up the stockpile would create the guaranteed demand that would encourage adoption of the design standard. That’s a very clever synergy. And as an added bonus, the consortium of companies that create and run the foundational chip standard would also be able to help carry out friend-shoring and de-risking, instead of leaving all the planning to the government.

You can read Newkirk’s full policy proposal here.

Winner #4: A legal plan for blocking Chinese chips

By: Ben Noon

Noon focuses on the difficult problem of identifying and restricting Chinese-made foundational chips contained within U.S. imports from other countries. He vividly lays out the dangers of allowing China to control the foundational chip industry:

The list of examples of Chinese economic coercion is long…Washington faces less blatant coercion compared to its allies…This may be because Beijing does not believe it yet maintains necessary leverage over Washington…China’s growing position in the legacy semiconductor market could change that. How would Beijing’s behavior change if sales of the Ford F-150 relied on Beijing’s willingness to sell its semiconductors?

Noon argues that export controls have little or no hope of containing the Chinese foundational chip industry. And he argues that CHIPS Act-type subsidies alone are insufficient to maintain a U.S. foothold in the market because Chinese subsidies will always be larger. Thus, he concludes, protectionism is necessary in order to keep China from dominating the global market for foundational chips.

The question, of course, is how to restrict imports of Chinese foundational chips contained in other products. Noon goes through and explains a list of various legal and administrative vehicles that the U.S. government has at its disposal to accomplish that task:

• Tariffs

• Investigation of and restrictions on imported goods linked to unfair trade practices

• Federal government purchasing restrictions

• The Office of Information and Communications Technology and

  Services (ICTS) at the Commerce Department, a recently created agency with broad authority to protect critical infrastructure from dangerous imported products

Noon believes that the most important legal justification for tariffs on Chinese chips is Section 301 of the Trade Act of 1974, which both Trump and Biden have used extensively in order to put tariffs on Chinese products.

The really tough question, of course, is enforcement. Noon recommends “a major expansion of supply chain analytical capabilities across the U.S. government,” but doesn’t say much more about that. He also suggests enlisting private companies as whistleblowers.

You can read Noon’s full policy proposal here.

All of these proposals are quite interesting, and we’ve already contacted the authors to talk about following up on their development. I was very impressed by the diversity of ideas here — different contributors targeted different aspects of the problem, which helped them come at the issue from a variety of angles. I continue to be impressed by the creativity and technical acumen of Noahpinion readers. Expect more policy contests at some point in the future!

Welcome back to part 3 of our interview with Yasheng Huang 黄亚生, the author of The Rise and Fall of the EAST: How Exams, Autocracy, Stability, and Technology Brought China Success and Why They Might Lead to Its Decline.

In this final installment, we discuss…

• The steelman case for why China needed a Xi,

• What sets Xi apart from his predecessors,

• Succession challenges and the importance of term limits in authoritarian states,

• Why engagement with China failed to produce political liberalization,

• How the US could have better leveraged economic relations with China,

• Creative approaches to human rights advocacy in China.

Co-hosting today is Ilari Mäkelä of the On Humans podcast. Here’s our first interview if you missed it, and here’s the first half of the second installment.

Succession Crises and The Death of Deng’s Legacy

Ilari Mäkelä: Let’s examine China today then. In some ways, Xi Jinping seems like a natural progression from Hu Jintao, who made China more statist, with Xi taking it even further. However, one could argue that this represents a more dramatic shift, to the extent that China today is no longer in the reform era but has entered a completely new phase. How abrupt was this change? In what sense was it new rather than just an intensification of previous trends? Where are we now?

Yasheng Huang: Looking at the three leadership generations — 1989, 2002, and 2012 — we can analyze them as such:

The 1989 generation changed the rules of the game, essentially reversing the political reforms initiated by Zhao Ziyang. 

The 2002 generation, led by Hu Jintao, changed the game but not the rules of the game. Within the existing structure, they strengthened government control and cracked down on social media, (that began under Hu Jintao, by the way, not under Xi Jinping). They also went quite far in controlling NGOs due to concerns about a potential Velvet Revolution.

Xi Jinping changed the rules of the game again, this time reversing Deng Xiaoping’s reforms. This represents a more significant change compared to the 1989 generation’s rule changes or the 2002 generation’s game changes. In modern Chinese politics, one doesn’t typically challenge Deng Xiaoping’s legacy.

Ilari Mäkelä: I agree. Could you be more specific about how Xi Jinping overturned Deng Xiaoping’s rules?

Yasheng Huang: Xi Jinping has made several significant departures from the Deng Xiaoping era. These include eliminating term limits, removing mandatory retirement, shifting away from economic growth as the Chinese Communist Party’s primary objective, and moving away from cooperation with the West in foreign policy.

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These are substantial changes. The 1989 generation altered Zhao Ziyang’s implementations of power separation between party and state, transparency reforms, and media protections.

However, they didn’t touch the core principles established by Deng Xiaoping, such as term limits and mandatory retirement. Both Jiang Zemin and Hu Jintao stepped down after their terms ended.

To challenge what I call the “third rail” of Chinese politics required something extraordinary. While the direction was the same, the departure was more abrupt and sharper. It was directionally consistent but represented a more significant shift.

Ilari Mäkelä: How positive or negative is this change? There’s an easy way to view it negatively as more autocratic. However, let me present a case for Xi’s era after 1989:

• The Shanghai model of development led to crony capitalism and massive corruption.

•  The rural-urban gap resulted in significant economic inequality.

• The purely GDP-driven model of legitimacy led to environmental degradation.

Xi came to power promising to tackle corruption and later focused on rural poverty. Branko Milanović, an inequality expert I recently interviewed, convinced me that there’s been a noticeable rise in the bottom 20% of global incomes, primarily due to China’s poor becoming richer over the past decade.

Additionally, Xi is more focused on issues like clean energy. During my time in China, I conducted a small field project on a ten-year fishing ban implemented by the government on the Yangtze River —  something unlikely to have occurred a decade earlier.

That’s my case for the need for a Xi Jinping-like figure. What’s your response?

Yasheng Huang: Milanović is correct that inequality declined under Xi Jinping, and the bottom 20% saw improved income growth relative to GDP growth. In the revised version of my 2008 book, I present statistics supporting this claim. However, the question remains — does achieving these goals necessitate eliminating term limits and mandatory age retirement? Does it require such a high degree of centralization?

It may require some revision of the economic growth objective, moving away from blind pursuit of GDP growth numbers in favor of income growth for poor and rural people. I agree with that. But consider two scenarios and choose between them:

1. Achieving these goals with higher GDP growth

2. Achieving these goals with lower GDP growth

Any rational person would choose the scenario where both higher income growth for rural Chinese and higher GDP growth for the country are accomplished. This was China in the 1980s, where each increment of GDP growth significantly improved rural income. The 1980s outperformed the subsequent three generations by a wide margin.

Xi Jinping did improve upon the previous two generations of leadership, but it’s important to note that under Jiang Zemin, income improvement substantially slowed.

Xi improved from a low base, which is commendable, but it was achieved largely through transfers from urban to rural people, not through fiscal stimulus.

This transfer approach can work for a period, but with the current challenges to GDP growth, it will become increasingly difficult to rely on pure transfers. During Zhao Ziyang’s era, extensive transfers weren’t necessary because rural income was growing rapidly on its own.

I would argue that tackling corruption and environmental issues doesn’t necessarily require political centralization. There are other ways to address these problems. The fact that they’ve been fighting corruption for eleven years suggests either that there’s too much to work on, or that their methods are ineffective.

Perhaps it’s time to rethink this approach to tackling corruption.

I would argue that transparency, government disclosure, increased media scrutiny, and more legislative oversight could be more effective in combating corruption than the current purge approach.

Ilari Mäkelä: Essentially, they’re doing the opposite of what you would recommend. Is that correct?

Yasheng Huang: In terms of methods, yes. I support the objectives of environmental improvement, government cleanliness, and improving the bottom 20% of incomes. I also agree that everything shouldn’t revolve around GDP growth. However, I disagree with their methods.

Regarding GDP growth, a cleaner approach could be adopted rather than the current investment-heavy method. This would involve allowing small-scale entrepreneurship, low-tech ventures, and more service sector activities. Unfortunately, these are not the activities encouraged by the current government.

Ilari Mäkelä: To summarize the historical development from the early reform era until today — you have the liberalization in the 1980s, followed by a period of confusion until Xi, and now a clear move towards less openness and freedom. You seem very pessimistic about China’s future trajectory in general, and the economy in particular under the current model. Could you elaborate on that perspective?

Yasheng Huang: Let me be clear, China has many positive fundamentals, including entrepreneurship, human capital, and globalization — not just in terms of factories but also in human capital. China has progressed further in this regard than countries like Japan and many others.

However, I am indeed pessimistic about China under the current policy model. This model overemphasizes the supply side and underemphasizes the demand side. It places too much focus on industrial policy, high-tech development, and technological aspects while undervaluing grassroots entrepreneurship and bottom-up growth models.

I’m also concerned about the constricted political and ideological environment, as well as the geopolitical tensions between China and the West. It’s worth noting that the two generations of leadership after 1989 globalized the Chinese economy and research and educational enterprise, which greatly benefited Chinese society and economy. Now, we’re moving away from that approach.

In my book, I discuss the curious combination of worrying about a Soviet-style collapse while prescribing a Brezhnev-style solution. This is profoundly puzzling to me. To avoid a Soviet-style collapse, China needs to move away from the Brezhnev model of stagnation, political control, and economic control.

What saved China — and by extension, the Chinese Communist Party — was entrepreneurship, private sector development, economic dynamism, and globalization. I find it perplexing that there’s now an argument for saving China from the private sector and globalization when these factors were delivering political benefits to the system.

As Deng Xiaoping famously said, “When you open the window, some flies will come in, but so will fresh air (打开窗户，新鲜空气和苍蝇就会一起进来).”

If you focus solely on the flies without considering the fresh air, you’re not striking the right balance. These are the reasons for my lack of optimism.

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Ilari Mäkelä: You make an interesting point in your book about this problem — the Chinese Communist Party genuinely believes that much of the growth has been due to their successes, thinking that with more power, they can do an even better job. But what you observe is that China’s significant growth was actually enabled by a hidden pluralism — through globalization, academic cooperation, the influence of Hong Kong and Taiwan, and various other factors. China had many more pluralistic conditions than its outwardly authoritarian appearance suggested, and these conditions are now being eroded.

Yasheng Huang: I’m constantly struck by the fact that Xi Jinping and many Western observers agree perfectly on this point. They all believe that it was the infrastructure, the power of the government to leverage data and financial resources, and the government’s organizational capabilities that delivered economic growth. They see eye to eye on this matter.

This view was pervasive among policy elites in China even before Xi Jinping, though Xi has taken it further by targeting the private sector as well. The fundamental problem with this view is that when China fully embraced it, Chinese productivity collapsed, even as GDP continued to grow rapidly for a while.

But who cares about productivity when it’s not a number you see on TV every day? We have Western analysts who just look at GDP, and anyone familiar with the Chinese economy would first question the veracity of the GDP numbers. This is not just a problem in China; it’s a problem in the West as well. Whenever I see someone being interviewed on prominent forums saying, “I know China because I have met with Chinese leaders,” I begin to worry about their perspective.

Jordan Schneider: Another problem with changing the constitution is that it introduces new succession problems.

Yasheng Huang: Indeed. Autocracies can build, at least Chinese autocracy can. However, autocracies suffer from succession issues. One inevitable problem faced by many autocracies is how to transfer power from one leader to another.

Imperial autocracies didn’t have to deal with this problem because power was passed to the son. In China, it was even more restrictive — only the oldest son was the legitimate heir. The rules of the game were very clear.

Autocracies often fail because the rules of succession are unclear. Gordon Tullock famously noted a difference between some autocracies and those he observed in Latin America (Brazil, Argentina) in the 1970s. There, the autocracies didn’t translate into bigger political problems because they had term limits.

China successfully transferred power three times in a row under term limits — to Jiang Zemin, then to Hu Jintao, and then to Xi Jinping. Before China instituted term limits, it was chaotic, as seen with Lin Biao 林彪, Liu Shaoqi 刘少奇, and Hua Guofeng 华国锋.

In my book, I call this “Tullock’s Curse.” China was suffering from this curse before term limits. We thought the problem was resolved when China instituted term limits. The worry now is that Tullock’s Curse may return because China abolished term limits in 2018 through constitutional revision.

We don’t know what will happen in the future, but if I were to bet on one sure source of instability and chaos, it would be this. Economically speaking, they are also adding complexity to the future. The political instability and uncertainty will likely stem from this change, though the exact timing is unpredictable as it’s largely driven by the health of individual leaders.

Jordan Schneider: People often overlook that during the post-Mao era and Deng Xiaoping’s rise to power, China initiated its only war. Joseph Torigian argues in his book that Deng’s decision to start the war with Vietnam, despite opposition from the Politburo and PLA, was a way for him to solidify his control over the system. This demonstrated that he was in charge and could command others to follow his orders.

While Deng had his reasons, one of them was partially to establish himself as the top leader in the new era. I’m curious about your reflections on the invasion of Vietnam and to what extent messy transitions lead to international adventurism.

Yasheng Huang: That could be correct. However, the current discussion about Xi is quite different. Deng was a contender at that time, not yet the supreme leader. Now, the speculation is about whether Xi will attack Taiwan.

Jordan Schneider: Exactly. The scenario I find more concerning is not Xi waking up one day and deciding to do something, but rather enough chaos in the immediate aftermath of Xi that there’s a domestic political reason to become more aggressive than in the past.

Yasheng Huang: I see. That’s interesting — a contending successor considering such a move.

Ilari Mäkelä: Or we might get material for an entertaining film like “The Death of Stalin,” but called “The Death of Xi."

Jordan Schneider: Let’s discuss the challenges of succession when you can’t rely on the firstborn and you’ve removed legitimacy. What new complications arise even if the leader tries to choose a successor?

Yasheng Huang: There are numerous complications. One is the lack of trust. In that type of system, with no clear rules, as soon as you designate someone, you also empower them. The reason why there’s no clear succession plan is that leaders always prioritize control and power. Essentially, when making a succession decision, you’re also deciding to weaken your own power. You’ll never feel entirely comfortable with that decision.

The outcome depends on the individuals involved, but there are structural tensions built into the system. From the potential successor’s perspective, once nominated, what do you do? It’s never a comfortable position because the leader doesn’t fully trust you and will watch your every move. On the other hand, if you don’t act, that may be used against you.

Two likely scenarios often occur, and they’re correlated. First, you make multiple mistakes. Because of these mistakes, you delay the decision until the last moment, as Mao did. Mao appointed Hua Guofeng almost on his deathbed. At that point, your mental and physical capacities are diminished, increasing the probability of making the wrong decision.

Mao made the wrong choice because he thought Hua would continue his policies, but he didn’t anticipate that Hua would remove the Gang of Four. It turned out that Hua was a Maoist, but he disliked the Gang of Four. By removing them, Hua inadvertently empowered Deng Xiaoping.

These theoretical dynamics play out and almost guarantee an uncertain, chaotic process. We can’t predict the next specific scenario due to the many unknown individual characters involved. However, we can be certain about the lack of stability and certainty.

Chinese Nationalism and Rethinking Terms for Engagement

Jordan Schneider: Let’s conclude with U.S.-China relations. You point to an almost original sin of U.S.-China engagement from post-Tiananmen through the mid-2010s, where the engagement strategy wasn’t really a strategy but more of a tautology. To have an engagement strategy, you also need a disengagement strategy, which the American political system never really embraced in the 1990s, 2000s, and early 2010s. Could you elaborate on what could have been?

Yasheng Huang: The engagement strategy was originally justified on political grounds rather than just economic ones. If you read the speeches by Bush and Clinton, who laid out this strategy, they justified it in political terms. It was also in the aftermath of the East Asian Tigers transforming into democracies. They imagined a similar trajectory for China 20 years in the future.

Once the strategy was in place, focusing solely on the U.S. side, they let it run on its own. It became all about economics, even though the original justification was political. The implementation focused on financial access to the Chinese market, investments, and companies like GM. It was all about economic and business interests. They never really leveraged the U.S. economic presence in China to accomplish the original political justifications they laid out.

A smarter political strategy would have been to deepen information industry engagement with China rather than simply focusing on products and finance. When examining the history of U.S. interactions with China regarding market access, it was all about companies like GM, GE, Goldman Sachs, or Morgan Stanley. When Google was leaving China or the New York Times was banned, the U.S. didn’t say much. The U.S. didn’t try to negotiate on behalf of Facebook or other social media companies to maintain their presence in China.

Some might argue that would have been worse, but in China’s closed environment, having the diversity of Google and Facebook would have been a plus in terms of political and ideological space compared to just having Baidu and Tencent. The U.S. never really advocated on behalf of the information industry. They advocated for Wall Street and big manufacturing companies through Treasury Secretaries and Commerce Secretaries.

This was an unthinking strategy. They never linked economic activities with potential political spillovers. I would argue that the information industry would have provided more political spillovers than finance and big manufacturers.

Another critique is that it may be inherent in the nature of the process. It’s difficult to disengage, it’s easier to engage more. Sometimes democracies must recognize that there are decisions they don’t control. Once the cat is out of the bag, it’s out. This is an asymmetrical game between China and the U.S.

China can choose to engage and disengage, but we cannot really disengage once engaged. Given that’s the case, we need to think about better ways to engage.

Jordan Schneider: You make an interesting argument that America was either shooting for the moon rhetorically, talking about how China needed to be an open liberal democracy, or just saying it would happen in time. Instead of focusing on making China into a Jeffersonian democracy, they could have aimed for something like Taiwan in the 1970s or Korea in the 1980s, which, while not entirely liberalized, would have been significant progress.

You also make interesting arguments about reciprocation in academia. The analogy of MIT only doing exchanges with Saudi universities on the condition that female Saudis are equally eligible demonstrates the type of things the U.S. could have done.

Deng understood deeply that he needed Western investment, education systems, and management practices to upgrade China’s ecosystem. Perhaps if the cards had been played differently in the early 1990s, we wouldn’t have reached the situation where, by the mid-2000s, Chinese leaders wouldn’t just shrug their shoulders at Western concerns.

Yasheng Huang: It’s puzzling. They aimed for the moon and then settled for nothing. Couldn’t there have been something in between? The U.S. administration also handled this poorly. Because the original justification was political, they felt the need to show concern for human rights. They would meet with the Dalai Lama and some Chinese dissidents. These symbolic measures alienated many Chinese.

Instead, they could have emphasized smaller steps. For example, convening conferences on the rule of law and commercial rules of the game. They could have insisted on reciprocity — “You have Confucius Institutes at our universities; we should have our own institutes at your universities, operating with the same freedoms as Confucius Institutes in America.”

They could have pushed for equal treatment of American newspapers in China, just as People’s Daily is available in America. They could have insisted on more balanced exchanges of scholars and students. We didn’t do any of that.

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Ilari Mäkelä: When it comes to issues like Xinjiang, the U.S. has done more than just meet with high-profile Uyghurs. They’ve tried various approaches, including targeted sanctions. Do you think the U.S. could do better on issues like Xinjiang? Or is there fundamentally only so much you can do from the other side of the world on such a massive issue?

Yasheng Huang: We’re returning to the meta-questions about engagement and disengagement. The Xinjiang issue now involves punishment and disengagement. My earlier point was about whether there was a way to make economic engagement produce more intellectual and ideological space compared to how we actually conducted ourselves. Xinjiang represents China moving further down a politically restrictive path, and China today is even more politically controlled than before. Now there’s a legitimate question: can we still engage with a country that has gone as far down this political path as China has? It’s a tougher issue now than before, and I don’t have a clear view on whether we should still engage or stop engagement altogether.

Jordan Schneider: US presidents meet with the Dalai Lama and fight for factories and financial access rather than for the rights of the New York Times in China, and the reason is American domestic politics. Tibet was a big issue in American politics in the early and mid-1990s, and money matters in Washington. The strategy you’re laying out, which bets on creating a Chinese intelligentsia that would yield dividends 10, 20, 30 years down the road, would have required a pretty enlightened viewpoint.

One of the concerning things about the future is the possibility of losing an entire generation of liberal or open-minded thinkers in China. It’s striking that figures like Zhang Yiming 张一鸣 and Jack Ma were pretty open to the West and had spent time here. You can find old WeChat posts from CEOs of the new generation of tech companies talking about wanting a more liberal order. The worry is that when you lean too far away, you lose any of that influence. I’m curious about your reflections on that or the fact that the vast majority of critiques in China come from the left rather than the right, arguing that the party isn’t doing enough for poor people.

Yasheng Huang: It’s a bit like the U.S. in the sense that right-wingers can say all sorts of things without facing consequences. In China, the rhetorical primacy lies with the nationalists. I consider myself a leftist, so I won’t dignify those people with that label. I believe many of them are more similar to right-wing nationalists in the West than to ideological leftist-leaning people in the West.

Leftists actually care about people — unemployment, inequality, the gains of the people. I don’t really see that in the rhetoric of many of these “little pinkies” (young Chinese nationalists). They care about the nation, nationhood, historical glory. These are classic right-wing nationalistic rhetoric focusing on abstract power. They care about bragging power, which fundamentally aligns with the ruling ideology, which I classify more on the right-wing nationalistic side than on the leftist side.

It’s really just this pursuit of power, the pursuit of abstraction, the pursuit of nationhood. For example, unifying Taiwan —  what does that give Chinese people in terms of improving their lives? I would argue very little. But somehow, unification of the country under the same political system is seen as enormously glorious.

That view is really a right-wing, nationalistic view. My temperament and way of thinking are fundamentally different from that. I care more about tangible things. Maybe I’m small-minded, but I don’t think about the nation in those abstract terms.

Jordan Schneider: One of your interesting arguments is that Washington should focus less on ethnic minorities in China and more on the persecuted CCP cadres and what they could gain from relative liberalization. Can you elaborate on that case?

Yasheng Huang: Many CCP elites have actually suffered terribly in the end. Look at Liu Shaoqi, or the four million people purged under Xi Jinping on corruption charges.

It’s interesting that quite a few of these people could trash the West and the United States all the time, but during moments of personal crisis, they actually turn to the West. The police chief of Chongqing, when being chased by Bo Xilai, defected to the U.S. consulate in Chengdu. He didn’t go to the Iranian, Russian, or North Korean embassies. He came to the U.S.

Elites park their assets in the United States and send their children to U.S. universities and high schools.

I think the West should craft an argument that appeals to CCP elites, rather than crafting an argument designed to appeal only to Tibetans and Uyghurs.

The simple fact is that in China, the Cultural Revolution didn’t single out Tibetans or Uyghurs.

I’m of Han ethnicity, and my parents suffered as much as Tibetans or Uyghurs did. So why do we insist on this ethnic line, which will antagonize 95% of Han Chinese, rather than relying on arguments that Han Chinese can also relate to?

We should think of an argument that plays more in that direction. I’m not sure exactly what that argument would be — it’s above my pay grade, as I’ve never been asked to create a policy brief for the Secretary of State. But in terms of general philosophy, we should craft an argument that appeals to more people than just ethnic minorities.

Jordan Schneider: I love this. You have a few great examples, like Liu Shaoqi waving a copy of the constitution and protesting that he had rights during a struggle session. Or Gu Kailai 谷开来, Bo Xilai’s wife — who ordered a hit and then ended up getting a commuted death sentence — writing in the late 1990s that the American judicial system is so slow.

It’s always, as you say, that democracy and the rule of law are like insurance policies. When you don’t know whether you’re going to have an accident, the smart thing to do is take out insurance.

Yasheng Huang: Why not make that argument to your Chinese counterparts? The Jesus analogy you mentioned is apt — it’s like becoming Catholic on your deathbed.

Jordan Schneider: You spent the past year in Washington. What are your thoughts and reflections? What surprised you most about the way the city views China?

Yasheng Huang: Living here, I’ve come to appreciate the deep and increasing complexity of geopolitical challenges and tensions more than I would just working in academia. These are complex issues. While I can be critical in my book, I do want to acknowledge that there are people in this city who want to do good. We do hear about sometimes over-the-top rhetoric against China, but there are also people who want to strike the right balance. They need ideas, advice, and inspiration.

I believe there’s room for some sort of reset and rethinking about China, hopefully in a more imaginative way. I don’t have high hopes, regardless of who wins the November election. If Trump wins, then forget about it. But on the Democratic side, I do hear more views acknowledging that while China poses geopolitical challenges to the U.S., there are areas where we have to collaborate with China. That’s just reality. Striking the right balance is an art rather than a science, but it would be beneficial if the Washington political establishment could be more open-ended in their approach.

Jordan Schneider: It’s interesting that you mention Trump. In your book, you note that Trump was the first president to introduce the idea of reciprocity and conditional engagement. While he might not have set the conditions for academic exchanges or fought for the New York Times, there is something to be said for him breaking the paradigm that wasn’t really going anywhere.

Yasheng Huang: I agree with that. We could work on that approach and make it more productive, not in the way he did it. He changed the rules of the game, and that’s the framework we have to accept now. But we can play the game better than he did.

Ilari Mäkelä: In my show on humans, I always finish by asking my guests: How has all the research that you’ve done and all the work that you’ve done shaped your outlook on humanity?

Yasheng Huang: I’ve come to appreciate surprises, contingencies, and the lack of predictability in history and in the world more than I did before. In a narrow academic environment, we always work on universal regularities and determinism. But history has taught me that there are consequential turning points. At the time, we didn’t think about them that way, but they could turn out to be significant. Now I have the mental habit of trying to think about issues in those terms and asking myself if a particular event is likely to be one of those consequential moments in history. The answers almost don’t matter, but I think it’s good to pose that question all the time.

Regarding humanity, I believe we are more complex than economists assume, and we sometimes behave in ways that are not terribly rational. This emphasizes the importance of the systems we create. The way I think about systems is that they place boundary conditions on either rationality or irrationality. How do we design a system that maximizes rational thinking and action while also alleviating the downsides? That’s a question that goes beyond the simple dichotomy of autocracy versus democracy. You need to think about how to balance competing forces — rationality vs irrationality, and scale vs scope. This is something I wasn’t thinking about before, and this research has taught me that it’s probably the right way to approach understanding the world and ourselves.

Yasheng Huang’s song choice:

The 1882 Chinese Exclusion Act prohibited nearly all people of Chinese descent from moving to the US and made ethnically Chinese immigrants already in the US ineligible for naturalization. Chinese immigration to the US remained highly restricted until 1965, when a new federal immigration law phased out national-origin quotas. And the ambiguous status of children born to Chinese immigrants during this time is part of the story of why the US today has birthright citizenship (see the 1898 Supreme Court case, United States v. Wong Kim Ark).

The economic impact of the Chinese Exclusion Act, however, is less well understood. (Notably, despite the protests of local business owners at the time, the congressmen from western states — Arizona, California, Idaho, Montana, Nevada, Oregon, Washington, and Wyoming — unanimously voted in favor of the Chinese Exclusion Act.)

An interesting new NBER working paper attempts to quantify the economic damage to the American west, using data from states where at least 1% of the total population in 1880 was Chinese.

Let’s break down the findings of this working paper, starting with three statistics:

• Chinese exclusion reduced the white male labor supply in Western states by 28% (compared to Eastern areas);

• The act reduced the total manufacturing output of these states by 62%;

• The act reduced the total number of manufacturing establishments in these states by 54-69%.

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Wait, a loss of Chinese workers reduced the number of white male laborers in these states? How did that happen?

The first statistic indicates that Chinese workers were creating a substantial multiplier effect in the economy out west. To understand why, we first need to understand the kind of jobs these Chinese immigrants were doing.

You probably already know that Chinese workers were instrumental in the construction of the transcontinental railroad — but Congress conveniently waited until the railway line was completed before deciding to gut the rights of Chinese immigrants.

What jobs, then, were those Chinese workers doing in 1880? The authors explain:

Chinese [railroad] workers usually worked on short-term contracts. After the completion of work, they were left by their employers in what were often sparsely populated areas.

Chinese workers often found new occupations in these places. In places where they had earlier logged to provide wood for railways and mines, they later logged to provide wood for the construction of new towns. Similarly, many who had worked as cooks or launders for the Chinese work gangs would later provide similar services for their new communities and local economies (Shih, 2022).

By 1880, Chinese immigrants worked in many sectors. For example, the manufacturing of shoes, hats and cigars in the Western United States was dominated by the Chinese during this period (Chang 2003, p. 60).

With this context, the economic multiplier effect of Chinese labor starts to become clear — after being abandoned somewhere along the railroad, Chinese workers built new infrastructure and provided services in remote western areas. After the Chinese Exclusion Act, the loss of Chinese labor made it hard for local businesses to find staff. That shock impacted a wide range of industries all at once:

The industries with the highest share of Chinese workers were personal services (e.g., private households, hotels and lodging places, or laundering and cleaning services) (50%), entertainment and recreational services (e.g., theaters) (22%), mining (25%), transportation (e.g., railroads) (8%) and manufacturing (6%).

So, the argument here is that the rapid loss of Chinese workers made western states worse places to live, thus discouraging prospective white migrants from moving West.

Even if there were more job openings available in theory, the authors argue, there was no way to disseminate information about these jobs at the scale and speed necessary to completely replace Chinese workers with white workers. Telegraphs and newspaper ads could only go so far.

It’s no wonder that 54-69% of manufacturing establishments opted to close up shop instead of waiting around for the New Englanders. The quote above suggests that those poor westerners couldn’t even buy cigars or a new hat to cope with their woes.

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To be clear, some people did move west, and the region still grew rapidly. “28% reduction in the white labor supply” expresses 28% less growth compared to regions that didn’t previously rely on Chinese labor. Still, the authors estimate that the negative impacts of the Chinese Exclusion Act persisted for nearly 60 years, dampening economic growth in the American West until at least 1940.

What would Arizona be like today if Congress hadn’t passed the Chinese Exclusion Act? We can only imagine — but I bet TSMC managers would be less disgruntled about opening a fab in Phoenix.

Building a Silicon Shield

This week, we have a special podcast for our Mandarin-speaking audience.

Lin Hung-wen 林宏文 is perhaps Taiwan’s most seasoned tech journalist, with decades of experience covering semiconductors, biotechnology, and Taiwanese industrial policy.

His book, The Radiance of the Chip Island: TSMC, Semiconductors, the Chip War, and My 30 Years of Journalism, explores the geopolitics of semiconductors through a uniquely Taiwanese perspective. An English translation of Lin’s book will be published in early 2025, at which point we will release an English translation of this interview.

If you speak Mandarin, however, you can enjoy our interview with Lin today, hosted by Arrian Ebrahimi of the Chip Capitols substack, and cohosted by ChinaTalk Editors Nicholas Welch and Lily Ottinger.

林宏文是《晶片島上的光芒》一書的作者,這本書深入探討了台積電的歷史、管理方法和國際角色。作為台灣最資深的半導體記者之一、林宏文以其三十多年的行業經驗,為讀者呈現了一個全面而生動的台灣半導體產業發展故事。

訪談中我們討論了以下幾個關鍵話題:

• 台積電的創立背景及其在全球半導體產業中的獨特定位

• 台灣政府在推動半導體產業發展中的角色、特別是工研院和科學園區的貢獻

• 台積電的管理模式、包括研發與製造部門的平衡以及人才培養策略

• 台灣半導體產業的國際競爭力、尤其是與三星等競爭對手的比較

• 台積電在全球地緣政治中的角色、以及“矽盾”這一概念的由來和影響

• AI時代對半導體產業的影響、特別是對記憶體和邏輯晶片整合的需求

• 台灣與美國在看待國際關係上的差異、以及這種差異對台灣國際戰略的影響

Lin’s song of choice:

Xi’s Fiscal Bazooka — Weibo Doomscroll

Moly at our partner Substack has translated some musings on the future of the Chinese economy.

On good vibes before the crash hit…:

Anyone else feel like the economy’s revitalized overnight?

1. The stock market is all red. Everything is rising. The bull market is back. [Chinese stocks are red when rising, green when falling, because red is lucky.]

2. The real estate market is warming back up too. Good news is endlessly rolling in and the number of sales is growing fast.

3. There are crowd everywhere during Independence Week, tourism industry is looking good. People don’t blink an eye when they spend money.

4. Lots of people going out to dinner, restaurants are full to exploding. People don’t hesitate to eat what they want and drink what they want.

I really feel like the economy’s taking an up turn, and it’s only gonna get better from here. Do you guys think so?

Comments say:

• How many days has it been, and you’ve already forgotten retirement age being delayed by three years… 😂😂😂

Another post on the stock market:

If you invested 200K into Chongqing Steel on the 18th of September, you’ve made 52K by now.

If you invested 200K into Zhengzhou Bank on the 18th of September, you’ve made 61K by now.

If you invested 200K into Tianfeng Securities on the 18th of September, you’ve made 104.5K by now.

If you invested 200K into Gujing Wine on the 18th of September, you’ve made 63.2K by now.

If you invested 200K in to Yantian Harbour on the 18th of September, you’ve made 41.5K by now.

If you invested 200K into China Mobile on the 18th of September, you’ve made 20K by now.

If you invested 200K into China Energy Engineering on the 18th of September, you’ve made 43.3K by now.

If you invested 200K into Jishi Media on the 18th of September, you’ve made 69K by now.

If you invested 200K into Vanke on the 18th of September, you’ve made 62.5K by now.

Who’s saying the stock market has no investment value? From the 18th of September to now, there’s plenty of stocks that have risen 20%! Never say that stocks have no investment value again, or other people will make fun of you! Right now, the index is only at 3300 points or so. It’s not too risky yet! There’s still time to buy in!

Comments say:

• We judge heroes on success and failure, but everyone is a Zhuge 諸葛亮 after the fact.

• It’s been falling for years, literally. Most investors are completely trapped 被套. Some have laid flat. Some can’t keep going and have to cut flesh to survive. Now it’s only been rising back up for a couple of days. It’s a little early to say there’s a lot of investment value in the stock market right now, isn’t it?

Then a few days later…

Three main indexes for the stock market fall significantly. The market is in its first round of adjustments? #Will millions of new investors still enter? On the 9th of October, the three big indexes for the stock market both fell significantly at market open. The Shanghai index fell by 1.79%, Shenzhen index fell by 2.92%, and the ChiNext index fell by 4.84%. In Shanghei, Shenzhen, and Beijing, nearly 5000 stocks are falling.

Comments say,

• Have confidence, people. It’s normal for the stock market to rise and fall. Just control your positions.

• Strategic callback.

On another note…

Ding Ding’s grandma got a scam call lately. It was a man, and he opened up by asking her, “Grandma, guess who I am.”

And grandma (who’s hard of hearing) asked, “Are you Ding Ding? What happened to your voice? Why is it so thick?”

The scammer was like, “Yeah, I’m Ding Ding. I got a cold and I’m still recovering.”

And then the situation got kind of ridiculous. The scammer started crying about how he got caught sleeping with a prostitute and asked for 50K from Ding Ding’s grandma.

Grandma had a very unique set of logic for an old lady. She not only believed every word, she even asked, “How did you sleep with a prostitute when you’re a girl too??”

I’m guessing the scammer was stunned too. Who would think Ding Ding [a fairly masculine name) was a girl? He just had to keep making shit up and said that he was with a big group. “Please don’t tell my dad. Just give me 50K, in cash. I’ll send my friend to collect the money.”

Grandma continued to ask how multiple people could do it together, and even advised, “Don’t let your husband find out about this! If he found out, your marriage would be doomed!”

And the scammer just had to keep emphasising, “Don’t tell my parents, okay?”

And grandma agreed.

A couple minutes later, Ding Ding got a call from her mom, asking, “You got caught sleeping with a prostitute???”

Ding Ding: “???????”

Ding Ding’s mom: “Your grandma said you got caught sleeping with a prostitute and you need 50K!”

Ding Ding called her grandma and told her, “You got scammed. How could you believe such an obvious lie? How would I possibly get caught sleeping with a prostitute?”

And Ding Ding’s grandma went, “Oh, that’s great you weren’t caught! I figured! It’s one thing to sleep with a prostitute, it’s another thing to get caught doing it!”

Comments say,

• Hahahahaha, what a progressive grandma!

• Question 2, if the lie went so well, how come the scammer didn’t make any money in the end?

• Question 1, just what kind of person does Ding Ding’s grandma think she is?

In July, Chang Che penned a fascinating piece for The New Yorker, “Reimagining China in Tokyo.” His article described a new wave of Chinese expats in Tokyo creating a community of bookstores, literary salons, and lecture spaces, reminiscent of the intellectual life they once somewhat enjoyed in China before Xi Jinping.

This new exodus marks a shift from previous emigration waves. In the post-Tiananmen era, we saw a divide between the traditional dissidents — those who, in exile, openly sought regime change in the mainland — and the emigrants who eschewed politics altogether and were content to “make money and pursue happiness in the now.” Today, we’re seeing a different type of divide among the latest Chinese expats.

ChinaTalk is running Che’s follow-up piece, which colorfully illustrates the anatomy of these new Chinese emigrant cohorts. “Neither ‘silent’ nor ‘dissident,’” these émigrés are less likely to echo the aspirations of figures like Liang Qichao, who sought to reform China from Japan in the early twentieth century. Instead, they represent two emerging visions:

1. A focus on free expression and open discussion of current affairs. This vision prioritizes exercising and voicing independent thought, even if it means facing potential censorship or criticism from Chinese authorities.

2. The creation of a more permanent “global Chinese identity” among the diaspora. To maintain ties with the mainland, politically sensitive material is off the table — but that’s almost the point: connections with the mainland can be preserved, while the scope of lectures and events can broaden beyond mere politics to history, art, literature, and more.

Che introduces us to the proponents of both. What exactly are the goals of these cultural creators, and how might their visions play out in this climate of ideological competition?

For future updates to Che’s work, subscribe to his Substack.

A “Garbage Time”

This August, I sat in on a strategy meeting at One-Way Space 单向空间, an independent bookstore nestled in an outdoor mall on the east side of Beijing. Founded in 2005, in a courtyard of Beijing’s Old Summer Palace, One-Way can sometimes feel like a relic of a bygone era. Walk into its three-story branch in Hangzhou, and you’ll be greeted by walls decorated with quotes from Kafka and Whitman and daring shelf categories like “Democracy & Freedom & Human Rights.” The bookstore is a major hit among educated young Chinese who have lived their formative years in an era of relative openness and transnational outreach. That the business has survived, even expanded, in an era of cynicism and insularity is no easy feat.

One-Way’s founders are masterful brokers of culture. Over the years, as Beijing’s bookstores toppled like dominoes, these owners — many of them former journalists — braved the smartphone age by transforming their business into a glorified ad agency. Car companies and real estate developers have become gainful clientele. To boost their client’s cultural cache, the team hosts events and pop-up stores in places like newly built apartment complexes. And the founders have tried to squeeze everything from their brand. One-Way runs its own coffee label, a publishing house, a well-known in-depth interview series on Tencent, and a surprisingly lucrative line of merchandise, including T-shirts, whisky, refrigerator magnets, and slippers.

Inside a studio with glossy wooden interiors sat Xu Zhiyuan 许知远 (one of the founders), the department heads, and two other executives who beamed in from a large monitor. A subdued worry hung in the air. One executive proposed a plan: marketing to China’s growing elderly demographic. What if they crafted narratives to challenge the stigmas around aging? Another department head considered selling merchandise on livestreams, which, in the world of Chinese business, is akin to a Hail Mary — potentially lucrative, but uninspired. Speaking last was Wu Qi 吴琦, the head of One-Way’s publishing division.

Wu, a soft-spoken man in his early 30s, had just returned from Germany, where he’d enjoyed several conversations with emigrants who — of all the things they could do in a new country — wanted to start a Chinese-language publisher. It struck him as an opportunity. “Their vision has never been to build an Apple [ie. a huge global brand], but to manage something between China and the world,” Wu concluded. The new emigrants, better educated and culturally literate, seemed to be looking for something more than just a comfortable material life, and they were asking One-Way for guidance. “This is a clear trend in our industry.”

Last December, a popular commentator named Hu Wenhui 胡文辉 published a screed on Weibo where he compared China’s present malaise to the waning years of the Soviet Union, when economic and cultural stagnation appeared, in retrospect, to prophesy its collapse. He dubbed it a “garbage time in history” 历史的垃圾时间, alluding to the last stretch of a basketball game when a blowout score has rendered all remaining plays useless. The phrase set off a torrent of discussion over the summer and forced Party-run papers into damage-control mode.

As China has become less open in recent years, it has alienated a generation whose outlook on life has been moving in the opposite direction. And Hu suggests that the best coping mechanism to a “garbage time” is to “exit”:

We can use prominent economist Albert Hirschman’s concept of “exit” to describe the strategy — when “voice” generates no effect, the people can only choose to “exit.” Regardless of the terminology — hiding, lying flat [躺平], or exiting — the strategy is a refusal to participate during the garbage time. … If we come across a garbage time of history, let’s exit and just take it as a long vacation of culture.

For several years now, but especially after the pandemic, this culture of escape or “lying flat” has been intensifying in Chinese cities. There was the popularity of “digital nomad” work, a boom in outdoor activities from hiking to rock climbing, the transformation of Dali 大理 into a burnout mecca, and a rise in activities involving spiritual contemplation. In June, I spent ten days in the Wudang Mountains 武当山 in Hubei Province 湖北省, one of the birthplaces of Daoism, where Chinese are reconnecting with their rich hermetic traditions that flourished during the Tang dynasty, another “garbage time” referenced in Hu’s essay. The monks in the temples told me that before the pandemic, Wudang was primarily a tourist site for foreigners because “Chinese were not interested in their own spiritual traditions.” Now, their classes on yǎngshēng 养生, the art of self-cultivation, and Taichi are booked out by young Chinese professionals from first-tier cities.

Then there are those who have opted for the real exit: emigration.

Lately, there have been a lot of reports about Chinese expats congregating in ways that might be vexing to the Communist Party. You can now go to a feminist stand-up comedy show in New York and hear women roast Xi Jinping in Mandarin. [Jordan: can confirm, these shows are excellent.] You can join civic groups in London that dedicate as much time to nature conservation and Palestinian rights as they do to the chained woman of Xuzhou (徐州铁链女事件). This April, I talked to a mainland comedian who had just finished performing a set for the Chinese diaspora community in Vancouver, Canada. He told me how freeing it was to not have to look over his shoulder for fear he might get reported by the audience. His second impression? “The sense of community,” he said. “There’s this feeling in the shows that you’re bringing Chinese together. Everybody was so emotional.”

One-Way opened a branch in Tokyo last August, and it has since hosted a relentless stream of lectures by Japanese and Chinese scholars on history and culture (though no politics or current affairs). What’s interesting to me is that the same type of people who seem prone to “lying flat” in China — young, educated literati — also appear most energized abroad. Having “exited,” Chinese appear to be rediscovering their “voice.”

I think the domestic stagnation in mainland China and the vitality of places like Tokyo are two halves of the same story. There is a reckoning, a recalibration unfolding both inside and outside China, where people are “adapting” themselves in accordance with a new world — xiūxíng 修行, the word I heard most in the Wudang Mountains, or zhuǎnxíng 转型, in the cities. I want to describe what I’m seeing and assess some of its contradictions and possibilities.

The Post-Covid Cultural Exiles

During a recent visit to Tokyo, I met many of the expats who are building these new Chinese public spaces. When you talk to them, you can hear their passion in every breath. What became clear to me in Japan was that, while Chinese civil society had been decimated over the past decade, its architects remain, and they are now building it elsewhere. Among them is Annie Zhang Jieping 张洁平, a mainland-born journalist now based in Taipei, who is planning to open a bookstore in Tokyo soon. After spending over a decade in Hong Kong, Zhang moved to Taipei in 2020 as part of a mass exodus following Beijing’s imposition of a new Hong Kong national-security law. Zhang seemed to have been aware at the time that she was part of a new chapter in the Chinese emigration story: “When I was in Taipei, I realized I was a part of this wave,” she told me. “We happened to be a couple years earlier than the mainlanders.”

In 2022, Zhang opened a bookstore in Taipei called Feidi (飛地nowhere), or “enclave” in Chinese. Feidi is to cultural vagabonds what Howard Schultz’s Starbucks is to commuters shuttling between work and home: a “third place,” one that can stabilize lost souls stuck between two divergent cultures. That, she said, was the great sublimating act of Hong Kong. Though Feidi seats only about thirty people, it has been a hit among the émigré community in Taiwan. When Zhang invited a Hong Kong musician for a book signing last January, roughly two hundred people showed up: “We had to ask the police for a street permit, you know, the ones you use for parades.”

It’s no accident that a mainland journalist who lived in Hong Kong is at the bleeding edge of this new cultural work, which is now sprouting up all over the world. It takes Chinese with a keen eye and receptivity to foreign cultures to create new pathways in this age of xenoskepticism. Luckily, China is full of them. One of the great ironies of this era is that the Chinese system is closing up at the same time that many of its inhabitants are hungrier for understanding and meaningful connections with the outer world. What are they to do in this “garbage time”? This is the arbitrage opportunity One-Way Space has seized upon, and it’s the reason why emigrants seek cultural activities today.

This wave of emigration — marked by exiled cultural production — is different from emigration waves of the past. My parents, for example, were part of the mass emigration wave of the 1990s, when some of the country’s best and brightest went abroad, many of them headed for the US and Canada. Over 870,000 people left China in 1992, catalyzed by Deng Xiaoping’s renewed commitment to market reforms in the wake of the crackdowns on student protestors in Tiananmen Square.

Tiananmen polarized this wave of emigrants. My parents, which represented one pole, emigrated to Japan in 1990, and forsook politics altogether. In Roman legal terminology, they retreated from the imperium toward the dominium, seeking to build wealth and meaning through pre-existing economic ladders and structures. Many in this group had technical backgrounds — in Tokyo, my parents got their PhDs in physics and chemistry — which were coveted in the 2000s thanks to expanding industries like IT. These Chinese emigrants siloed themselves in universities and corporations, accenting the Asian stereotype of the “silent” or “model minority.”

On the other end of the spectrum were the Tiananmen student leaders like Zhou Fengsuo 周锋锁 and Wang Dan 王丹. After Tiananmen, they joined dissident communities and continued to pursue their political activism. Shaped by the period of heady political experimentation that was the 1980s, they were full-blooded creatures of the imperium. They talked in the language of “isms,” universality, power, and sovereignty. After exile, if China didn’t change, they would consider their mission incomplete, if not a failure. “When we left China, everyone still imagined we would return,” Wang told me. “The reason my English is still not great is because I’ve been steeped in Chinese communities” ever since.

One way to refer to these new cultural architects might be the “minjian emigrants,” in the vein of sinologist Sebastian Veg’s term for “grassroots” intellectuals 民间知识分子 who chose to operate outside government institutions in the aftermath of Tiananmen. While the events of the square extinguished the vita activa of Chinese like my parents, it transfigured that of others. For instance, after Liu Suli 刘苏里, a former Tiananmen student leader, was released from prison, he opened All Sages Bookstore 万圣书园 in Beijing in 1993. Liu was part of a generation of thwarted idealists who traded their romanticism for humanism, their liberal proclamations for projects and professions. Several other independent bookstores opened across the country after Liu’s. “China is not a liberal society,” Liu once told a journalist, so bookstores “express our longing for freedom.”

In his seminal work on the Chinese diaspora, the historian Philip Kuhn traces Chinese emigration back to the family, the exporters of labor and remittances. “We are looking at a system of labor distribution,” Kuhn concludes, where the essence “is not the separation but the connection.” I grew up in Japan in the 1990s, when this connection largely still held. My parents worked in Japanese restaurants and sent their savings back to China — not too different from the nineteenth-century Chinese merchants who moved to Southeast Asia, or the contract laborers that made up America’s Chinatowns. Among the minjian emigrants, benefactors as they are of market reform and globalization, the flow of money has reversed. And unlike the stereotypical fùèrdài 富二代, or “rich second generation,” their money seems to be going toward cultural projects rather than Porsches and high-rise condos.

The minjian emigrants are neither “silent” nor “dissident.” In central Tokyo, there is a bookstore run by a former human-rights lawyer named Li Jinxing 李金星. On the week I visited him, he had organized a book club comparing Chinese and Japanese paths to modernization (the implication was that China had failed); a documentary screening of Alexei Navalny, the late Russian opposition leader; and a discussion of Liang Qichao 梁启超, a former exile and father of modern China. Is this “dissident” work? I don’t think so. Part of what is appealing about Li’s lectures is that they offer a bridge to the younger generation, who tend to absorb ideas through culture — music, books, films, podcasts — as opposed to, say, rallies and political-activist groups. This is why the Liang Qichao lectures are titled, “Rebuilding China in Tokyo,” not “What we can learn from Liang Qichao so we can change China (again).”

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Liang Qichao, Kang Youwei, and Sun Yat-sen

Liang came up frequently among exile discussions in Tokyo, often with a tinge of sentimentality. In 1898, Liang settled in Yokohama after a failed attempt to overhaul China’s imperial system earned him a death sentence. He arrived in a Japan that felt decades ahead of his homeland, replete with a universal education system, railways, a constitution, and political parties. There, he founded a reform-minded school and wrote prolifically about the nature of modernity, Western civilization, and the path to reform. These writings found their way into China, reaching an audience of up to 200,000 people, even though they were technically banned.

Beyond his writings, Liang was also involved in political activism. He helped his mentor, Kang Youwei 康有為, raise funds from the overseas Chinese community for his Protect the Emperor Society 保皇会, which continued to fight for the reform policies that led to Kang and Liang’s exile. By the time Liang visited the United States in 1903, the society had a chapter in Japan, Hong Kong, Macao, Canada, the United States, and Australia. It was from these same communities that much of the funds to supply Sun Yat-sen’s revolution would come. Sun founded the Tóngménghùi 同盟会, a secret society and predecessor to the Kuomintang 国民党, in Tokyo in 1905; six years later, that society helped topple the Qing dynasty. In gratitude, Sun dubbed the overseas Chinese “the mother of revolution.”

What’s striking about the Liang era is the cohesion between a few influential leaders and their diaspora constituents. Discriminatory laws helped Chinese coalesce around a shared national identity, making it easier for leaders like Kang to link their destiny to a nation struggling against foreign powers.

Such “hub-and-spokes” dynamics are weaker today. Modernity has given subsequent Chinese emigrants greater freedom to choose where to live and what to do. These new “spokes” for self-actualization have weakened the sense of national unity that supplied reformists and revolutionary movements. When Li Jinxing arrived in Tokyo in the fall of 2022, his first impression was that the Chinese community was not congregating the way he would have imagined. “I thought, ‘This is a free country!’ — but it turns out even in a free society, Chinese are still not interested in Chinese affairs,” Li told me. Even with the new bookstores, the diaspora community that the minjian emigrants hope to foster doesn’t have the revolutionary fervor of their pre-modern antecedents. The Liang era still feels worlds apart.

Nor are the “hubs” so clearly defined. After their exile, the overseas reputations of Kang, a former advisor to Emperor Guangxu 光绪帝, and Liang only grew. Reports of Liang’s visit to the United States bore stately titles like “Oriental Mark Anthony Tells Chinamen How They Have Only Been Slaves.” When Kang’s society building burned down in the 1906 San Francisco earthquake, he recouped the money through donations in a matter of months. I can’t think of anyone who commands China’s public sphere as powerfully as these turn-of-century exiles. (The closest might be the master con artist Guo Wengui 郭文贵.) These were big fish in a smaller pond.

I wonder also if this era may be uniquely difficult for Chinese to imagine alternatives. At the turn of the century, it was not a stretch for reformists like Liang to think China could learn from Japan, a state that shocked the world in 1905 by defeating the Russians in Manchuria and Korea. With China’s opening to the world in the late 1970s, this enchantment, or “beaconism,” turned to America, giving rise to expressions like “the moon is rounder abroad” 外国的月亮比较圆. Many non-dissident Chinese liberals today are disillusioned by the West, and their search for new beacons seems haplessly elusive. After a decade writing about Western philosophy and history for China’s premier media outlets, Xu Zhiyuan has turned to historical biographies of Chinese intellectuals. And even though Li Jinxing has been eagerly following in Liang’s footsteps — he is taking a Japanese language intensive and studying the Meiji restoration — he admitted to me that he hasn’t found anything useful yet.

The Liang lectures in March, delivered by the mainland scholar Fu Guoyong 傅国涌, brought up the tension between the power of the state and the resilience of individual will. After the talk, one elderly Chinese emigrant, who had lived in Japan for decades, stood up to give the young listeners in the room something of a pep talk. “I hope there are young people here who can inherit these stories,” he said. “Your generation shouldn’t underestimate yourselves. Everyone should think of themselves as agents of history.”

This is easier said than done, of course. One soft-spoken engineer in his thirties asked Fu for advice on how to combat his passivity to historical events. Fu assured him that it was not his fault. “Environment matters,” he said, referring to the Party’s technologies of censorship and repression. “If a society suppresses free thinking too aggressively, it cannot produce [Liang Qichaos]. Freedom is their oxygen.” In a review of a recent book on Liang’s exile — written by none other than Xu Zhiyuan — the historian Li Li 李礼 observed the following:

After reading this book that describes a hundred years of history, you will realize an awkward truth: since his exile until his death in 1929, Liang Qichao enjoyed a level of freedom of expression that remains unattainable for his biographers and readers in 2023.

I suspect the causes of demotivated youth run deeper than free expression, mainly because the problem is not unique to China. Alienation, loneliness, a numbness to politics, an ennui around online relationships — these are symptoms prevalent in the US and Europe as well. Li Jinxing’s hypothesis is that this well-heeled, smartphone-addicted era might require new solutions. “Before, it might have been a violent revolution,” he told me. “But they didn’t have any other choice!” I asked what the new approach looks like: “I haven’t figured that out yet.”

Of course, there is another interpretation: someone like Liang simply hasn’t emerged yet. Before the lecture concluded, Fu reminded us that history is replete with instances of men who overcame what seemed like impossible odds. “Such is the definition of greatness,” he averred. “I believe that, within these 1.4 billion people, there are already many people out there. We may just not know who they are.”

Two Visions of Diasporic Identity in the Xi Jinping Era

One simple way to differentiate between the minjian emigrants and the dissidents is to ask them about their views of Donald Trump. For many reasons, Chinese dissidents have frequently grafted their antipathy of the Communist Party to the “woke” politics of the American left — which is why The Epoch Times, a media outlet affiliated with the Falun Gong, is one of the most powerful right-wing publishers in the United States.

You don’t see this brand of Trumpian activism among the bookstore owners in Tokyo. Their approach to politics is as observers, not actors. The mindsets of those like Annie Zhang Jieping and Li Jinxing remind me of the Central European intellectuals during the Cold War. People like Václav Havel and Adam Michnik shared a skepticism toward the binary political categories of left and right. Instead, they advocated for what Geroge Konrád calls “anti-politics” — a focus on civil society and moral integrity over traditional power struggles. They were meliorists, not dogmatists; their work did not involve scheming their surrogates into state power, but the gritty work of altering societal attitudes and beliefs through grassroots associations. In doing so, they offer more practical guidelines for how to imagine a freer life under totalitarian rule.

That such gradualists like Zhang and Li have had to leave China is a serious indictment of how intolerant the regime has become. The historian Timothy Garton Ash once equated the central European strategy of building a civil society to “tree roots gradually undermining a house.” Now that the Communist Party has razed its understory, does their work overseas even matter? What is accomplished by having the roots grow around the house rather than beneath it?

In an important respect, Zhang’s and Li’s work no longer bears this activist flair. In particular, they see cultivating the gardens of culture around China as an end in itself, not just a means. In April, I talked to Wu Guoguang 吴国光, a post-Tiananmen exile and scholar on Chinese politics at Stanford. He framed the new emigrants’ work as the creation of “an overseas public sphere” (per the German philosopher Jürgen Habermas), where Chinese can discuss matters that are pertinent to them as overseas Chinese, rather than as fully assimilated immigrants or uprooted mainlanders. Wu finds the diaspora’s tendency to polarize in this manner to be symptomatic of China’s historical misapprehensions of the West:

We Chinese haven’t found an identity that is both Chinese and compatible with a liberal pluralist society and cosmopolitan life. We need to find this. It’s not just overseas Chinese — all of China is like this. Why? Because ever since its interactions with the West, we’ve never learned what to keep and what to discard. We either learn nothing or assimilate entirely. We need to acknowledge that we are different but we can live together.

Wu held up the Jewish people as an exemplar of this middle path: a community that has cultivated a distinct overseas identity, while also maintaining their traditional ties to their motherland. He hoped the new cultural emigrants could follow suit, teaching the diaspora how to relate “to each other,” not just “to China.” Such a sphere, he said, may include NGOs that help the overseas community deal with the widespread problem of intergenerational conflict over politics and culture.

The seeds of this public sphere have already sprouted. Zhang Shizhi, a former vice president at a major state publisher in Beijing, started his own publishing company in Tokyo last year. “In recent years, we exiled publishers have been talking amongst ourselves about making a sort of publishing consortium,” Zhang told me. The consortium would publish uncensored works by Chinese writers and deliver it to readers overseas. Such publishers already exist in Taiwan, but Zhang’s would be one of the first in simplified Chinese to do so.

When I talked to Li in March, I asked him, from every possible angle, whether any of the things he was doing were aimed at changing China. He demurred, often trying to play down his bookstore space as a mutual-support system for the Tokyo community. Li told me, for instance, about a recent visitor: a teary-eyed entrepreneur who was on the lam from the Chinese police and was worried about what might happen to his wife and kids. “A lot of Chinese people today feel unsafe,” Li told me. “Everybody is thinking, for instance, ‘When can I return safely?’ Just that issue alone brings up a host of other questions.” Still, I think Li hopes his community work will find its way back into China. He publishes videos of his lectures on Weibo, and they have yet to be censored. That reminded me of Liang, whose writings managed to re-enter China through written correspondences and periodicals. “Any societal transformation must begin with a transformation in thought,” Li told me.

There were two distinct visions of overseas Chinese identity taking shape in Tokyo. The first harks back to the civil society of the 2000s, when the space for free expression was more expansive. You can see this identity in Li’s lectures as well as the groups that Chinese international students have created after the “Bridge Man” incident 四通桥事件 and the white paper protests 白纸运动. Perhaps the best representative of this kind of identity right now is the Bumingbai podcast 不明白播客, hosted by Yuan Li 袁莉 of The New York Times. The podcast speaks boldly and directly about current affairs, and platforms a diverse range of Chinese perspectives on everything from covid lockdowns to China’s mental health crisis, from the Netflix adaption of The Three-Body Problem to the legacy of the Cultural Revolution. In short, the first version of overseas Chinese identity draws its strength from its extrication from censorship controls — but unlike dissident activism, its primary purpose is not to change the regime, but to exercise independent thought.

The second vision is the one adopted by the founders of One-Way Space. If you visit their Ginza branch, you will not find material that is censored in China. (Having such material would endanger their employees and businesses on the mainland.) But even so, they are still able to find an endless supply of collaborations with Japanese scholars and intellectuals who are willing to deliver lectures on literature, art, and history, just not politics. The bookstore’s feat is that it has managed to create an attractive cosmopolitan brand while managing to steer clear of the Party’s expansive content controls. The founder Xu Zhiyuan has said he plans to expand his store to places like Vancouver, Amsterdam, and Singapore, among others.

Xu’s vision is for One-Way to represent a “global Chinese identity,” as opposed to just an overseas one. And, as his sly phrasing implies, this will be safer and likely more inclusive to Chinese, who already carry a built-in filter when they go abroad. Wu, the scholar, called their unfinished status that of “sub-exiles” 亚流亡: “A lot of Chinese overseas can talk about French politics but still can’t bring themselves to talk about Chinese politics.” The challenge to this approach is that the cost of self-censorship also gets passed onto the local culture, which can generate awkwardness and outrage (see the Hugo Awards controversy). A bookstore might, say, refuse to host certain Japanese speakers over something that they wrote or said. A Chinese publisher collaborating with a Japanese outfit on an essay collection might request some redactions from the other side. Such friction is an inevitable byproduct of this collision of cultures in the Xi Jinping era.

To be sure, the first vision also has challenges. Participants of this identity may not seek to be subversive, but it will occasionally be construed as such. Its media will be censored, creators will be criticized and de-legitimized on Chinese social media, and those who engage with it will do so at their own peril. When I was in Tokyo, the community that enjoyed the Bumingbai podcast seemed to act as though they had taken a “red pill”: they were afraid of mentioning it publicly for fear of alienating other Chinese who may not share their worldview. But this identity can also credibly challenge the Party’s narratives on global and domestic events. When tragedy inevitably strikes in China again, people in this group will not remain silent. Chat groups will buzz, lectures will be convened, donations will be sent forth, and rallies will erupt in London, Tokyo, and New York, just as they did during the covid lockdowns. I think we know which identity Liang would have preferred.

Whether these two visions can reconcile remains unclear — but it is the elephant in the emigrant’s creative studio. What they share is an abiding interest in using space, conversation, and culture to stimulate energy and thought and to break out of China’s cultural stagnation. And it is already influencing the wider Chinese diaspora. Wang Dan, the Tiananmen dissident, told me that he had recently started his own “public salons” at his home in Los Angeles: “When we first arrived in America, thirty years ago, we were poor students struggling with our own lives”; bookstores and lectures were out of sight and mind. Now, as more middle-class Chinese emigrate and bring their wealth abroad, he is hoping to use lectures to rebuild his dissident network. “I think these ideas are just starting to percolate,” Wang said, because “the conditions have changed.”

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Angela Shen is back at it, this time with a multi-part series on industrial robotics and AI. If you missed her first ChinaTalk feature on biotech, check it out here. 

At the 2024 World Robot Conference in Beijing, attendees cheered as a humanoid robot scored a goal in a fully robotic football match. Visitors could play a bot in Chinese chess and rock-paper-scissors, enjoy robotic performances of Yangqin melodies and martial arts, and marvel at robots assisting complex osteotomy and endoscopic surgeries. With the humanoid robot market surging 86% between 2022 and 2023, these mesmerizing displays make a bold statement about China’s big ambitions for robotics.

The global robotics industry is projected to reach upward of US$42 billion in 2024, of which China will make up about US$8.47 billion (~20%). Service robots account for over three-quarters of this projected market volume, and industrial robots account for the rest.1 While China shows improvement in both types of robotics, industrial robots are particularly relevant due to China’s status as a global manufacturing superpower.

To understand the future potential of these bots, we must also understand the motivations and methods behind China’s industrial policy for robotics.

China’s robotics, by the numbers 

The factors driving robot adoption vary by country. Japan pursues robotics to address its aging population and high labor costs. Germany, meanwhile, invests in robotics as an alternative to human labor in the face of the country’s stringent worker safety regulations.

In general, high-income countries have a larger incentive to use robots than low-income countries: if human work is cheap, there isn’t much room for robots to cut labor costs. Industrial robots’ many applications in the electronics and automotive industries means that countries active in these sectors are also more likely to automate. As a result, the top four players in the global robotics race are South Korea, Singapore, Germany, and Japan.

National robot adoption is measured by “robot density,” ie. the number of installed robots per 10,000 workers. In 2022, China became fifth-most-automated in the world, showing rapid improvement since 2016, when the country ranked 25th. China’s 2022 robot density was 322 units per 10,000 employees. In 2024, China reported 470 units per 10,000 employees, and targets 500 units per 10,000 people by 2025.

This robotics success revolves around China’s role as a consumer. For 11 consecutive years, China has been the largest market for industrial robots. In 2021 alone, 243,300 industrial robots were installed in China. That’s over half of the global total.

Chinese manufacturers’ choices to adopt robots mirror drivers of automation in other nations:

• firm characteristics (with larger firms and those in the automotive and electronics sectors showing a positive correlation),

• market factors (such as total wage bill, voluntary turnover rates, labor costs, and concerns over product quality),

• the manual nature of tasks performed,

• and government connections.

At the same time, China’s robot implementation is surging faster than can be explained by firm-level economics alone. China has 12.5 times more robots than its wage level would predict, according to an ITIF study of robot adoption across countries.

Which raises the question: why do industrial robots matter so much to China?

Job loss? Nothing to worry about 塞翁失马，焉知非福 

Western media often fret that robots could render humanity as obsolete as the horse.

Chinese media, largely, does not. Government documents rarely express concerns over job replacement, instead promoting the message that robots are a positive solution to China’s labor-force challenges. With broader public acceptance of robots, China arguably resembles Japan more than the US or Europe, where public fears of job replacement may present legitimate hurdles to further robot adoption. 

China is an industrial superpower, but recent demographic changes may challenge its future economic growth:

• China’s working-age population is shrinking — both in absolute size and as a share of overall population. By 2050, the working-age population is projected to drop by over 20%.

• Rising wages, higher labor costs, and younger generations’ disinterest in traditional manufacturing jobs threaten to exacerbate the effects of population decline. 

• In 2023, the Ministry of Human Resources and Social Security released a list of 100 occupations facing labor shortages, forty-one of which were manufacturing-related. 

• The Ministry highlighted pressures on the automotive industry — helping to explain recent significant increases in robot installations in automobile manufacturing.

• The COVID-19 pandemic boosted global adoption of industrial robots, highlighting their resilience against health-related supply chain disruptions.

• Research supports a positive relationship between robots and total factor productivity: robots can compensate for labor shortages, decrease error rates, improve safety, and generate higher productivity.

With the government forecasting a manufacturing sector shortage in 2025 of nearly 30 million people, some Chinese firms hope robots will fill this gap.

Industrial Robot Policy

To China, industrial robotics are therefore crucial for protecting its dominance in manufacturing. Given Beijing’s emphasis on technological advancement and self-sufficiency, it’s unsurprising that China is taking serious steps to become an innovator and producer in the field of robotics. 

Starting from the 10th Five-Year Plan, China’s government has articulated a desire to develop novel technologies that boost industrial competitiveness. In 2015, China introduced the Made in China 2025 中国制造2025 initiative, aiming to establish itself as a leading manufacturing power by 2049. The plan targets ten key sectors, one of which is “high-end numerically controlled machine tools and robots.” And, advancing industrial robotics is a clear goal of China’s investments in “new quality productive forces” 新质生产力. Most recently, China pledged to increase investments in large-scale equipment upgrades by 25% by 2027.

The Robotic Industry Development Program 机器人产业发展规划 (2016-2020) was implemented to promote the use of robots in manufacturing, attract foreign investment, and boost domestic robot production. The program aimed to triple the annual production of industrial robots to 100,000 by 2020 — a goal that China exceeded, producing over 237,000 units in 2020 and 363,000 units in 2021. 

In 2018, China launched the National Robot Innovation Center, a collaborative effort involving the Shenyang Institute of Automation, the Chinese Academy of Sciences, the Harbin Institute of Technology, and other companies. The 2023 “Robotics +” “机器人+” plan aims to double China’s manufacturing robot density by 2025, compared with that of 2020. Humanoid robots are meant to be a major source of that growth. In its “14th Five-Year Plan” for Robot Industry Development “十四五”机器人产业发展规划, the government targets mass production of humanoids by 2025 and world leadership by 2027.

Local and provincial governments have sought to support these strategic goals — at least twenty-one cities and five provinces offer subsidies for industrial robotics. Hunan, Shenzhen, and Beijing have released new robot industry development action plans. Beijing’s measures to promote robotics include investments in R&D, innovation platforms, industrial parks, and talent recruitment, as well as policy support with expedited approvals for land, factories, and new projects and support for public listings. In Guangdong, more than 2,000 manufacturing firms accepted government subsidies to help them switch from human to machine labor. Dongguan 东莞, a city in Guangdong province, stands out for initiating more than 4,600 "human to machine" projects, supported by a 200 million RMB annual reimbursement fund for manufacturing firms. 

Dongguan also benefits from its Songshan Lake industrial development zone. In Songshan Lake, hundreds of robotics firms benefit from government-supported startup incubators and abundant robot manufacturing capabilities that offer large R&D time and cost savings.

Success, but at what cost?

Domestic robot manufacturing is increasing. In 2022, 36% of industrial robots installed in China came from domestic manufacturers, up from 25% in 2013. On the innovation front, China holds global leadership in robot-related research publications and patent filings, with 190,000 patents as of July 2024. Unlike in the US, Japan, South Korea, or Germany, where private companies dominate, the vast majority of patent filings in China come from universities. (To be sure, as with many other emerging technologies, China’s rising prominence in innovation comes with caveats: substantial government incentives and lower domestic approval thresholds may help support record-breaking patent numbers.) A number of Chinese robotics firms have blossomed under such supportive conditions. Since 2017, there have been over 3,400 robotics start-ups in China.

This feature of China’s robot market — numerous small- to medium-sized enterprises rather than a few dominant players — has drawbacks, as smaller firms may lack capital and technology reserves to withstand shocks and be competitive. Nevertheless, a couple of Chinese robotics firms have been able to stand out. Belonging to the China Academy of Sciences, Siasun 新松 has an international imprint in over forty countries and boasts annual revenue of over 3.9 billion RMB. Etsun Automation 埃斯顿自动化, an established domestic producer in China, offers sixty-four different industrial robot products and has received over 4,874 patent authorizations distributed among China, Japan, the US, and Europe. Shenzhen-based humanoid robotic specialist UBTECH 优必选 has collaborated with firms like FAW-Volkswagen and Foxconn, with plans to commercialize its humanoid robots starting from automotive manufacturing into other industries.

Unfortunately for China, its domestic robotics industry still depends on foreign players. Many of China’s robots are sourced overseas, from places such as Japan, South Korea, Europe, and the United States. In 2019, 71% of new Chinese robots were imported from abroad. In 2022, China incurred a deficit of US$1.39 billion for its industrial robot imports. This imbalance is likely to continue due to lagging capabilities in core value-adding components like servo motors and controllers.

At the same time, this year’s World Robot Conference hints at opportunities for China to break this dependence — Shenzhen-based Wisson Technology 万勋科技, for instance, uses 3D-printed plastics and pneumatic artificial muscles to power its robots, rather than traditional motors and reducers. Chinese firms are also leveraging cost competition to hopefully overcome foreign dependencies. While China remains dependent on imports for important robot components, its products are estimated to be up to 30% cheaper than European and Japanese counterparts. Between 2016 and 2023, the average price of industrial robots sold in China dropped from 300,000 to 188,000 RMB per unit. By selling robots in the low and medium end of the market, Chinese firms could edge out foreign competitors in the local market and set themselves up for international expansion, while reinvesting profits into more high-end technologies.

AI-driven synergy

Of course, the most attention-grabbing part of the 2024 World Robot Conference and China’s robot policies is Beijing’s desire to advance AI-driven robotics. In Chinese, AI-driven robotics is often referred to as “embodied intelligence” 具身智能. At the main forum of August’s conference, Beijing released its Embodied Intelligent Robot Action Plan 具身智能机器人行动计划. In this plan, China strives to be the first in several key related technologies: AI (the “brain” 大脑), motion control and balance (the “cerebellum” 小脑), and robotic body components (the “limbs” 肢体). Successful embodied intelligence would mean achieving both “one brain with multiple forms” 一脑多形 (AI that can adapt to various machine forms) and “one machine with multiple uses” 一机多用 (a machine can adapt to a diverse array of tasks and environments).

Applying AI to robots has understandable appeal. AI can streamline the design and maintenance of robots through its optimization and predictive capabilities. With human-like cognition, AI could boost robot performance directly — by enhancing sensory capabilities, enabling smarter human-robot interactions, and allowing for adaptive learning.

So far, AI applications in robotics have largely been upstream, in areas like semiconductor fabrication, rather than in downstream operational upgrades. The physical world of robots tends to be less forgiving of mistakes than the digital world. While some AI models, like OpenAI’s Sora, demonstrate a preliminary understanding of the physical world, significant work is needed for AI to effectively direct robots in every environment.

Additionally, robots have been widely used in industrial spaces for far longer than AI. Robotics faces challenges common to AI adoption in existing industries: integration with legacy systems, upfront resource costs, data management issues, and scarcity of in-house expertise. Many automatable manufacturing tasks are either already automated or have more cost-effective alternatives.

Still, Chinese companies are getting creative. Manually operated forklifts are getting updated into Autonomous Mobile Robots (AMRs) by firms like VisionNav Robotics 未来机器人 and EP Equipment. Quicktron Intelligent Technology 上海快仓智能科技 has provided over 230 Automated Guided Vehicles (AGVs) to a medical warehouse in Guangdong, and MegaRobo 镁伽 is building robots to support the development of self-driven laboratories. Domestic market share has been increasing for cobots (collaborative robots) designed to work alongside humans with high levels of safety and flexibility. Rising Chinese cobot developers include AUBO Robotics 遨博, Elephant Robotics 大象机器人, Han’s Robot 大族機器人, HIT Robot Group 哈工大机器人集团, JAKA Robotics 节卡机器人, and ROKAE 珞石机器人.

The World Economic Forum maintains the Global Lighthouse Network, a list of manufacturers leading in advanced technology, sustainability, and productivity. Over 40% of those lighthouses are Chinese. These Lighthouses have been commended for their quick adoption of advanced AI applications in production of everything from pharmaceuticals to steel to air conditioners. With these factories leading the way, AI and robotics might find a permanent future in manufacturing in China.

Forging Ahead

China has come a long way in the field of robotics. From Xianxingzhe 先行者 , the first Chinese bipedal humanoid created in 2000, which was mocked for its clunky shape, Chinese robots now capture worldwide fascination with their mimicry of facial expressions and burger-making skills. Beyond flashy displays designed to bring science fiction closer to reality, China is making moves to build a robust domestic industrial robotics industry that could change the game for how its future economy runs. While innovation is limited and dependencies on foreign imports remain, Chinese robotics may continue along the trend of dropping prices and increasing installation rates to eventually change the face of global robotics. 

Do you work in robotics? Please reach out by responding to this email we would love to connect!

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Critical minerals! The world needs more of them, and the US government can help. We interviewed Arnab Datta of the think tank Employ America to talk through the ideas he put forward in his piece co-authored with Daleep Singh on “Reimagining the SPR.”

Since we recorded, Senators Hickenlooper, Graham, Coons, and Young introduced the Critical Materials Future Act to establish a pilot program at the Department of Energy (DOE) to employ an array of creative financial tools and acquisition authorities to support domestic critical material processing, refining, and recycling projects. The DOE was authorized to receive appropriations of $750 million to support at least three domestic projects, with support for each going toward at least three types of critical materials. 

The legislation includes many ideas first put forward in Arnab’s piece. Three exciting provisions are worth highlighting:

1. It gives the Secretary of Energy a wide array of authorities to support projects including the use of forward and futures contracts, options, and other transactions as deemed necessary; 

2. It includes flexible hiring authority to ensure that the program can hire experts from the private sector to carry out the goals of the program; and

3. The program would be guided by a holistic set of objectives beyond mere “stockpiling” including to provide financial stability and reduce supply chain vulnerabilities. Furthermore, the report required by the creation of the program would evaluate the use of the flexible financing authorities to alleviating challenges like market volatility, boost price transparency, and other important goals. 

Co-hosting is Matt Klein who writes the excellent overshoot newsletter. 

We get into:

• The history and future of the strategic petroleum reserve, and how lessons from the oil market can offer insight about how to trade lithium, copper, and graphite.

• How to engineer bipartisan support for moonshot policy ideas.

• Lessons from a former kindergarten teacher on handling Congresspeople.

The Future of the Strategic Petroleum Reserve

Jordan Schneider: Let’s talk about critical minerals, stockpiling them, and smart ways to trade them.

Arnab, for background, what is the strategic petroleum reserve, and how has it evolved over time?

Arnab Datta: The strategic petroleum reserve was established in the mid-seventies, basically in the wake of the Arab oil embargo that came out of the Yom Kippur War.

As net importers of crude oil, we realized we were very vulnerable to these types of shocks. We established a reserve, which is essentially a set of salt caverns that are dotted all over the Gulf Coast that could store crude oil for us.

At the same time that this was happening, the International Energy Agency was established, and all the members were required to keep about 20-25 days of export capability in their reserves.

At max capacity, we probably held about 600-700 million barrels of oil in there, but it hasn’t been utilized extensively. There have been a couple of geopolitical disruptions where oil was released from the SPR, for example, during the civil war in Libya in 2010-11. We’ve used it in response to natural disasters like hurricanes and things like that here, but that hasn’t really been utilized to its full extent.

When it was established, people thought about it as this asset of oil sitting in a reserve that we can release. But the SPR was created with a whole other part of its mandate to basically boost our domestic industry. If you look at the acquisition authority specifically, there are a number of goals that are outlined in that, including maximizing domestic oil production and promoting competition.

Matt Klein: Historically, Congress basically just sold oil from the SPR for money to close budget gaps.

Arnab Datta: It’s funny — if you go back to 2014, there was a big review of the SPR during the Obama administration, and that’s when the recent set of mandated sales began. They were just there to fill budget gaps.

Right now, the legal capacity limit of the SPR is a billion barrels, but the physical capacity limit is 720 million barrels. Around 2014, there was a plan to establish a new site in Alabama. They canceled that. Then they just started selling off all the oil just to whatever budget deal needed a piggy bank. Now, hopefully, more and more people are realizing that is short-sighted.

Jordan Schneider: Talk a little bit about how domestic oil production changed the whole point of this thing and what you guys have been pushing in the wake of the invasion of Ukraine.

Arnab Datta: As I said, the SPR was designed when we were net importers of crude. But in the period since the SPR was established, we became net exporters of crude and we are now the number one oil producer thanks to the shale revolution.

As we’ve become this huge exporter, our vulnerabilities have shown in other places. Refining capacity is one — we haven’t built a new large refinery with capacity over 100,000 barrels per day since 1977. Exxon Mobil Holdings recently announced that they are trying to build one in Texas. But as you can see, our vulnerability is no longer really in crude oil.

A second thing that happened during that period was financialization. The WTI contract and the Brent crude contracts were established in the eighties, and they transformed the market dramatically. They’ve made it easier for producers to attract more financing. They created a mechanism for the bottom of the market to hit less quickly in the event of a supply glut or for the top to be a bit slower in the event of a shortage. More broadly, there’s a transparent market with important pricing and investment information that’s widely available.

Coming out of the COVID pandemic and recession, we started to get really worried about the prospect of a crude oil shock causing inflation and even a potential recession. We had been looking at investment patterns in shale and seeing investment drop off, so we were worried that prices would go really high.

We started to explore different authorities that we could use to boost domestic oil production in the short term and minimize some of that price pressure.

We zeroed in on the SPR, and whether contracting authorities and acquisition authorities at the SPR could be used to provide producers with the certainty they needed to go and produce.

Coming out of the shale revolution in the late 2010s — prices decreased and there were a whole host of bankruptcies among shale producers at each successive price level. Thus, investments eventually started to become less sensitive to price increases.

Even as prices coming out of the Russian invasion of Ukraine hit $130, we didn’t really see a huge investment response. Why? You heard oil CEOs talking about this. They had billions of losses over the previous decade that they needed to make up, and they couldn’t justify investments to their shareholders if the price increases were going to be just a momentary blip.

We needed some mechanism essentially to get at that capital discipline problem.

Matt Klein: When oil prices went extremely low and WTI went negative, there was actually a proposal to refill the SPR specifically to essentially bail out American oil producers.

That did not happen, which probably exacerbated the supply shock problem a year or two later.

Arnab Datta: It shows you how short-sighted politicians can be on this stuff. They took the stance of “We’re not going to give a bailout to oil companies,” but the oil companies ended up profiting off of that in the end.

Matt Klein: I know a lot of the work that Employ America has published is about using the SPR for managing crude, but is there a capacity with the existing legislation of the SPR to also stockpile and trade refined products as well?

Arnab Datta: It depends on how creative you want to be with an authority. We do have smaller kinds of refined product reserves — they’re not utilized in the same sense. There are storage issues that come with storing refined products.

A lot of this is oriented around the question of how much oil price instability — both for refined products and for crude — affects exchange rate stability. We made the case that this is something worth taking seriously and accordingly, that the Exchange Stabilization Fund at Treasury should be utilized for this purpose.

Now, that’s not something that it’s typically seen as outside of the scope of some of the folks at Treasury. I understand their concerns. But outside of some of those authorities, it’s difficult to do this.

Matt Klein: You mentioned the storage issues — do you mean that refined products just literally would not be suitable to put in the salt caverns that the SPR has?

Arnab Datta: Yes, they degrade differently. To be clear, we could build facilities to store refined products. But they degrade outside very, very specific conditions. They degrade much more quickly.

Jordan Schneider: Why don’t you talk through the tension of working on this and pushing forward climate goals as well?

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Arnab Datta: I’ll credit my colleagues, Skanda Amarnath and Alex Williams, for making the case that this is important for decarbonization.

When you think about the energy transition, the price volatility of crude oil is as much of a challenge as crude oil itself. There’s a tendency among folks on the further left to engage in “keep it in the ground” rhetoric.

It ignores the fact that people need oil. This is not something that’s going away overnight. We need to think about how we are managing that stable transition and making sure that EVs, for example, are price-competitive with ICE cars.

This type of flexible contracting allows you to essentially set a soft floor on prices. If prices go to $40 again, EVs become less price-competitive. Making sure that the levers of policy are being utilized towards price stability over time is important.

Matt Klein: China is another very large oil consumer, of course, and they are much less transparent, but they also have very large strategic reserves and seem to use them actively to manage prices. What your sense is of how that works?

Arnab Datta: I have some friends who are very interested in this and they share data when they can find it, which as you said, is not easy. Generally, when I see some big development that they’ve started purchasing a lot, I try to just think about it in the context of what it means for prices going forward and whether we’ve got enough supply coming on.

There have been times when some action has happened where they started purchasing and storing a bunch of refined product. There’s always a worry about what that might mean — What are they gearing up for? I just can’t get a sense of their motivations from that. I really try to look at what it means in the broader picture for the supply-demand picture.

Jordan Schneider: Let’s come back to the legislation. What is the actual contracting change?

Arnab Datta: Put simply, the DOE can now utilize forward fixed price contracts when it’s acquiring oil for the Strategic Petroleum Reserve. In the past, prior to this rule change that happened at the tail end of 2022-2023, the regulation for acquisition basically said, “When acquiring oil for the SPR, DOE shall use a price index to account for fluctuations in market prices between the time of contracting and the time of delivery.”

What does this mean in practice? If I am DOE and I write a solicitation for a million barrels of oil nine months from now, the clearing price at delivery is not pre-contracted for. It’s based on the spot price of oil at that time. What that means is if you’re a producer and prices go up in that period, great, you’ve earned a little bit more money, but if prices go down, you'‘e at a loss. At the time that this practice was established, it wasn’t necessarily a bad thing. In some ways, it made sense. It was before a futures market. But now, particularly in the context of sending an investment signal, which is one reason why the DOE undertook this change. You want certainty. That’s the thing that producers need. They need certainty, particularly at the floor that they're going to be able to get a certain price.

The big change that DoE made in this regulation was changing that single sentence from “shall” to “may.” They can still do the market index pricing, but they’ve started to use fixed price forward contracts, which they’ve been engaging in for the better part of a year now.

Matt Klein: The type of oil that’s produced in the US by shale producers is meaningfully different from the type of oil that historically the US has imported and put in the caverns. Does the SPR make allowances for things like the sulfur content and viscosity? Are they aiming to specifically say, we want to support the US shale industry by stockpiling the light sweet versus the heavy sour? How is that process unfolding?

Arnab Datta: Unfortunately, their solicitations are all in sour crude right now. There’s a good reason for that - it’s what they have storage capacity for in the SPR. They do take sweet and they have stored it, but it can’t be commingled from what I understand. You basically need to keep the sour with the sour and that’s where the capacity is right now.

The other reason they tend to prefer to purchase sour is because our refining capacity is much more oriented towards sour. That’s a challenge that we still have to work through frankly.

If we’re thinking about incentivizing domestic investment, we’re really thinking about the shale patch because that has the shortest investment cycle - just nine to twelve months. We need to think about how we can maybe reorient some of our existing SPR caverns towards the sweet so that we can use it more as an investment signal that way.

Matt Klein: You mentioned you’re from Canada — the tar sands oil is very sour, right? Is there a possibility of doing some kind of cooperative arrangement with the authorities there to say, “Well you have the really sour stuff, we got the sweet stuff, so let’s work out a deal?”

Arnab Datta: It’s something I would certainly like to see. There are authorities and ways that you could do this. You could utilize the exchange authority. Whether it’s possible technically - the people who manage the SPR are really the only ones who know that.

But it’s a broader point that’s really important - because of how globalized this market is, we should be thinking more about how we can utilize allies and their resources to achieve a shared goal here.

One big development in the oil industry of the past couple of years is that the Dangote refinery in Nigeria finally got online and that’s purchasing West Texas intermediate - shale sweet crude. We do have capacity coming online that is able to take more of our shale patch product.

From Strategic Oil to Strategic Minerals

Jordan Schneider: How do the dynamics we’ve been talking about around energy map to critical minerals?

Arnab Datta: One thing that is similar is that a lot of the dynamics that you see when it comes to investment among producers are true for a lot of commodities, like copper and lithium. They tend to be characterized by these supercycles that are in some ways even more extreme. In the shale patch, you have a nine-to-twelve-month timeline from investment to production. In a lot of mining contexts, that time period can be years.

You don’t have a lot of price certainty. There is a risk that you’re going to start producing at a time when there’s too much supply already on the market and you’re not really going to get a great price for it. These are the dynamics that characterize all commodity investment. That's the challenge we really need to work with here.

There’s a tendency to under-invest, because the cost of underinvesting is suboptimal profits, while the cost of over-investing is potential bankruptcy.

You saw this after the big shale investment in the late 2010s when oil prices went down, but you also saw it in lithium. In the late 2010s, China had basically scaled back a bunch of its EV subsidies, so there was a huge supply glut of lithium on the market. You saw producers from Australia and Quebec basically go bankrupt because they couldn’t sell their product on the spot market in a way that was economical.

Jordan Schneider: All right, so what’s the answer?

Arnab Datta: Daleep Singh and I wrote an article about this in FT — this was before he rejoined the administration, but our idea was to reimagine the SPR as a strategic resilience reserve. The concept is that we have these vulnerabilities in other places with other commodities, whether it’s lithium, copper, steel — a whole host of things that we need for the energy transition, but also in refined products. Could we reimagine the SPR to basically address the similar vulnerabilities and disruptions in different markets?

Jordan Schneider: Let’s go a few levels deeper, Arnab.

Arnab Datta: It’s worth stepping back and just thinking - put simply, we’re trying to manufacture a lot of the tech needed to decarbonize here in the US - EVs, solar panels, small modular reactors. But to manufacture that stuff, we need a steady supply of a bunch of different commodities, let’s call them energy transition commodities. Things like lithium for EV batteries, graphite for casings for nuclear reactors and copper for electrification.

For many of these commodities, the US producers are reliant on a single source - China. They’re the only ones who really have developed these markets. They've designed them in a lot of ways around their own domestic goals and policy. So when we think about having our own manufacturing renaissance, basically from a risk management perspective, securing the supply chain for these commodities is a key challenge that we have to undertake.

If you’ll indulge me in going a little bit deeper on that, this issue runs from a market level all the way down to individual projects. If you think about energy transition, commodity demand is rising all over the world. But the supply is controlled by China from the raw ore, which sometimes they can control anywhere from 60% to 90%. Even more important is the refining capacity, which they often control 90% of. They really have a lot of the supply themselves.

What they can do is they can tactically strategically flood the market for these commodities, driving the price down globally. That both changes the market, but it makes it really difficult for new entrants to invest. If we’re thinking about domestic miners in the US, miners in Australia and Canada, it’s very difficult for them to invest when the current price of lithium, for example, is really low. So that makes it difficult. It also reduces the value of those assets, and it creates opportunities for China to go in and buy these distressed assets and continue that domination.

But aside from these market dynamics, the market infrastructure itself is also very dominated by China. If you take something like lithium or cobalt, the only physically cleared benchmark contracts are on the Guangzhou Futures Exchange. Basically, there’s a couple for some of them - I mean, there are ones on the LME as well. But if you’re looking to hedge, that’s where you have to go.

The existing cash-settled contracts are also imperfect. If China has a localized supply glut, it’s going to impact the price of those contracts. If you’re a lithium producer in Quebec and you’ve got a signed offtake agreement with Texas Tesla Gigafactory, the price index in your contract, which is normal practice, is highly correlated with Chinese local market supply. When their prices go down, the value of your contract with the Texas Tesla Gigafactory goes down. That makes it very difficult. It can make your project more distressed.

Stockpiling is an answer a lot of people are throwing around. It’s useful because you can give producers some of the certainty they need, but it’s not necessarily sufficient, because what we really need is market infrastructure. We need something more transparent.

Matt Klein: If China is the biggest market for physical lithium, changes in Chinese demand will affect the price of lithium, which will affect the Quebec-Texas trade — that makes sense to me. But I don’t understand why the fact the futures market is based in China would make a difference. Can you kind of walk me through that?

Arnab Datta: I should have been a bit clearer there. The fact that the physical contracts mostly exist in China is much more of - if you’re a producer looking to hedge, that’s where you have to go. That market is not necessarily the best governed or necessarily the most reliable in terms of meeting contract obligations. I’ve talked to producers who have tried to go there and use it to hedge, and they haven't had great experiences with the actual honoring of contracts. In 2019, a lot of these offtake contracts, whether they were on exchanges or not, just weren’t honored. Companies were left holding the bag.

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Jordan Schneider: You had this cool riff on lessons from the Fed and this idea of crisis prevention versus crisis mitigation. Why don’t you talk a little bit about that?

Arnab Datta: This case, zooming out — the thing we’re really trying to deal with here is uncertainty. Uncertainty can come up in a bunch of different contexts. There are a lot of different market failures that can happen — agency issues, asymmetric information — but you're basically dealing with a bunch of different tail risks.

What we analogized to was the Federal Reserve. When it’s managing financial risks, it essentially has a toolkit that it can utilize to prevent crises and to mitigate them when they occur. We can’t predict everything, obviously, but if we can build a toolkit that’s capable of conducting operations in both those spaces, you can build something more resilient.

In the context of the Fed, crisis prevention looks like things like capital requirements for banks to make sure that if there’s some kind of a crisis, they can bring some equity to bear. Then there are a whole host of other bank regulations. In past crises, in 2008 and 2020, they’ve basically served as the lender of last resort. To keep liquidity in the system, they purchased distressed assets - I mean, indirectly, at least.

In the context of commodity markets, you have similar dynamics. You need to evaluate, in real time, if there is enough resilience in the system so that we’re getting the level of production we need. You can do that with things like forward price contracts, like put options. You can make sure that there’s enough incentive to produce to a certain level so that we don’t have a shortage.

But if it does occur, or if you get the other challenge, where if you get too much production, you can have the federal government step in and just start purchasing it and serving as the buyer of last resort so that those companies that did produce don’t end up going into bankruptcy. They have a place where they can still remain viable as companies by selling their product.

Matt Klein: Arnab, you said that Employ America got into this originally because you were rightly concerned about the possibility of an oil shortage leading to unwelcome inflation in ‘21 and ‘22, which was right. I’m curious, are you guys next going to cook up a plan for the Fed to trade commodities futures as the logical way of doing this?

Arnab Datta: We, in our paper, laid out a couple of ways this could go. One is you can cobble together a set of executive branch authorities to basically undertake the work necessary to do this. There’s some new offices that have been created. These are offices that potentially could be set up to evaluate markets in real time. There's a foundation that was established at the Department of Energy with a pretty wide ambit to support the Department of Energy’s work. Could they be evaluating what’s happening in lithium and copper and saying, we need to hit this vulnerability? Possibly.

Then you have a number of different funding streams, like the Office of Clean Energy Demonstrations. You have the Loan Programs Office. Could they be undertaking activities? We put out a recent proposal for LPO to basically capitalize a special-purpose vehicle that would engage in the trading we’re talking about to give producers the certainty they need to go produce. It’s not a perfect version of this, but it's a pretty good one, and it’s one you can do with the authority you have.

Broadly, though, I’d love to see Congress equipping an office with the capacity in terms of staff to evaluate these challenges and vulnerabilities in real time and giving them the toolkit to actually act through market channels. Basically, to both purchase either directly with producers and tie it to capital commitments, or to just purchase on exchanges would be really useful.

Regarding our SPR intervention — what is happening now is great in terms of the fixed-price contracts, but it’s still a bit clunky. Besides the sour-not-sweet issue, it happens kind of beside the market rather than through the market. If we’re thinking about market intervention, if DoE could just directly be trading WTI contracts, that’s a more efficient channel to the market. Equipping the SPR office of the DoE to basically set up a trading account at CME and start trading this stuff would be pretty useful.

They can keep pushing for an incentive to build even more storage capacity, potentially. There are new contracts being established. There’s a new company - I mean, it’s been around for a while, but there’s a company called ABX that just launched their first contract last week or a couple of weeks ago. It’s an LNG physically cleared contract. They’re looking to really make a splash in battery metals in physical contracts, which don’t really exist outside of China right now.

Jordan Schneider: We saw this work pretty well with the CHIPS program office, but that required a new organization and 200 people coming in from outside of government who have been actively playing in these markets for their careers. Curious about your take on that, Arnab.

Arnab Datta: It’s always tough. CHIPS has done a great job. One thing I will say is just stepping back to your point about the political consensus around this — it is changing.

I speak with a lot of miners and folks in the industry — they speak to Republicans about this.

More and more Republican staffers I talk to are starting to understand, particularly because these are not functioning free markets. This is a place where another country is playing a very active role, and there is an understanding that we need to respond in kind. We can leverage our skills in building financial markets to do that.

To your point about staff capacity, when we first started doing this work, advocating for this with the SPR, there was a lot of resistance from people internally because it is very different. It’s a totally different type of contracting. It’s not something that had been done. But you also do find that over time, bureaucrats do learn how to do this stuff, and they can figure it out. Ideally, you want to set up something that has the capacity to do this - like the Fed has economists and people from the banking industry who know how to set up purchasing facilities in a crisis. You want that built in, probably, but there are also ways to get it done without that.

Jordan Schneider: One thing about the other dynamic that is a little underappreciated about this is you can attract talent to do cool stuff. This is a whole lot more exciting than whatever was happening with the Strategic Petroleum Reserve ten years ago. If you allow people sort of room to run and be creative and thoughtful and use their energy in an active way — you can attract a different type of talent.

Arnab Datta: Traders are included in this context. I’ve spoken to traders who lament the fact that Joe Biden is now the greatest oil trader of all time. It’s him and Marc Rich basically, next to each other. When you think about the necessity of doing this for public purpose and that you're not going to get a percentage of the trade on the other end of it, but you're going to execute something really cool, people get excited about that.

Matt Klein: I’m reminded of something I worked on a long time ago when I was an intern somewhere else, which is the farm subsidy system we have in this country. People obviously have a lot of issues with it in various ways. Nevertheless, there’s a pretty strong cross-partisan consensus that it's good to have a whole system of supports that are all different for different kinds of crops. It's not just one system - it’s very customized for things like whether it’s peanuts or wheat or soy or whatever.

Yet that seems like something built up over 90 years. Do you see other people thinking about this commonality, like what we can learn from that and whether that is an appropriate analogy?

Arnab Datta: It’s right. The Commodity Credit Corporation is the last of the government corporations established out of the New Deal that’s still standing. That’s because farmers rely on those tend to come from red districts. You could imagine something like that for mining districts.

One important thing is that people in that context understand that we need to be creative and have flexibility in designing different contracts for different goods, as you said. What happens in the lithium market is going to look very different than graphite.

We did a series last year on why the federal government has an interest in establishing a liquid lithium benchmark. In the context of graphite, that’s not really true, because graphite is used so differently, basically in everything, that its form and function look so different that it doesn't make sense to have this commoditized version of it.

That analogy is helpful for that point as well. It takes time to build these things. After we wrote the FT article, a lot of folks started to reach out, people from mining in the defense industry and commodities that are coming into defense with the green energy transition. Building that type of coalition, though, is something that can be done. It's just that everyone needs to see something in it for themselves.

Part of that is where you get into the contractual flexibility, the financing flexibility, so that every kind of industry can get something appropriate for them. One of the problems that we have with legislating these days is something very narrow gets constructed. It's a loan authority. Loan authorities can be great. Lending right now is helpful because the cost of capital is very expensive. But it's not the only thing. It's not the thing that's going to bring a project online necessarily, because you also need a demand piece to it. So making sure that something is built that has that flexibility is really key.

Matt Klein: Right. The demand piece is why the cost of capital is so expensive.

Arnab Datta: Exactly.

Jordan Schneider: We got the inside game. We got the outside game. We've got PDFs, we've got Financial Times articles, we got blog posts, we got private memos, we got podcasts.

How do you sort of orchestrate something like this, a relatively bipartisan, technical-ish thing into existence?

Arnab Datta: Orchestrating is very generous. I'm just incredibly lucky to work with amazing people. Skandar, our executive director, was very early in identifying this as a potential problem. It helps to be first and be good and be right early on.

The way that we approach our work here, particularly in the inside-game aspect of it, is we do a lot of work and apply a lot of rigor to make sure that what we're proposing is within the realm of possibilities, both from a legal perspective, from a policy implementation perspective, and from a political perspective. You need to evaluate all of those fears and put something forward.

I was very lucky. My first job was with Michael Bennet, who's a very thoughtful senator. My first boss was a guy named Charlie Anderson, who thought through this stuff very deeply and technically as well. So I was lucky to learn that skill from him and other people in that office. When you're thinking about balancing the different pieces, the first piece of it is really getting those details right. Everything after that can follow, but it needs to have some level of viability and rigor to it early on.

Our very first version of this was the weekend after Russia invaded Ukraine. Skander and I wrote a two-page memo that we sent to NEC and NSC outlining the contours of the original proposal, which is different than what it ended up being. Then realizing we heard some positive responses to it, we got some more negative responses to it. We tried to then think about what the public case looks like.

We need to think about how to reach every different kind of stakeholder there that might have some agency in this. We started to make that public case. Then over time, when we felt that they weren’t being responsive enough, we got a little bit harsher. Then when they were responsive, we started to ease up a bit and try to find ways to work through some of the details. You need to be nimble.

Jordan Schneider: Can you expand on making sure this is actually legal and knowing when to be mean?

Arnab Datta: On the legal side, it is common practice for the White House to suggest something to an agency and for that agency to come back and say, “This is unlawful.” That happens in every administration. It is not always true, but sometimes it is. But a lot of times it’s “This isn’t how we do this now.” There’s a conception that the way we do this now is the only legal way to do this. It's evolved over time.

You need to be able to have the confidence to say, that's not always the case. Then it just goes to how strong a legal argument you're able to craft. I'm a lawyer, and I relish the opportunity to write a legal memo laying this stuff out. Generally, in the context of the spending power, that's something where the executive branch has a pretty high amount of leeway.

When it comes to contracting, the law will define and constrain what you are able to do, but it’s rarely going to say you absolutely can’t do this. With modern-day financial contracts and lending contracts, you can usually craft something that is flexible enough to meet your goal and also comply with the law.

That’s an important thing. I’m sure there are general counsels at the Department of Energy who would disagree with my interpretations of things, but at least showing that you’ve done the work also goes a long way because you want the principal, the champion who’s pushing this forward, to at least have some of that confidence as well.

As for when to be mean, it’s going to be different for everyone. We got a bit harsher in our tone. Skander went and did some podcasts where he was a bit harsher. We put out a couple of blog posts where we were critical of Secretary Granholm and what she was saying publicly. For us, our North Star was the policy response. When we felt that they weren’t being responsive and they weren’t being correct in how they were applying this, we started to get a bit harsher. Then when they were communicating with us a bit more, we eased up.

I’ll single out a guy at NEC named Neale Mahoney, who became the champion for this and really saw it through to execution. He was someone who was very responsive and he helped us think through some of the logistical challenges.

Jordan Schneider: Resources and time are limited and you can’t do everything. As you’re thinking about trading off between another one-on-one meeting with a staffer versus writing another thing, is there a heuristic? Is it all just by feel?

Arnab Datta: I don’t know if there’s a heuristic. I will say that very quickly you run into the capacity limits of one organization and a couple of Twitter accounts who care about this thing. When it comes to the things that I’m happiest to try to invest time in and hand off, it’s some of that amplification effort.

We were really lucky to talk to and get some journalists who have influence to write about this stuff at important junctures, folks like Matt Yglesias or Robinson Meyer who really get this policy and get the importance of it. That’s something where I’ll certainly invest more time because I know that’s going to reach an audience that is helpful for me.

There are two pieces specifically about this that you can go on our website and see. One is about managing logistical risk at the SPR and the other is about auction design. I would imagine that maybe ten people read the entirety of these reports. They are long, they took days to write. I’m really proud of them. They’re really good. But that work is partly to get something out there, even though no one’s going to read it. It’s helpful for people within the administration to say this is out there now, there is an argument here that is credible, that has some work behind it. I’ll put a lot of work into that even though no one’s going to read it.

One thing I would say as a piece of advice is something I wish I did more: ask people “What does your boss read?”

Getting direct time with the boss, with the actual representative or senator, is difficult. It’s certainly difficult for outside people. The way you can do that is by getting into the publications that they read themselves.

You also need to manage bad press. Marco Rubio, for example, does care about the press that he gets on the Wall Street Journal op-ed page. In the past, there have been cases where he spent a lot of time on bills and he’s been publicly supportive of them, and then just changed a day later because one bad article came out.

The Future Of ChinaTalk and Advice for Fatherhood

Jordan Schneider: ChinaTalk is basically not going to be able to pay for my incipient child with just philanthropic support and paid subscriptions. That requires me to look for sponsors that are not foundations.

Where would you two draw the lines if you were me?

Arnab Datta: I’m highly nonjudgmental about sponsorship stuff. When I was in high school, I was the kid who just didn’t care that Wilco was in Starbucks or whatever, because I just liked Wilco and I wanted more people to listen to their music.

Your product is good and people care about it, and it’s really good that you keep doing it. Other than ethically bad companies, you should just go nuts and get what you can to keep it going.

Jordan Schneider: I love the permission slip. I’ll take it. My favorite iTunes review I’ve ever gotten is, “Jordan’s a US government shill. He gets all this money from the CIA.” I wish!

Jordan Schneider: Matt, I’m about one month out from fatherhood. What’s your advice?

Matt Klein: There’s a really good book, later adapted to a movie, called Lone Survivor. It’s about a Navy SEAL in Afghanistan. The whole first part of the book is about Navy SEAL training. At the culmination of the training, they go through something called hell week. This is when overwhelmingly most people drop out and don’t become official Navy SEALs.

The challenging part isn’t that they ask them to do anything harder than they’ve been doing. They’ve already done long runs and other tasks like being chained down in a pool to see how long you can hold your breath underwater. The hard part about hell week is that you're doing the normal stuff while being sleep-deprived for basically the entire week. They also play loud noises at you, including the sounds of crying babies.

What this means is — you are going to be a Navy SEAL soon, so that’s kind of cool.

The other thing to think about is, if it seems really hard, a lot of other people have managed to survive it. You’re in good company.

Jordan Schneider: That was the best line from the baby class you take before delivery. I was in this room with all these overachieving couples in their early thirties, and then the head nurse who was doing the class said at the end, “Some teenagers have kids. I have faith in you. It's gonna be okay.”

Arnab Datta: I used to teach kindergarten, and I had a couple of kids who had close to teenage parents. They turned out fine.

Jordan Schneider: How has your experience in a kindergarten classroom helped you in your policy entrepreneurship journey, Arnab?

Arnab Datta: Being able to address every level of immaturity or maturity is helpful, especially with Congress and people in Congress, from baby staffers to representatives and senators themselves.

Is China’s model of economic development compatible with democracy? Were events like Tiananmen Square and the rise of Xi Jinping inevitable under China’s governance structure?

Welcome back to part 2 of our interview with Yasheng Huang 黄亚生, the author of The Rise and Fall of the EAST: How Exams, Autocracy, Stability, and Technology Brought China Success and Why They Might Lead to Its Decline.

In this installment, we discuss…

• The aspects of imperial China’s governance Mao chose to embrace, and those he chose to abandon,

• The factors enabling Mao’s radical policies compared to imperial rulers,

• Why China was able to grow so much faster than India, despite the setbacks of the Cultural Revolution,

• Statistical approaches for evaluating the effectiveness of autocratic development models,

• China’s economic reforms and rural development policies in the 1980s,

• How the events of 1989 permanently altered China’s trajectory,

• Whether the rise of Xi Jinping was inevitable.

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Co-hosting today is Ilari Mäkelä of the On Humans podcast. Here’s part one if you missed it.

Mao’s China — Dynastic Traditions and Leninist Innovations

Jordan Schneider: Last week, we discussed Chinese history up to 1949. Ilari, could you give us a brief recap of our first episode?

Ilari Mäkelä: To understand China’s history, Yasheng Huang emphasizes the importance of focusing on the little-studied period after the collapse of the Han dynasty in the third century. During the next few centuries, China resembled Europe, with no single power base and competing ideologies. Huang’s studies have shown that this was also when China was at its most inventive.

Unlike Europe, this political fragmentation ended when China was unified again in the 6th century under the Sui dynasty. Everything changed with the introduction of civil service exams on a large scale. These exams allowed a significant portion of the population to participate and created stability. Many Chinese believed that through hard work, they could gain political power.

While this system prevented the development of a European-style aristocracy, it funneled all intellectual efforts into serving the emperor. Consequently, there were no power struggles like Henry VIII versus the pope, nor was there an Enlightenment-style intelligentsia. Instead, China produced numerous Confucian-educated civil servants.

Jordan Schneider: Professor Huang, what aspects of this imperial tradition did Mao adopt or reject when he began to rule in 1949?

Yasheng Huang: Mao took over China in 1949, inheriting certain aspects of imperial China while departing from others. He maintained and extended autocratic controls, implementing strong economic controls through central planning, state ownership, and government price-setting. Politically, communist China’s power reached beyond the county level, extending to villages through land reforms and the communist system.

However, Mao actively went against imperial tradition by de-emphasizing bureaucracy and meritocracy. This shift began in 1957 and intensified during the Cultural Revolution in 1966. Universities were closed, examinations and expertise were downplayed, and ideology was elevated. While ideology was important in imperial China, Mao’s approach differed significantly, relying on political and ideological studies rather than the traditional examination system.

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Jordan Schneider: It’s interesting that you argue the more codified a system is and the fewer power bases that exist, the more important the leader’s actions become. However, even powerful Ming or Song dynasty emperors couldn’t have executed the level of radical changes that Mao implemented from the mid-1950s through the end of his reign. Mao seemed to combine the worst of both worlds — centralized personal power without bureaucratic and cultural safeguards that would have prevented disasters like the Great Leap Forward or the Cultural Revolution.

Yasheng Huang: Excellent observation, Jordan. Two additional factors contributed to this difference.

1. Modernity — imperial China lacked modern means of transportation and communication. Indoctrination was the primary tool, and once officials were dispatched to remote regions, central control diminished. In contrast, modern systems allow for instantaneous and ongoing control through air travel, trains, and buses, facilitating frequent indoctrination sessions in Beijing.

2. Transformative agenda — imperial China, like many traditional polities, focused on maintaining the status quo. They often lacked knowledge of potential transformations or how to preempt them. Mao, however, had a highly transformative agenda. In 1958, he famously aimed to surpass Britain and America in steel production — a concept foreign to Ming dynasty emperors.

Communist China was more ambitious and transformative, aided by Leninist techniques and organizational capacity. It wasn’t a carbon copy of imperial China, but incorporated elements borrowed mostly from the Soviet Union.

Vladimir Lenin’s theory of the vanguard of the revolution emphasized the ability of political elites to rapidly transform society. While Karl Marx predicted that communist revolutions would occur after capitalism, Lenin argued they could be launched directly from feudalism. This transformative agenda was absent in imperial China but central to Mao’s rule.

Jordan Schneider: The contrast between the Ming dynasty and Mao’s Leninism is fascinating. You argue that when Marco Polo arrived in Yuan Dynasty China, he felt transported 500 years into the future. During the voyages of Zheng He 鄭和, the Chinese viewed other cultures as backward and lacking.

Human nature may play a role here. When elites feel they’re at the top and things are stable, they may be less inclined to explore, change their minds, or question whether their system has all the answers. In contrast, from the fall of the Qing dynasty through the Republican period to Mao’s era, there was a keen awareness that China needed to catch up with the rest of the world.

To what extent is this perspective determined by China’s relative position as more or less advanced than other societies?

Yasheng Huang: I agree that the factor I mentioned is one of many contributing to this perspective. However, even given the disparity between East and West 500 years ago, it doesn’t fully explain China’s isolationist stance. The mental model you describe likely applies to the political elite who, upon seeing nothing impressive abroad, decided to remain insular.

Today, people from wealthy countries often explore poorer regions out of curiosity. When Christopher Columbus embarked on his voyages, he had personal motivations and potential gains alongside nationalistic agendas. This personal stake was entirely absent in Zheng He’s voyages, which were purely state-sponsored activities with national objectives.

Jordan Schneider: That’s an apt comparison. European colonization in the 18th, 19th, and 20th centuries — despite the lack of respect for native populations — still involved scientists and observers who documented their experiences. This information flowed back into the broader ecosystem. In contrast, China lacked this type of engagement for over a thousand years.

Autocratic vs Democratic Development Strategies

Jordan Schneider: Ilari, would you like to bring us back to Mao?

Ilari Mäkelä: One interesting aspect is the package Mao inherited from the imperial era (albeit in a mutated form) is the autocratic tradition, which we often view as partially negative.

One of the most fascinating questions in comparative economics is why China has grown so much faster than India. Some argue that democracy doesn’t work well for such a large country as India, suggesting that autocracy, like in China, is necessary. You have a different perspective, focusing more on China’s human capital resources.

I recall you mentioning in your TED talk that China grew at a pace similar to or even faster than India, even during Mao’s era. This suggests that growth occurred despite policy, not because of it. You attribute this to an inherent push for growth in China, absent in India, linking it primarily to literacy. Is this correct?

Yasheng Huang: The baseline judgment on China and India is based on almost a single data point from the World Bank website — the GDP per capita of China and India in 1980 or 1990. It shows that India had a higher GDP per capita than China at that time. Twenty or thirty years later, China’s GDP per capita surpassed India’s. Many people used this data point to argue that autocracy (China) could grow faster than democracy (India).

However, there are a couple of problems with this conclusion. First, the data is almost certainly wrong. One issue with Chinese GDP data is that they used a Soviet system called the material product measure, which didn’t include the service sector. In poor countries without industrialization, you have agriculture and a sizable service sector. For many years, the service sector was very large in the Indian economy.

Ilari Mäkelä: But isn’t it still true that China has undergone a more dramatic transformation than India since the 1980s?

Yasheng Huang: Absolutely. The point I was making earlier disputes the initial discrepancy. Given that China grew faster than India, it’s actually more impressive if you believe that China started from a higher per capita base. However, there are many differences between China and India. It’s puzzling why people immediately jump to the conclusion that it was because India was a democracy and China was not.

To properly evaluate this, we need to look at global evidence to compare at least two competing hypotheses, which are human capital and the political system. Academic literature increasingly shows that autocratic and democratic systems don’t have a significant impact on growth rates. Some autocracies grow very fast, like China, Taiwan, and South Korea in the 1960s and 1970s. There are also spectacular failures, such as the Philippines, Indonesia, and many African countries.

The problem with the formulation by many Chinese and some Western intellectuals is that they escalate a factual statement about China growing faster than India to a statement about the superiority of autocratic systems.

When discussing systems rather than specific countries, you need evidence from other countries with the same system as China. That’s just common sense.

Jordan Schneider: Where do you think this argument comes from then?

Yasheng Huang: Some people believe in autocracy and are grasping for evidence to show their belief has economic benefits. I often point out to them that China was also autocratic under Mao, but it didn’t grow very fast during that period. An honest person would conclude that there must be something else different between Mao and Deng’s eras. Perhaps globalization, open policies, or private sector development played a role.

I’m dissatisfied with media coverage because they often go for sensational statements without examining the logic behind people’s views. In academic seminars, these arguments wouldn’t hold up for five minutes because basic logic would demolish them. Unfortunately, media attention often goes to those making broad, sensational statements rather than those presenting logical arguments and evidence.

Liberalism and the Future of Chinese Democracy

Ilari Mäkelä: One reason for the hyperbolic “it’s because of autocracy” conclusion might be that some Westerners have inadvertently contributed to this by repeatedly claiming that autocracies cannot grow fast. When faced with a fast-growing autocracy, it’s easy to jump to the opposite extreme conclusion. Would it be fair to say that there are certain conditions under which autocracies can grow fast? For China, factors like the imperial legacy of civil service exams (Keju) leading to high literacy and human capital, and a post-Mao autocratic political environment that was more conducive to growth due to increased pluralism and diversity, played significant roles?

Yasheng Huang: That’s a very good observation, Ilari. In my current book, which is a revision of my 2008 book, I argue that the right way to look at China or any country is to focus on the direction of movement rather than static conditions. That is, we need to look at whether the is country moving towards more openness or more closure.

It’s not accurate to say that China couldn’t grow because it’s not a Western democracy, or that it could grow because it’s not a Western democracy. The key is to look at the movement of both Eastern and Western countries. Are they moving in an open or closed direction? In statistical terms, this is called a difference-in-differences approach.

Under Deng Xiaoping, China was undoubtedly an autocracy, but it was moving away from Mao’s totalitarianism towards a more authoritarian society. For people living there, this shift made a huge difference. The incentive effect comes from that movement.

Imagine an entrepreneur in 1978. They wouldn’t be deterred by the lack of Western-style institutions. Instead, they would be encouraged by the fact that they could now start a business without fear of arrest, unlike in 1976. The incentive effect came from China becoming less autocratic, not from being autocratic.

As a policy question, the real issue is whether to move the country more towards or away from autocracy, even if the decision isn’t about fully embracing democracy.

Jordan Schneider: Can we relate this to your personal history? If you were born five or ten years earlier, do you think you would have even bothered learning English? How did this change in the political climate reflect in your youth, particularly in terms of learning and the drive to acquire knowledge?

Yasheng Huang: In my personal case, I was always interested in knowing more rather than less, regardless of the environment. After coming to the US, I spent hours in the library reading Western writings about China, particularly about the Cultural Revolution and the Great Leap Forward, because I couldn’t access that knowledge in China.

Regarding business motivations, people need to feel secure to make investments. If you know you’ll be arrested immediately after making an investment, you won’t do it. In my book, I emphasize the importance of not underestimating the incentive effect of not being arrested. Many people focus on China’s lack of secure property rights law, neglecting the fact that Deng Xiaoping significantly increased the personal security of the Chinese people. This increased security was a crucial factor in encouraging Chinese entrepreneurs to start businesses.

Ilari Mäkelä: The era after 1978 is indeed special and quite different from everything else that happened under the CCP. There wasn’t a significant rural-urban gap at the time, with rural areas growing as fast as urban areas. There was also a diversity of voices within the party, ranging from old-school economic planners to reformers like Zhao Ziyang 赵紫阳. Since you lived in China in the 1980s, could you share your personal experience of that period?

Yasheng Huang: I first came to the US in 1981, but I returned to work for the World Bank in China during the 1980s. However, my understanding of that period didn’t come from my lived experience. Like many Western observers, I didn’t have a clear view of the 1980s until I began working on my 2008 book.

After publishing a book on foreign direct investment (FDI) in 2003, I was left with the question — what was driving Chinese growth in the 1980s, before FDI became crucial? This led me to research the 1980s extensively for my 2008 book, Capitalism with Chinese Characteristics, which is also summarized in my 2023 book.

I discovered that reforms in rural China went far beyond agricultural reforms. There were contracting reforms, land reforms, village elections, and even rural financial liberalization. I was astonished by how proactive the Chinese leadership was about rural financial liberalization. Top officials from various banks were issuing support for these reforms.

Large-scale financial institutions developed extremely fast in rural areas during the 1980s. This affected 800 million people, as China was 80% rural at the time. Yet, Western scholarship largely ignores this period. The prevailing narrative is that China grew without financialization or with a state-owned financial system, disregarding the extensive documentation and statistical analysis showing otherwise.

It’s frustrating and saddening that there’s so little curiosity about this crucial period in China’s development, despite its immense impact on hundreds of millions of people.

Ilari Mäkelä: You’ve piqued my curiosity. Before we discuss what happens next and why this trend doesn’t continue, I’d like to ask a question. I mentioned earlier that one of the interesting aspects of the ATS is that it’s not always a matter of the CCP making decisions based on a grand strategy. Often, it’s because there is no grand strategy. There are internal power struggles, such as Deng Xiaoping versus Chen Yun 陈云, or Zhao Ziyang versus Li Xiannian 李先念. Based on your research into those documents, to what extent was this a unanimous decision in Beijing versus the liberal factions of Hu Yaobang 胡耀邦 and others being able to operate under the cover of confusion?

Yasheng Huang: People like Hu Yaobang and Zhao Ziyang didn’t suddenly decide to implement financial liberalization. What’s remarkable about 1980 is threefold.

1. There was political fragmentation at the very top, as you mentioned.

2. The policy ethos was focused on tangibly improving people’s lives rather than solely on GDP growth. Any policy or practice that improved people’s lives was considered the right approach by definition. For example, small-scale sellers on Beijing streets selling chickens and various goods were allowed because it improved their lives by providing income.

3. There was a prevalence of initiative-taking. A concrete example is the Rural Credit Foundation, an almost national-scale rural financial institution. The central bank refused to recognize it, fearing disruption of financial control. However, the Minister of Agriculture stepped in and provided legitimacy. Such local bureaucratic initiative is unimaginable in China today or even in the 1990s.

These practices weren’t initiated by Deng Xiaoping, Zhao Ziyang, or Hu Yaobang. Deng Xiaoping famously said about township and village enterprises, “The Central Committee of the Chinese Communist Party takes no credit for it. It was a total surprise to us.” Essentially, there was space for organic and spontaneous practices, which almost entirely disappeared, especially in rural China, after 1989.

Jordan Schneider: Let’s discuss 1989 then. You have this concept of axiomatic legitimacy, where after 1500 years of imperial rule over the broader Chinese landmass, people expect and defer to the legitimacy of the center, except during rare occasions like dynastic falls or major invasions. Professor, to what extent do you believe a counter-revolutionary reaction was inevitable?

Yasheng Huang: I don’t believe 1989 was inevitable. I concede that China’s post-1989 direction was more likely than before, but it wasn’t 100% determined by axiomatic legitimacy. Every culture starts with certain presumptions. In Chinese culture, due to history and autocratic rule, there’s a presumption that whatever the government does is legitimate and beneficial to individual welfare.

This view was present in both the 1980s and 1990s. The difference lies in the ability to question and debate these presumptions in the 1980s. Sometimes, you might end up with the same view you started with, which is fine. However, the opportunity for discussion and inquiry existed.

In contrast, without freedom of discussion or what Amartya Sen called “discussion democracy,” people tend to maintain their initial views without examination.

This is evident today, where many young Chinese people, even those living in the West, refuse to engage in different mental processes and cling to their axiomatic views.

Jordan Schneider: The real question is whether a discussion democracy can exist under CCP rule. Is it possible to have a system where people like young Yasheng Huang can question the legitimacy of Beijing’s rule? Can a governing body be comfortable with this level of questioning, or was the 1980s an anomaly due to the aftermath of Mao’s era, which ended when the system responded to people asking too many questions?

Yasheng Huang: I’m of two minds on this issue. It’s debatable whether 1989 was an inevitable result of a looser autocratic system or a consequence of individual decisions by leaders and students. When I study history, I’m struck by how often individual events shape its course.

Looking at Taiwan and South Korea, both experienced massacres but didn’t reverse their economic and social progress. At some point, their leaders decided to let go and allow change.

Today, Taiwan and South Korea are vibrant democracies, arguably performing better in some aspects than Western democracies. During the pandemic, for example, people in these countries trusted their governments more readily.

Regarding China in the 1990s, it wasn’t necessarily imperative for the regime to reject all political reforms proposed by Zhao Ziyang. Hu Jintao moved China further in a statist direction, and Xi Jinping continued this trend. I attribute much of the blame to the leadership that came to power in China after 1989, whom I refer to as the “Shanghainese” due to their origins and viewpoints.

This new leadership focused on globalization, privatization, and urban development while neglecting rural areas. They viewed the countryside as a burden, believing peasants couldn’t contribute significantly to GDP growth or technological development. This perspective shaped the “China model” of urban development, high-tech industries, and infrastructure that we see today. The rural reformers, including Zhao Ziyang, were sidelined or marginalized in the aftermath of Tiananmen.

Ilari Mäkelä: I’d like to challenge your earlier statement that 1989 wasn’t that important. It seems it could be the most crucial event. The conservative old guard wanted to maintain their way, while Deng Xiaoping aligned with liberal reformers like Hu Yaobang and Zhao Ziyang. The Tiananmen Square protests allowed the conservative faction to drive a wedge between the political and economic liberals and Deng Xiaoping, who appeared to be an economic liberal but a political conservative.

This shift resulted in everything you described, but it also led to another significant change. You mentioned the ideologically stubborn youth in China today. Some argue this is also a post-Tiananmen symptom. The government decided to emphasize ideological training over economic focus. New curricula were introduced, emphasizing national humiliation. Wang Zheng’s 汪铮 book, Never Forget National Humiliation, discusses how this phrase became a classroom mantra for Chinese children.

The narrative of Chinese humiliation and rejuvenation under the Communist Party became a way to prevent another Tiananmen Square incident. By teaching children about the horrible past and the great present, while instilling suspicion of foreign influence, the government shaped a new generation. The Xi Jinping era seems to be a natural progression of two trends — nationalism in textbooks and the lack of political pluralism in the CCP.

Yasheng Huang: I apologize if I wasn’t clear earlier. I absolutely believe that 1989 was extremely important. In fact, I think it was more significant than many scholars have acknowledged. They usually recognize its political impact but overlook its economic consequences. In my revised 2008 book, I presented statistics demonstrating that Tiananmen also had substantial economic effects.

The question is whether it had to turn out this way. There’s an unconfirmed rumor among Chinese intellectuals that Deng Xiaoping considered inviting Zhao Ziyang back at one point. If true, and if Zhao had returned, would China have taken such a divergent path? My observation is that while there was a 90% chance of China ending up this way, there might have been a 10% chance that leaders weren’t as constrained by 1989 and could have continued reforms.

Taiwan and South Korea, for instance, had their own massacres but managed to move on. Perhaps some distance from the event is necessary. However, China remains stuck in a Tiananmen mindset long after the event, which I believe is largely, but not entirely, determined by Tiananmen.

Jordan Schneider: The key issue, relating to your lifespan argument, is that reform in Taiwan and South Korea occurred after the death of their autocratic leaders. China’s problem was that it had more people with charismatic, revolutionary legitimacy who lived exceptionally long lives. If Deng Xiaoping and Chen Yun hadn’t been around in the late 1980s, the slightly younger generation, more open to different political perspectives, might have had more power. My counterfactual is that if Tiananmen had happened in 1994 or when these older leaders were more incapacitated or absent, the balance of power within the system might have been different. Even after Mao’s death, there were still enough people with strong beliefs in the old system and charismatic credibility to maintain their influence, preventing the new generation from asserting themselves.

Yasheng Huang: I agree with your analysis about the overlapping generations, which was absent in Taiwan and South Korea. Interestingly, the Cultural Revolution profoundly affected many revolutionary elders. While many were staunch conservatives, a few were quite liberal – more so than the technocrats who came to power in the 1990s. They were willing to think about issues systemically, which is how I define liberalism: considering solutions at a system level rather than focusing solely on leadership changes.

Take Xi Zhongxun 习仲勋, Xi Jinping’s father, for example. He was liberal not just in supporting liberalization but in making procedural arguments. At the Politburo meeting that ousted Hu Yaobang, he argued that the process violated agreed-upon rules. This was a revolutionary way of thinking in such a system, more profound than simply advocating for a market economy or democracy. His insistence on process and rules was more revolutionary than economic liberalization, although ultimately, he was defeated.

The lesson China should have learned from the Cultural Revolution was that it wasn’t just Mao’s mistakes, but the system that allowed him to make those mistakes.

Earlier Chinese Communist Party documents reflecting on that period showed this understanding. They instituted some separation of powers, with the presidency and party secretary general held by different individuals. However, this lesson was forgotten after 1989 when Jiang Zemin was brought to Beijing. Worried about his weakness, they abolished other power centers to consolidate his authority, leading to the China we see today.

Jordan Schneider: Professor, I searched for your name in Chinese and found many English language interviews about your book, but only one in Chinese. Have you considered starting your own YouTube channel or podcast series?

Yasheng Huang: I’m not very good at that, to be honest. It’s worth noting that before Xi Jinping, and even during his first term, I did many interviews with Chinese media outlets. I could go into great detail about data and evidence, much more so than with Western media. I was very impressed with the quality of Chinese financial journalism. However, the situation has changed now, not because the quality has declined, but because the political environment has shifted.

Ilari Mäkelä: Let’s examine China today then. In some ways, Xi Jinping seems to be a natural progression of these trends…

In part 3 we discuss the rise of Xi, succession dynamics, and prospects for liberalization in China’s future

We discuss…

• The Steelman case for why China needed a leader like Xi Jinping,

• What sets Xi apart from his predecessors,

• Succession challenges in authoritarian states and likely scenarios post-Xi,

• Why engagement with China failed to produce political liberalization,

• How the US could have better leveraged economic relations with China,

• Creative approaches to human rights advocacy in China.

Read more

To discuss Trump’s VP pick, ChinaTalk chatted with Employ America’s Arnab Datta and economist Matt Klein, who writes the excellent Overshoot newsletter. 

We get into…

• Vance’s beliefs about the economy - from dollar hegemony to tariffs and industrial policy,

• Psychological dynamics at play within the Trump-Vance ticket,

• The case for weakening the US dollar, and how the executive could make that happen.

Spotify:

Apple Podcasts:

The Death of Dollar Hegemony?

Jordan Schneider: Matt, kick us off – what can we expect from JD Vance economically? I hear he’s read your book, Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace.

Matt Klein: You can see this in the questions he asked Federal Reserve Chair Jerome Powell — “Why should the dollar be the reserve currency? Why would we want it to be the reserve currency? Is it a problem that foreigners like using the dollar?”

This indicates that he and his team have read and absorbed some points from the book I wrote with Michael Pettis. We argued that while the US economy is large globally, the use of the dollar vastly exceeds the size of the US economy.

Concretely, our economy is between 20-25% of the world, but our currency and financial system meet the needs of 80% of the world. That leads to big mismatches between what makes sense for global savers and investors versus Americans.

There’s an argument to break that link — to have the dollar used mostly by Americans — and have the US financial system focus on what makes sense for Americans, not on creating assets for foreigners. This is an argument from our book which Vance seems interested in.

Jordan Schneider: If a president wants to devalue the dollar and ensure the US is not the global reserve, how would they go about realizing that practically?

Matt Klein: If your goal is to make US assets less accessible and attractive to foreigners, legislation would help. Without it, you could arbitrarily enforce the rule of law, use sanctions, or confiscate wealth. Many countries have trouble attracting foreign investment by doing this unintentionally.

Bipartisan legislation was proposed five or six years ago to give the Federal Reserve authority to impose a tax on any foreign purchase of US assets. The Fed could adjust the tax based on their judgment of foreign demand for US assets to balance financial inflows and outflows.

Another option, used by many countries to lower exchange rates, is to have the central bank buy foreign assets. You create dollars and buy something else. The Swiss National Bank has bought dollars and euros, including stocks, to manage exchange rates. Singapore’s Monetary Authority targets the exchange rate instead of setting interest rates.

There’s no inherent reason why the Fed couldn’t do this, but legislation would help.

To change the wording — the dollar is not strong, it’s expensive. It’s overpriced.

Jordan Schneider: What would that do to the global and American economy?

Matt Klein: For the US economy, if you make the dollar less expensive relative to other currencies, Americans should find US-made goods relatively cheaper than foreign-made goods. People outside the US should find US-made goods more affordable. This should increase buying of US-made products and decrease American buying of non-US products.

Second-order effects could include increased profits, investment, and hiring in export industries, while import-dependent businesses might do less well. Globally, companies competing with US firms might lose out.

This could create an inflationary impulse, which sometimes is welcome. The Bank of Japan, Swiss National Bank, and Swedish Central Bank have intervened in currency markets to generate inflation when it was too low.

The actual impact could be more complex. Some countries, like China, use sterilization techniques to offset some effects of currency interventions.

Jordan Schneider: What are the first and second-order global effects?

Matt Klein: It partly depends on the magnitude. A 10-20% move isn’t unusual over a multi-year span. For larger moves, there’s debate among economists. Some argue a stronger dollar is bad for emerging markets because it tightens financial conditions. Others say a weaker dollar hurts exports from these countries.

The net impact is unclear and context-dependent. Some argue it doesn’t matter because international trade is invoiced in dollars anyway, but this ignores the eventual conversion to local currencies for profits.

A massive move could lead to asset sales and potentially higher US interest rates. Usually, significant currency moves are responses to other factors, like the dollar’s appreciation during the financial crisis due to widespread dollar-denominated debt.

Jordan Schneider: Let’s talk tariffs. Matt, did Vance learn anything from your book in this department?

Matt Klein: We actually wrote that many arguments for tariffs don’t make sense in a world of floating exchange rates. The textbook argument is that tariffs penalize exporters because imports remain constant while the exchange rate appreciates, making exports less competitive.

If tariffs act as tax increases and tighten the government budget, it could reduce American spending and the trade deficit, but by making Americans poorer. Some in the Trump administration have suggested using tariff revenue to offset tax cuts elsewhere, complicating the net effect.

Jordan Schneider: All right, let’s talk industrial policy.

Arnab Datta: I’ve worked with Vance’s office on some initiatives. He’s thoughtful and diverges from Republican orthodoxy, particularly on spending. He’s willing to invest in strategic sectors. The question is how much he’ll define that conversation in a future Trump administration.

Even in areas with bipartisan consensus, like next-gen geothermal energy, many Republican senators support the industry but don’t want to spend money. I’m curious how a future Vice President Vance might influence thinking on these issues.

Jordan Schneider: He has said he supports the CHIPS Act, framing it in an isolationist context about reducing dependence on Taiwan. He has a bias toward treating manufacturing as the only “real” part of the economy.

Matt Klein: He didn’t come from Silicon Valley. He came from Ohio.

Arnab Datta: I’m always curious about what Vance actually thinks because he tends to look for the most partisan aspect of an issue. The semiconductor example you used about not wanting to protect Taiwan is one version. Another is his argument about immigrants driving up housing prices, which has no evidence. I’m never quite sure how to evaluate these things.

Jordan Schneider: He’s been playing that game really aggressively for the past eight years

The Psychology of a Trump Apprentice

Jordan Schneider: We’ve done a lot of Shakespeare emergency episodes over the past few months, which explore the question of how well politicians can really “know themselves.”

Vance is clearly very smart and thoughtful. But he has also been able to put on the clothes of some guy who does great on Tucker Carlson, and he’s been completely inhabiting that role for a number of years now. Does that end now? Is it in his marrow at this point?

Matt Klein: It’s not Shakespeare, but there’s a relevant line in “A Man for All Seasons.” The line is: “But for Wales” - basically, you’re giving up all of your principles for a little bit of power.

Sir Thomas More: There is one question I would like to ask the witness. That’s a chain of office you’re wearing. May I see it? The Red Dragon. What’s this?

Judge: Sir Richard is appointed Attorney General for Wales.

Sir Thomas More: For Wales. Why Richard, it profits a man nothing to give his soul for the whole world. . . but for Wales.

Jordan Schneider: But the difference is, Vance now has a good chance of being president. Not just if Trump dies, but running in four or eight years. Your Faustian bargain here has the potential to have a pretty high payout from a power acquisition perspective.

There’s been some reporting about how all his staffers are really tall and smoke a lot. Can we get a vibe check on the broader energy of the JD Vance universe?

Arnab Datta: That is not something I have experienced. The folks that I know from his world are average height, and as far as I know they don’t smoke. But I don’t hang out with them enough to know that for sure, I guess.

Jordan Schneider: Fair enough. One interesting discovery from my aggressive googling over the past 48 hours is that his wife spent a year in China after college as a Yale China fellow, teaching at Sun Yat-sen University.

Matt Klein: I mean, Matt Pottinger spent a long time in China, too.

Arnab Datta: My big takeaway from this is Yale Law School just keeps winning, controlling the country every other way.

Jordan Schneider: Anyway, it’s reported that everyone wants to have this really tight relationship with Trump and ask him for favors all the time. In a Shakespearean way, it seems like Vance was very strategic about this. He didn’t even ask Trump to endorse him. The only thing he asked for was an endorsement of a transportation safety bill or something.

If and when Vance is sitting in the White House and thinks “This is my time to spend some political capital and push something with Trump,” I wonder if Trump will end up seeing his own mortality and feel threatened.

That mentor-protégé dynamic may get a lot more complicated as time goes on, perhaps becoming more contentious and dark.

Arnab Datta: I’m just thinking about Trump in a mentor relationship, and that sounds not great.

Is he gonna get annoyed when Vance gets some good press and try to cut him down a little bit? I don’t know.

Jordan Schneider: Well, if he starts pushing things Trump doesn’t want to be pushed, then all of a sudden he goes from surrogate son to someone who’s trying to do unpopular things that are obnoxious. Matt, can you talk about this better than I can?

Matt Klein: I’m just surprised that someone who’s gone as far as he has in talking about January 6 and so forth would bother to push Trump in a place that Trump wouldn't want to go anyway.

Jordan Schneider: Perhaps it’s more strategic for him to hide his talents and bide his time.

Matt Klein: There’s nothing to hide. He’s been very clear over the past few years about what he thinks about the Constitution and what he thinks his role as a senator is and so forth.

We already got you up to speed on Tim Walz. Today, ChinaTalk editor Nicholas Welch is here to evaluate what JD Vance brings to the ticket.

We cover:

• Vance on Economics and Power

• Vance on China

• Vance the Man

• Vance on AI and Big Tech

Economics = Power

Probably more than anything else, Vance wants the United States to be “strong” — economically, militarily, culturally.

What increases strength? Domestic industrialization, mostly. Vance on Face the Nation:

Look, the reason Europe has become weaker is because they’ve de-industrialized. And why have they de-industrialized? Because they’ve pursued a green energy agenda, following the lead of the Biden administration — and that necessarily empowers China and Russia.

Re-industrialization, Vance says, will bring much-needed innovation in the United States:

One of the things I’d like us to do is broaden the aperture a little bit, and think about innovation not just in software, but innovation in transportation and logistics, innovation in energy — the whole suite of things. …

We had this conceit that we could separate the manufacture of things from the design of things. … But if you want to build a high-tech, high-dynamic-growth economy, you have to have some native manufacturing and some self-reliance.

And what about military power? To The New York Times:

The most important lesson of World War II […is…] that military power is downstream of industrial power. We are still, right now, the world’s military superpower, largely because of our industrial might from the ’80s and ’90s. But China is a more powerful country industrially than we are, which means they will have a more powerful military in 20 years.

Vance is absolutely correct that America’s civilian-sector industrial base was indispensable to manufacturing war materiel during WWII. (Pradyumna Prasad and I wrote about that last year for ChinaTalk.) And maybe Tesla Cybertrucks make for better, cheaper Humvees. I wonder, though, if he thinks the complexity of modern military assets has kept pace with that of civilian manufactured goods. I could be totally wrong about this — I know vanishingly little about how cars and planes are made — but it’s my intuition that, since 1950 to the present, the complexity of fighter jets has far outpaced the complexity of cars, and that the Ford factories of the 2010s will have extremely limited impact, if any, in producing sixth-generation fighters.

Moreover, as Pradyu and I noted last year, “AI even more obviously [than manufacturing] has this latent potential to quickly transition non-military applications to military ones.” Maybe historians (and VP candidates) 100 years from now will look back and say, “Military power is downstream of AI development.”

In any case: revitalizing factory work in Youngstown and bolstering hard military assets — to Vance, it’s all part of the same national security bundle. I’m not actually sure where Vance’s limiting principle is: does all manufacturing fall under the national security umbrella? Semis do. Cars probably do. T-shirts?

The Biden administration and a bipartisan Congress believe that the reshoring and subsidizing of critical industries are national security imperatives. Vance, of course, was a huge proponent of the CHIPS Act: “It’s a great piece of legislation,” “the sort of policy you need to break our reliance on China.”

Vance would go further — “much further,” he said in the 2021 senate debate against Tim Ryan, “so we don’t have to defend island countries if it’s not in our core national interest.” In September 2023, for example, Vance introduced the Drive America Act, which would replace EV subsidies with gas-vehicle subsidies: “If we’re subsidizing anything, it ought to be Ohio workers — not the green energy daydreams that are offshoring their jobs to China.”

Beyond subsidies, Vance is a fan of wielding broad tariffs to reshore domestic manufacturing. When Margaret Brennan of CBS noted that tariffs by definition are inflationary, Vance interrupted, “I don’t necessarily buy the premise there.” Vance continued, “If you apply tariffs, really what it is, is you’re saying that we’re gonna penalize you for using slave labor in China and importing that stuff in the United States.” Over time, that penalizing will assist in industrial onshoring, which both fulfills a national security interest and, in the long haul, will bring down prices for Americans.

What about foreign investment, or decoupling? More than Chinese investment in the United States, he seeks to regulate US investment in China — almost like a “reverse CFIUS”:

[I’m specifically concerned about] joint ventures that often take the shape of American company, X, joins with Chinese company, Y, and puts a ton of capital into the Chinese mainland, but then anything that company develops in the future, and even in the past, is controlled by the Chinese. We should basically be trying to prevent those types of arrangements completely. …

[C-suite execs will say that] “if the price of opening those markets to our business is there’s a little theft along the way, well, that makes economic sense.” For the United States as a sovereign nation, it doesn’t make sense at all.

Is another US-China trade war coming? On Face the Nation again, when Brennan asked how he would apply “proper leverage to the Chinese and to the Mexican drug cartels” to stop exporting fentanyl:

SEN. JD VANCE: Well, I think you walk into Beijing, you talk to Xi Jinping, and you say, “Your entire economy is going to collapse unless you get access to American markets. You need to take this fentanyl seriously, or we are going to impose serious tariffs and economic penalties for not following our laws and not helping us stem the flow of this deadly poison.”

MARGARET BRENNAN: And you wouldn’t be worried about blowback on the US economy?

SEN. JD VANCE: I think that we have a powerful economy, Margaret, with the best workers in the entire world. If we need to fight a trade war with the Chinese, we will fight it, and we will win it.

Lately, both Trump and Vance seem to be expressing a preference for tariffs over sanctions. There are tradeoffs for using each (see Nicholas Mulder’s two ChinaTalk shows on sanctions, and Brad Setser for tariffs). I don’t see the sanctions ratchet getting turned down any time soon, even assuming tariffs become the Trump administration’s preferred economic weapon — so I would predict the use of both in a second Trump term.

Generously deploying tariffs marks a departure from the pro-free-market, non-interventionist economics we’re used to seeing from the GOP. I don’t know how this will all shake out among Republicans. Some support tariffs; others “are hoping that this is just Trump’s bluster — that he’s not actually serious about imposing tariffs, but is rather using tariff threats to bully other nations into becoming more friendly to the United States.” But Vance, from all accounts, is a bona fide tariff supporter — this is no “bluster” from him. Are Republicans ready to start voting for Warren-Sanders–esque economic policies emanating from the Trump administration?

I suppose the short of is that, no matter who wins the election, the federal government is going to keep deficit spending, which is somehow still possible. Joy.

The China-Threat Axiom + Max Realism

It is axiomatic to Vance that China is “the biggest threat” to the United States. Especially given his recent military experience (he’s the first post-9/11 veteran on a presidential ticket), Vance knows that the PLA is the only military that could seriously contend with the United States. He doesn’t like that “China has stolen a lot of American jobs.” The fentanyl crisis is an issue close to home for him: Vance has worried aloud about a “reverse Opium War, where China manufactures fentanyl, sends it into our country, and it devastates American communities, jobs, families.” And he despises censorial regimes, as well as what he describes as collusion between the CCP and Silicon Valley companies (like Google) to suppress the political speech of Americans.

Vance’s #1 concern — more than any economic objective, more than global warming, more than a nuke in Iran — is a Taiwan contingency. Here’s Vance at the Heritage Foundation:

The thing that we need to prevent — more than anything — is a Chinese invasion of Taiwan. It would be catastrophic for this country. It would decimate our entire economy, where the computer chips — so many of those are made in Taiwan … it would throw this country into a Great Depression.

Pretty much every other aspect of Vance’s foreign policy preferences can be directly linked back to that axiom. When Vance asks someone about a policy issue, he uses China as the litmus test.

Take climate change, for instance: “The people who believe that climate change is going to cause an end of planet Earth — they’re not serious about actually making our planet more clean, which is what nuclear and dealing with China would do. … [China] is the dirtiest economy in the world.” (See Brenda Shaffer’s comments to Nikkei Asia, in a story covering a Vance rally: “It is a ‘green myth’ that China is an environmental leader. … While China is credited for the highest penetration of EVs, the environmental gains are canceled out by the country’s reliance on coal to generate the electricity to run the vehicles.”)

And consider Ukraine. If Vance had it his way, he would end the war immediately, “freeze the territorial lines somewhere close to where they are right now,” and provide “some American security assistance over the long term.” That’s not because he hates Ukraine or loves Russia. It’s because he’s an ardent realist — “moralisms about ‘this country is good,’ ‘this country is bad’ are largely useless” — who believes,

1. China poses the greatest threat to the United States, and

2. the United States is too deindustrialized today to support a military powerful enough to take on Russia and deter China simultaneously.

Again at Heritage:

And right now, you know that Joe Biden is not sending weapons to Taiwan — weapons that we promised the Taiwanese — because we’re sending those weapons to Ukraine or elsewhere. How does that make any sense? …

It’s hard for a lot of us to accept that the “arsenal of democracy” in World War II is making one-twentieth the artillery shells that Russia is making. But that is the reality.

In his New York Times op-ed:

These weapons [Patriot missile system] are not only needed by Ukraine. If China were to set its sights on Taiwan, the Patriot missile system would be critical to its defense. In fact, the United States has promised to send Taiwan nearly $900 million worth of Patriot missiles, but delivery of those weapons and other essential resources has been severely delayed, partly because of shortages caused by the war in Ukraine.

On Fox:

America is stretched too thin. We do not have the industrial capacity to support a war in Ukraine, a war in Israel, potentially a war in East Asia if the Chinese invade Taiwan, so America has to pick and choose. …

You have to ask yourself, is China going to be more dissuaded by us thumping our chests and acting tough in Europe, or are they going to be more dissuaded by us having the weapons necessary to prevent them from invading Taiwan?

My argument is the Chinese are focused on real power. They’re not focused on how tough people talk on TV or how strong our alleged resolve is. They’re focused on how strong we actually are — and to be strong enough to push back against the Chinese, we’ve got to focus there. And right now, we’re stretched too thin.

On Twitter (Xi and Putin had just signed a declaration on entering “a new era” of Sino-Russia relations):

I’ve heard many people say that the goal of our Ukraine policy is to show China that we are “tough” and can’t be easily pushed around. The Chinese apparently don’t care.

In other words, Vance wants to pull out of Ukraine precisely because he thinks it would increase US credibility in deterring a Taiwan invasion. From a hardcore realist’s perspective, “resolve” or “solidarity” mean nothing unless they’re backed up by sufficient “missile systems, artillery systems, and bullets” — and the United States and its allies, Vance believes, are unprepared to fight or aid more than one war at a time.

At least one Chinese scholar agrees with Vance’s take: Gong Jiong 龚炯 recently argued that “a Harris rather than a Trump presidency would be more beneficial for China”— in large part because, “as long as the war in Ukraine continues or persists in some form or another, it will not be easy for the United States to shift its focus to Asia fully.”

(For an argument on the other side, that supporting Ukraine helps the US military-industrial base prepare for a Taiwan contingency, see Gabriel Scheinmann’s piece in Foreign Policy.)

If China did invade Taiwan, would Vance want the United States to respond?

I think so. Because I don’t think Vance would abandon Ukraine so he could focus on Taiwan — only to then completely abandon Taiwan, too. That’s the weakest of all possible outcomes for the United States.

To be sure, Vance has never explicitly confirmed that a Trump administration would respond with boots on the ground. Vance told NYT that, “the honest answer is, we’ll figure out what we do if they attack.” But in my view, that answer codes as a diplomatic response, not a tacit no. (Biden has been raked over the coals for being too explicit on Taiwan, four times, during his presidency.)

Last year, Vance said in an interview, “Look, we may eventually be forced to fight a war with China. But if we are, God forbid, we need to be more self-sufficient economically.” And in his VP acceptance speech, he said, “Together, we will send our kids to war only when we must” — ie. war is an option on the table — “but as President Trump showed with the elimination of ISIS and so much more, when we punch, we’re going to punch hard.” I don’t see how “punching hard” could refer to anyone else except China. He’s certainly not referring to Russia.

I also don’t think Vance’s comments about US involvement in Iraq indicate less willingness to respond to a Taiwan contingency. Vance reflected in 2020, “I left for Iraq in 2005, a young idealist committed to spreading democracy and liberalism to the backward nations of the world. I returned in 2006, skeptical of the war and the ideology that underpinned it.” That’s not a criticism of war itself. It’s a criticism of the United States seeking unachievable objectives, like democratizing Iraq by force. Vance supports aid to Israel but not Ukraine for exactly the same reason: “Israel has an achievable objective; Ukraine does not.”

So if I were a PLA general, I would advise Xi Jinping that Vance would support a strong American military response to a Taiwan invasion.

Vance the Man

JD Vance is a complicated guy. He has changed his name five times. In a very thoughtful essay published in 2020, Vance described how he began as a Protestant Christian; went through a religious skepticism phase, then toward a Christopher Hitchens, Sam Harris–esque atheism in his early adult years; then encountered a brief libertarian spell, which he attributes to overcompensating for the loss of his faith and cultural conservatism; then imbibed in a full-on moral secularism at Yale Law and Sidley Austin; was soon rescued by Peter Thiel and René Girard, and rediscovered Christianity through the works of Saint Augustine; now he’s formally a Catholic.

And that was all before he ran for senate.

The upshot is that, for most of his life, he hasn’t been a politician and seemed to say and write pretty much exactly what he thought. He’s unquestionably intelligent, articulate, and prolific in sharing his views. His wife, Usha, said at the RNC in July, “The JD I knew [at Yale Law, where they met] is the same JD you see today — except for the beard.” I’m inclined to believe her: she has a resume that would make any lawyer drool; she could easily chart her own course without JD if she were unhappy with him.

The downside is that Vance is a politician now — so, just like Kamala Harris, we’re supposed to believe that his “values have not changed” when his positions have. A few years ago, Vance viewed Trump as a “moral disaster,” “total fraud,” “reprehensible,” and wondered aloud whether he is “America’s Hitler”; in 2016, Vance and I both voted for the same third-party throwaway, Evan McMullin. Vance used to say things about the GOP like, “When the 2008 election was called for Obama, I remember thinking: maybe this will teach my party some very important lessons. You can’t nominate people, like Sarah Palin, who scare away swing voters.” Today, of course, he is on the ticket of the most polarizing candidate in modern American history.

There are several valid ways to make sense of this — only Vance himself knows which of these is accurate (and maybe not even him):

• “…but for Wales?” My former boss, Mitt Romney, told his biographer, “I don’t know that I can disrespect someone more than JD Vance.” “Romney wished he could grab Vance by the shoulders and scream: This is not worth it! ‘It’s not like you’re going to be famous and powerful because you became a United States senator. It’s like, really? You sell yourself so cheap?’”

• On the other hand, people can genuinely change their minds. Sometimes that’s a good thing. Elbridge Colby said in a conversation about Vance, “The criticism that he’s evolved his thinking — that’s not a serious critique. Who hasn’t changed his thinking? Is it a crime to change your thinking based on your own growth, and your own observation of the world, and facts? I think that’s good. Is everyone bound to what they believed when they were twenty-two? No!” So perhaps Vance is a true convert to Trump. Vance summed up his thinking this way: “Like a lot of other elite conservatives and elite liberals, I allowed myself to focus so much on the stylistic element of Trump that I completely ignored the way in which he substantively was offering something very different on foreign policy, on trade, on immigration.”

• In 2021, Vance told TIME that Trump is “the leader of this movement, and if I actually care about these people [ie. Rust Belt constituents] and the things I say I care about, I need to just suck it up and support him.” So it’s possible that Vance still has no special regard for Trump, but rather views Trump as the best vehicle to achieve his own policy aims. My people are suffering, and the Dems think my constituents are a “basket of deplorables,” so I’ll have to deliver my policy platform with the other guy.

That said, if Trump returns to the White House, I suspect Vance’s greatest contributions to the second Trump administration actually won’t be in the policy sphere. (Many VPs disdained the job. Harry Truman, for instance, said being VP is “about as useful as a cow’s fifth teat.”)

Vance’s greatest contribution will be keeping Trump hinged.

Last year, I was in a room with former Trump national security advisor John Bolton, who was probably grateful for the opportunity to serve but has written critically about Trump’s national security policies, including with respect to China. Bolton described to the audience how Trump would, not infrequently, storm out of vital national security meetings, leaving his staff and advisors to retreat to their offices in defeat. Usually, however, Bolton could count on a knock on his door maybe an hour later: it was Mike Pence, who’d say, “I got the President on board. I got him. We’re good to go.” And America lived another day.

Pence knew how to speak to Trump in a way that none of his advisors or Cabinet officials could figure out. After all, he is just about the only person who survived all four years of Trump (and perhaps only because VPs aren’t fireable at will). The country owes a debt of gratitude to Pence, and not just for his actions on January 6. Everything could have been so much worse than it already was.

A second Trump administration would feature massive discontinuity, impulsivity, and a revolving door of advisors and Cabinet officials. If all Vance can do, then, is consistently talk some sense into Trump until January 20, 2029 (and no longer), that’s a success in my book.

Vance on AI and Big Tech

The mainstream media has struggled to make sense of Vance’s AI policies.

On the one hand, Vance wants “looser regulations.” Tech policy experts who spoke to NYT “expect that Mr. Vance would take a more laissez-faire approach to AI regulations compared with the Biden administration’s.” Vance has “vocally supported open-source AI.” And in a senate hearing four days before Trump announced his VP pick, Vance rhetorically asked,

Very often, CEOs — especially of larger technology companies that I think already have advantageous positions in AI — will come and talk about the terrible safety dangers of this new technology and how Congress needs to jump up and regulate as quickly as possible. And I can’t help but worry that, if we do something under duress from the current incumbents, it’s going to be to the advantage of those incumbents and not to the advantage of the American consumer.

In other words: AI companies are talking up “catastrophic risks” (while developing at breakneck speed) so they can have first-mover advantage in securing cushy regulations for themselves — which, Vance says, actually will just “entrench the tech incumbents that we already have.”

On the other hand, Vance at times seems eager to intervene in AI development and regulating Big Tech companies. He has “called for the breakup of Google,” and has “urged more investment in US companies to help them compete against China.”

“Mr. Vance did not respond to a request for comment. He hasn’t previously directly addressed the apparent contradiction in his regulatory views,” signs off NYT.

The only reason the mainstream media are confused is because they live in a leftist bubble, and have never asked anyone who’s politically right-of-center what they think of LLMs.

To Vance, the CCP and Big Tech are, in many ways, essentially the same:

Read more

ChinaTalk’s Tokyo correspondent with an essay on the future of the LDP and Japan.

The run-up to the election for the new leader of Japan’s Liberal Democratic Party (LDP) had few electrifying moments, but one came when the princeling Koizumi Shinjiro dropped his radical, hopeless manifesto for changing the country. He torched the political elite, declaring that Japan was in decline — trapped in a terrible, terminal downward spiral that put the lives of Japanese people and the future of the country at risk…

His schemes to arrest that decline were not appealing to most LDP electors, but it was brave to say what most acknowledge privately: Japan has no future. Perhaps there will be jobs and distractions for its few young people as the archipelago transitions into a budget tourism destination. Maybe the increasing heat of the real estate market will allow the postwar generation to afford a tolerable senescence. Maybe the money will still come to support the American bases. But, most relevant to this readership, Japan will cease to matter geopolitically.

On September 27, Koizumi came in third behind Ishiba Shigeru, the America-skeptical ICBM otaku, and Takaichi Sanae, the ultranationalist Abe Shinzo disciple. A runoff spit out Ishiba as the new leader of the LDP and Prime Minister–designate.

This is how it was always going to happen, despite Koizumi’s apocalyptic warning.

Kishida Fumio, the current Prime Minister and chief of the Liberal Democratic Party (LDP), was unable to overcome catastrophically low approval numbers, a slack economy, and (by American standards pretty tame) scandal. He announced last month that he would move aside for a replacement, and the usual crowd lined up to take a shot at his posts. We had seen them all before: the would-be Iron Lady (Takaichi Sanae), the Georgetown-educated internationalist (Kono Taro), the old-school bureaucrat (Hayashi Yoshimasa), the princeling (Koizumi Shinjiro), the financial whiz (Kobayashi Takayuki), the military nerd (Ishiba Shigeru)...

A bit of LDP Kremlinology, a scan of opinion polls, and a survey of newspaper columns made it clear that the frontrunner would be perennial also-ran Ishiba, with Takaichi taking up the lead, and Koizumi and Kobayashi tolerated as sideshows. The two younger men — Koizumi and Kobayashi — made waves early on, with bold proposals for economic reform (Kobayashi’s pro-business platform) and constitutional revision (Koizumi wanted to put the clause outlawing war to a referendum), but they lacked support from the éminences grises of the LDP. Takaichi, the most hawkish of the candidates, tried to soften her image ahead of the showdown with Ishiba, but was tripped up by her allegiance to other former Abe acolytes that have been caught up in the recent political financing scandal.

And so, Ishiba was chosen almost by default. Even though Ishiba’s record in the House of Representatives and Cabinet was not electrifying, and even though his national public support has always been anemic — he is competent. He won’t embarrass himself. He will be designated the Prime Minister on October 1.  

Ishiba will undoubtedly drag the LDP across the line in the snap election he has called for late October. Although his party has been internally fractured by factional battles and scandals, the elements of the opposition that could stand against the LDP are once again in complete disarray (conservative Noda Yoshihiko’s election to the leadership of the Constitutional Democratic Party a few days earlier broke their temporary pact with the Japan Communist Party); the LDP’s current and potential government partners — the regional technocratic parties, as well as the Soka Gakkai–backed Komeito — are still content to offer their support.

For anyone that believes in Koizumi’s warning of terminal decline, the election of Ishiba might be slightly disturbing. It’s not that he is an incompetent leader, nor that he is particularly corrupt — but rather that he is unlikely to be able to actually do anything.

The ultra-stable state of Japanese politics is precisely the problem. It has become increasingly difficult to push the country in a new direction.

Ishiba is destined to become another in a long line of interchangeable helmsmen, steering Japan into increasing geopolitical marginalization.

Ishiba will be another Kishida, at best. We will have another “compromiser,” as Kenji Kushida termed Kishida. Many more uncharismatic caretakers will shuffle through the revolving door. Like Suga and Kishida, Ishiba will keep the machine ticking along, without seeking — or managing — to create policy with their individual stamps on it.

Even though Kishida arrived in office with a respectable mandate, modest goals, factional support, and plenty of good will, he was forced to water down his New Capitalism scheme, which was intended to get the economy back online. In the end, the modest reforms that he did force through earned guarded praise from international observers, but he failed to snap the long-term malaise, growing inequality, and the short-term pain brought on by inflation, frozen wage growth, and the weak yen.

As William Pesek pointed out in Barron’s, eyeing Kishida’s replacements, “there’s not a single known economic reformer.” That is true of Ishiba, certainly. He has signaled with familiar language his desire to raise wages and increase consumption, but it is clear that radical reform is not on the horizon.

Increasing poverty, or at least inequality and a stagnant economy, are not minor inconveniences, even to geopolitical partners.

And so, perhaps, as American leaders as far back as Ronald Reagan have demanded, Japan will get serious about funding its own defense, but the cash and political will required is not forthcoming.

The record of Abe is important here: he was a man with a mandate, who remained in power longer than any postwar Prime Minister — but he failed in his pledge to roll back Article Nine, succeeding only in securing a shaky legal ruling to follow the United States into regional conflicts. Those that came after him have struggled, and the same pattern will continue. Kishida fought for more defense spending, but it still remains unclear where the money to pay for it will actually come from, nor what strategic benefits will be acquired.

Ishiba might have once expressed bold plans to take Japan out from under America’s nuclear umbrella, but, in truth, he will be a caretaker Prime Minister with a shaky majority — and that is not a strong position from which to defy public opinion and go against the peace commitments of his coalition partners (the Soka Gakkai–linked Komeito are sometimes a peculiar partner to the LDP)...

Nobody will press Ishiba to act rashly. The geopolitical realities of the Second Cold War, as well as the sort of warfare we can expect, no longer call for an unsinkable aircraft carrier, as another LDP man termed Japan in 1983, during a desperate visit to Washington. For the conceivable future, there’s not much reason to expect the theater-wide conflict imagined in the simulations (to draw Japan in, these rely on fantastic strikes on Okinawa). Proxy wars and insurgencies on China’s margins could involve Japan’s espionage agencies, but probably not the Self-Defense Forces.

The American leadership can deal with this.

If we could imagine the situation as seen from Zhongnanhai, they might sum it up this way: the Japanese will buy Tomahawks, tolerate bases in Okinawa, and put increasingly absurd strings of zeroes behind their defense budget, and talk about reshoring — but their military capabilities, willingness to fight, as well as their ability to wage economic warfare, are limited. Maybe we can sell them electric cars, eventually. 

And so, exports to and imports from China continue to increase. The political and industrial elite of Japan, despite embracing American directives on China, cannot lean too far in one direction.

The possibility of Japan distancing itself from American-led security initiatives and turning to closer ties with China seems just as unlikely — for many of the same reasons. To rebalance away from the United States would require thorough reform and tactful planning of matters as diverse as trade policy, food security, and defense.

Ishiba is not a renowned statesmen. Pro-China smears against him have been picked up by mainstream outlets beyond Japan, but it is mostly fantasy. The fact that he was in Taiwan when he announced his run for the LDP leadership is not a coincidence. Rather than being enthusiastic about the possibilities of the Sino-Japanese relationship, he is mildly unenthusiastic about perpetually hitching Japan to American fortunes, skeptical of the nuclear umbrella, and believes in securing Japanese independence by restoring her military might. It is illuminating that he is alone among LDP heavyweights in advocating normalizing relations with North Korea, while also suggesting first-strike capability against Pyongyang is crucial.

He will also be forced to tackle the China relationship without the benefit of the eighty-five-year-old Nikai Toshihiro, long-term LDP Secretary-General and stalwart protector of a Sino-Japanese relationship, who has become vital to the local economy. Chinese domestic observers celebrated his visit to Beijing earlier this month as a sign of stability, but an editorial in the Asahi Shimbun noted that it is probably the end of an era.

As far as the rest of the world is concerned, the Japanese political system will tick along, without causing undue distress to the United States, nor beyond the level of diplomatic dustups, to friends-of-friends, like South Korea and the Philippines.

Ishiba is unlikely to arrest — or even acknowledge — the decline that Koizumi spoke about. If Ishiba oversees the decline reasonably, he will continue to hold power; if he fails, another LDP veteran will be shuffled into his office. And none of it matters.

Dylan also writes a fantastically eccentric Substack. My favorite entry is his one on eating Chinese noodles in Tokyo. See below for his meditation on Ishiba.

CJK

This began as an outlet for what could be called China analysis, but I have relaxed the rule, so I can write about 1980s Vietnamese cinema, perfume, Korean politics, industrial policy, and Swedish Maoists.

By Dylan Levi King

It was a Friday, the day Abe Shinzo was shot. I was on my way back from the beach, I think. I remember watching a screen in the train paused on the shot of the ambulance waiting for the helicopter to arrive and carry the Prime Minister’s body away. There was no official announcement, but the tone made it clear that he was already dead. I almost wept, thinking of his widow, and thinking of the man that I had seen in the quarantine video, playing with his dog in a modest kitchen. The screen flipped to the next news story, or to an advertisement. I looked around the car. I don’t know why I imagined some public expressions of grief or distress from the commuters, but there were none. ▭ I wanted it to mean something. That night, I went to a ■■■■■ ■■■, and tried to make conversation about it with ■■■ ■■■■ behind the counter. She changed the topic. I tried the same tactic with a ■■■■■■■ ■■■■■■, when I went to pick up ■■ ■■■ ■■■■ ■■■■■■■, but I was brushed off in the same way. ▭ But it meant nothing. ▭ The best I got was from two kids from Okinawa in the square outside Koenji Station, who were at least willing to celebrate political violence. ▣ I took a train to Nara a few months later. All I found were tattered sheets of A4, bearing warnings against laying flowers, pasted up where the Prime Minister had collapsed. There was nothing else to see. I walked in the dead malls around the station. I walked through the state housing projects at the other exit. ▣ This is a good thing about Japan: the sort of political discussion that animates American society is rare in Japanese life. I am talking about my neighbors. They fall into three groups: there are those that do not apparently care at all about political affairs, there are those that are engaged with local committees, but mostly as a channel to air grievances against neighbors, and there are those that are actively involved in politics and never talk about it in social settings. Most of the latter group are members of the Communist Party. I can spot them among the group that gathers outside the Metro station every second afternoon to shout for denuclearization and living wages. ▣ This makes me think of an acquaintance, an older woman that I talk to every now and then because our ■■■■ ■■ ■■ ■■■ ■■■■ ■■■■ ■■■■■. I learned that she attends any political rally that is held in our neighborhood. She goes to greet the politicians running for office, and even calls up encouragement to them, as they speak from the roofs of vans. She will attend events for any candidates that arrive, regardless of affiliation. Her own politics do not align with any of them. She is rare: she likes to talk about politics in the same way that Americans do. She asked me earnestly one day whether or not I thought vaccines might contain 5G transmitters. When I reacted with enough warmth, she began to inform me about various Zionist and Korean conspiracies against her country. She doesn’t vote. She doesn’t care. Nothing matters. ▣ I am being dismissive, I know, of this woman. I was too dismissive of the old Communists I mentioned before. I was too dismissive of the young men from Okinawa that fantasized about even more shocking acts of terrorism. By not even mentioning them, I am being too dismissive of the young people that are involved in ongoing struggles. I am talking about the minority; I don’t understand them. ▣ The lack of interest makes sense, generally. Populism is taboo. Charisma is closely monitored. Voter turnout will never improve. It is fine that a Prime Minister can be chosen only because he has failed enough times, and everyone feels pity for him. ▣

Check out more from Dylan here:

CJK

This began as an outlet for what could be called China analysis, but I have relaxed the rule, so I can write about 1980s Vietnamese cinema, perfume, Korean politics, industrial policy, and Swedish Maoists.

By Dylan Levi King

Angela Shen is the newest member of the ChinaTalk research team. Today, she’s breaking ground with an in-depth biopharma explainer.

On June 13, Chinese drug-research company XtalPi 晶泰科技, also known as QuantumPharm, debuted on the Hong Kong stock exchange for US$126.7 million. The AI-powered drug-discovery startup’s digital prediction algorithm and computational models helped Pfizer design Paxlovid, the world’s first FDA-approved oral COVID-19 drug — saving precious time for the drug to enter large-scale production. XtalPi is a leader in the application of AI to expedite the expensive, laborious nature of drug development, with life-saving results. Founded at the Massachusetts Institute of Technology, with innovation centers and industrial parks in Boston, Beijing, Shanghai, and Shenzhen, XtalPi also models the global interdependencies of the pharmaceutical value chain.

Fundamentally, biotechnology involves reading and designing new biological “code,” including DNA, RNA, proteins, and metabolites. Underlying all life on Earth, this “code” is incredibly complex; only in recent decades — with the help of new technologies such as AI — has humanity shown the potential to understand and shape these building blocks of life. With its ability to process and analyze enormous amounts of data and simulate intricate systems, AI stands out as a potentially revolutionary tool for the synthesis of biological drugs that can diagnose, cure, treat, or prevent disease.

AI algorithms, for instance, can be used to develop cancer therapies personalized to patients’ cancer and immune cells. “Self-driving laboratories” combine AI and automated machines to rapidly expedite drug discovery and testing processes. AI models can predict designs and conduct simulations to identify possible molecules for novel drugs.

Like in many other countries, pharmaceuticals constitute the largest segment of China’s biotech sector. China’s 14th Five-Year Plan prioritizes innovation-driven development, particularly in AI, biotech, and pharmaceuticals. With the exchange of ideas, talent, and resources across national boundaries, China has advanced rapidly. Radical technologies like AI and biotech, however, also have a dark side — and fear of the threats they pose to national security have driven countries like the United States to initiate policies focused on technological decoupling.

The question is, are the benefits of global biotech collaboration (e.g. better innovation) outweighed by the risks (e.g. national security)?

In other words, what should the future of global biotech innovation look like?

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From policy to market: understanding drivers of tech innovation in Chinese biopharma

The biopharmaceutical sector is known for long time horizons, sustained investment flows, and intrinsic uncertainty. Drug discovery and development requires high scientific and technical know-how. For both scientific and regulatory reasons, drugs must endure an extensive testing and approval process before manufacturing and commercialization can even be considered.

Due to these barriers, innovation can be expensive and difficult. And China’s pharmaceutical market has only recently embraced innovation, as a result of top-down strategic prioritization of novel science and technology development.

In the last decade, Beijing has implemented policy reforms which better foster a regulatory environment that rewards biopharmaceutical innovation. Before 2015, the Chinese Food and Drug Administration (CFDA) 国家食品药品监督管理总局 — the main governing body for drug review, approval, and monitoring — suffered from extreme incompetence, including a major bribery scandal and massive approval backlogs. With foreign firms blocked from the Chinese market due to time-consuming approval requirements, Chinese pharmaceutical firms had little incentive to innovate, instead mainly producing generic versions of existing drugs.

Then, in 2015, the CFDA endured a policy overhaul to improve efficiency and transparency in the drug approval process, aligning with the “Healthy China 2030” “健康中国2030”规划 national-level commitment to improve health outcomes through medical innovation. After hiring more than 600 new employees and introducing a Generic Quality Consistency Evaluation, among other policy changes, the CFDA cleared a backlog of 20,000 drug-approval applications within two years. In the first round of auditing alone, 85% of drug filings either failed or withdrew, in an event described as the “July 22 massacre of the pharmaceutical industry.” After filtering out low-quality and incompetent actors, the industry cleared a path for stronger quality controls. This leads us to 2017, when China joined the International Council for Harmonisation of Technical Requirements for Pharmaceuticals for Human Use (ICH) and started adhering to the ICH-GCP (Good Clinical Practice) guidelines. Facing higher standards, domestic firms boosted investment in new product development, setting themselves up for success in global markets.

Meanwhile, incentives shifted away from generics and toward novel drugs. Established in 2018, the National Healthcare Security Association began conducting regular rounds of price negotiations with drug companies for inclusion on the National Reimbursement Drug List (NRDL). To access the national medical insurance scheme’s large market, firms agreed to tighter profit margins on generics, increasing the relative profitability of innovative drugs.

The CFDA, now known as the National Medical Products Administration (NMPA) 国家药品监督管理局, has since issued hundreds of policies that tighten definitions to reduce unoriginal drug applications, strengthen evaluation standards, and create expedited approval pathways for certain products. Between 2011 and 2021, the median approval time for drugs decreased by over six months. With streamlined approval processes, stronger drug-approval standards, and greater financial incentives, Chinese domestic firms finally had good reason to pursue innovative drug development.

Beyond a more favorable regulatory environment, Chinese biopharma innovation has benefitted from the availability of talent, capital, and infrastructure. Beijing’s well-known talent programs aim to encourage academic entrepreneurship, foster knowledge exchange with foreign universities, and establish a highly skilled scientific and technical workforce in China, including in the life sciences. High concentrations of talent, resources, and infrastructure in government-supported high-tech parks and biotech “clusters” benefit from agglomeration effects that further facilitate innovation.

Moreover, venture capital and private equity (VC/PE) financing is very accessible. This includes Chinese corporate VCs like Qiming Venture Partners 启明创投 and Sinovation Ventures 创新工场, foreign VCs like Sequoia Capital, and government-sponsored VCs. Direct government support also exists in the form of subsidies, grants, and programs. For instance, the National Natural Science Foundation of China (NSFC) 国家自然科学基金委员会 awarded 51,600 grants in 2022 for exploration and innovation. On the municipal level, Shanghai recently promised up to 100 million yuan per year to companies making R&D progress on innovative drugs or conducting high-level clinical trials overseas. Finally, initial public offerings (IPOs) — especially on the Hong Kong stock exchange and Shanghai stock exchange’s science- and technology-focused STAR market — have been a vibrant source of capital, reflecting public and investor interest in China’s biopharma potential.

Chinese contract research organizations (CROs) and contract manufacturing organizations (CMOs) are critical players in the story of Chinese biopharma innovation. CROs provide outsourced services for early-stage R&D, including clinical-trial management, biostatistics, and regulatory affairs. CMOs do the same thing but for drug manufacturing, and contract development and manufacturing organizations (CDMOs) do both. These organizations offer highly skilled workforces, advanced technology, research infrastructure, and regulatory knowledge that can reduce costs significantly for biotech and pharmaceutical companies. Chinese CROs and CMOs are especially valuable for their connections with local academic institutions and hospital systems. While North America and Europe still dominate the global CRO market, leading Chinese CROs like WuXi AppTec 药明康德 and Pharmaron Beijing 康龙化成 have been able to expand globally, with over 75% of their revenue coming from clients outside China in 2021.

By some metrics, this focus on innovation is working: Using high-impact research output to gauge country-level technological expertise, ASPI’s Critical Technology Tracker reported that in 2023, China ranked first in synthetic biology and biological manufacturing. The number of biotech Patent Cooperation Treaty (PCT) filings from China increased from 266 in 2013 to 1,920 in 2023, exceeding the European Union. China is now second in the world for clinical trials on the International Clinical Trials Registry Platform (ICTRP). China’s share of the global drug-innovation pipeline increased from 4.1% in 2015 to 13.9% in 2020, reflecting rapid growth.

Part of this progress is thanks to new applications of AI. Chinese startups received 31% of the global share of funding for AI-driven drug discovery, with seven of the top twenty highest-funded firms originating in China. These firms include XtalPi — which boasts the highest pre-IPO capital raised at US$786 million — as well as Insilico Medicine 英矽智能, METIS 剂泰医药, and Xbiome 未知君. So far, they seem to be putting that funding to good use: XtalPi’s technology helped identify a gastric cancer treatment in six months, a shorter timeline than usual; Insilico Medicine took less than 18 months and US$2 million to develop the first-ever fully AI-discovered drug to reach Phase II clinical trials. Chinese big tech players are also gradually leveraging their existing AI capabilities to enter the biopharma and medical space, as illustrated by Tencent’s iDrug.

These AI developments benefit from China’s public healthcare system, which enables data agglomeration. China’s vast population and extensive network of public hospitals facilitate the collection of large data sets — an essential ingredient for training AI. The government manages the use of this biodata, which can include a person’s genetic information, health records, and demographic details. To enforce this state control, a policy mandates that all digital healthcare services work with physical hospitals, inhibiting the advance of privately owned platforms. Simultaneously, measures like “Healthy China 2030” promote data standardization and connections between data centers, helping produce usable data for AI.

Much like the US and UK, China also has its own genomic database, the China National GeneBank (CNGB) 国家基因库生命大数据平台, which contains over 10 million genetic-data samples. Owned and funded by the government, the CNGB is operated by BGI 华大基因, a major Chinese gene-sequencing company. The state keeps these databanks well-connected and accessible for Chinese researchers: the NMPA has approved biodata access for a number of Chinese companies working on AI-related drug research such as Yidu Tech 医渡科技, and a set of data-management guidelines released in 2022 makes it easier for market actors to access data.

The use of AI in biopharma, however, is still in its nascent phase. Many challenges have yet to be solved, including integration with internal R&D systems, in-house AI enablement capabilities, scalability, data collections and security, and so on. Future progress will also first require overcoming many nations’ increasingly securitized approaches to biotech and biodata.

Threats posed by biotech: national security and global supply chains

The theft of critical data and technology can compromise sensitive research and potentially lead to the misuse, manipulation, or weaponization of biotech advancements. Driven by these security concerns, as well as underlying geopolitical tensions and competitive pressures, the US and China have strategically sought to decouple biotech supply chains. 

A wave of this anxiety occurred in the US in 2021, when the US imposed sanctions on Chinese life sciences organizations and proposed a ban on the National Institute of Health’s ability to fund China-affiliated entities. A report by the US National Counterintelligence and Security Center even questions the motives of conventional corporate behavior like acquisitions and partnerships by all Chinese biotech firms.

On biodata and national security:

China takes a protectionist approach to biodata. Unlike its counterparts in the US and UK, the China National GeneBank is almost exclusively accessible to researchers who are Chinese citizens. The 2020 Biosecurity Law 生物安全法 reinforces government sovereignty over biodata and bans foreign actors from collecting, preserving, or providing domestic biodata. Cooperation with foreign researchers is limited by the Ministry of Science and Technology’s (MOST) 科学技术部 various regulations on human genetic resources. Due to these guidelines, high-profile research projects between top Chinese, US, and UK universities have had licenses revoked by Chinese regulators. Foreign firms, meanwhile, must get approval from the Cyberspace Administration of China (CAC) 国家互联网信息办公室 for all cross-border data transfers, a process known for being time-consuming and difficult. These data-access asymmetries exacerbate market barriers inhibiting US and foreign biotech firms from operating and innovating in China.

In the US, a 2024 Biden administration Executive Order prohibited the high-volume export of biodata to China. A few weeks ago, the US House passed the Biosecure Act, which bans procurement, contracts, and funding for biotech companies designated as national security threats. Five Chinese entities — BGI, MGI 华大智造, Complete Genomics, WuXi AppTec, and WuXi Biologics 药明生物 — are directly targeted.

Unlike China, the US’s restrictions are motivated less by protectionism and more by fears of privacy, blackmail, and counterintelligence risks. In 2021, BGI faced controversy for proposing to help run COVID-19 testing spaces in the US; many saw BGI’s proposal as a ploy to control American healthcare data. Various biodata theft attempts have sparked additional anxiety around alleged links to China. However, there are limits to the malicious use of biodata — processing, storing, transferring, and using biodata that is often decentralized or unstandardized can lead to countless errors along the way.

Even so, China’s biodata collection faces a different set of concerns: human rights violations. Human rights organizations have raised concerns about China’s systematic collection of biodata without informed consent or reasonable justification. For example, biometric collection in Xinjiang and Tibet has used pretexts of anti-terrorism campaigns and medical programs. These genetic databases may serve policing purposes such as forensic profiling and surveillance, with potentially discriminatory or repressive consequences. Chinese research found to be linked to such data may have significant ethical implications.

On global supply-chain interdependence:

The US’s pending restrictions on Chinese biotech have highlighted another dimension of the biopharmaceutical industry: a globalized value chain. Chinese entities targeted by the Biosecure Act manufacture key pharmaceutical ingredients and drugs for foreign firms, including more than forty-five US-headquartered companies. About 80% of the Active Pharmaceutical Ingredients (APIs) used in the US are manufactured abroad, mainly in China and India. Facing US legislation, multinational corporations (MNCs) like Bristol Myers Squibb have needed contingency plans to make up for the sudden change in supply. In fact, at least twenty-three US biotech firms have warned of dependencies on WuXi AppTec. This overdependence on Chinese drug makers has raised alarms in both the US and the EU, who cite notable risks of supply-chain disruption, drug shortages, and poor product quality.

Without the ability to outsource to these Chinese CROs and CDMOs, however, US drug development costs are projected to rise. The greatest impact would be on manufacturing capacity, with slowdowns in clinical trials delaying innovation pipelines and raising costs. Small, mid-size, and virtual biotech companies in the US and Europe would be especially affected, as their business models commonly rely on outsourcing proof-of-concept drugs until they reach clinical stages.

Moreover, decoupling US and China biotech supply chains might not be feasible or necessary. Switching to Indian suppliers is more expensive and impractical, since India depends on China for around 80% of APIs. US-China dependency goes both ways: China still relies on US-made patented drugs, especially to address surging rates of cancer. US exports of pharmaceuticals, medicines, and medical equipment to China are growing, amounting to US$14.9 billion in 2023. Instead of just anticipating risks, the US and other nations could reframe the conversation to explore how to maximize the global benefits gained from Chinese biotech’s growth.

The value of global collaboration

China’s participation in biotech innovation has undoubtedly produced global benefits.

Academic exchange and research partnerships consistently lead to innovation. Scientists’ international mobility correlates with boosts in research quality. Research collaboration has been common in the last few decades: six of the top ten ranking US research institutions — Berkeley, Harvard, Michigan, MIT, UCLA, and Yale — have at least one biotech-focused partnership with a Chinese counterpart.

Firm-level activity between Chinese and foreign biotech firms — such as out-licensing, investment, and partnerships — is unlikely to stop. Many Chinese biotech firms, including those focused on AI-driven drug development, have always been multinational. XtalPi was established by three quantum physicists at MIT and maintains a location in Boston. Insilico Medicine boasts locations in Boston, New York, Montreal, and Abu Dhabi.

In-licensing and out-licensing deals that exchange technology, intellectual property, or products are common practice among Chinese, American, and European firms. More MNCs are pursuing out-licensing deals, which means that they are choosing purchase rights to drugs produced by China’s advancing innovative capabilities. In 2023, Chinese biotechs and MNCs signed thirty-three out-licensing deals — over twice as many as there were in 2019. Twenty-seven of these deals centered around innovations in oncology, highlighting China’s growing focus on cancer. During that period, therapies originating from China also earned designations from the US FDA, including fast-track status, which is granted to new drugs that address unmet medical needs.

Despite geopolitical tensions, companies like Merck and AstraZeneca have continued to provide financing and make deals in China. MNCs have supported local innovation in China through investment, incubators, and technology platforms. And this investment is not one-sided: in 2018, China invested US$1.45 billion in US health and biotech industries, accounting for 27% of its overall investment in the US. Cross-national firm partnerships have already borne fruit, exemplified by the XtalPi-Pfizer collaboration for the development of the oral COVID-19 drug. XtalPi also recently announced a collaboration with Eli Lilly to leverage its AI and robotics drug discovery platform. Future partnerships remain likely.

Geopolitics notwithstanding, collaboration is paramount for keeping the world safe and healthy. The most extreme and serious risks of biotech and AI — such as bioterrorism and unethical gene editing — require a globally accepted framework of governance. The current patchwork of disparate national regulations will not stop bad actors from simply relocating and exploiting biotech in ways that have international consequences. Coordination of regulatory standards may also unlock life-saving benefits — harmonization of cancer clinical trials between China and the US, for example, could save an estimated 1 to 2 million lives each year. Collaboration is also necessary for life-saving innovation: without China’s WuXi AppTec, for instance, the development of treatments for cystic fibrosis, leukemia, endometrial cancer, and ovarian cancer would all be hampered.

From these examples of global collaboration, a framework gradually emerges of how the US and other countries can reap the benefits of Chinese biotech expansion: fostering connections and knowledge exchange improves the quality of research and may lead to novel insights; allowing corporate deal-making and partnerships expands public access to innovative Chinese drugs; and synergizing governance systems improves the distribution of existing treatments and opens the doorway for new drugs. Meanwhile, Chinese citizens could benefit if Beijing eases its protectionist stance on biodata and pharmaceuticals, leading to more impactful research and better access to critical treatments.

Looking toward the future: moving beyond pharma

Debates over security and competitiveness that challenge future international collaboration in biopharmaceutical research reflect broader questions affecting biotech and other emerging technologies. How to resolve these debates is of the utmost importance, especially since innovations in biotech have critical significance for not only medicine, but also agriculture, military and defense, healthcare, energy, and materials.

No technology comes with a pre-set positive or negative conclusion. The rise of AI-driven drug development showcases the speed and strength of the world’s culture of scientific collaboration. At the same time, biopharma AI’s corresponding costs and risks reflect the challenges of adapting to groundbreaking emerging technologies, especially amid today’s escalating geopolitical tensions. If handled correctly, innovations in AI applications in China’s biopharma industry will unlock treatments that improve and save millions of lives.

Yasheng Huang 黄亚生 is the author of one of the decade’s greatest books about China — The Rise and Fall of the EAST: How Exams, Autocracy, Stability, and Technology Brought China Success and Why They Might Lead to Its Decline. It’s a rich book, a product of a career of reflections, with each page delivering something novel and provocative.

In this first half of our two-part interview, we discuss…

• How the imperial examination system (known as keju) shaped Chinese governance, culture, and society,

• Why autocratic Chinese dynasties benefitted from a meritocratic bureaucracy,

• Statistical methods for analyzing social mobility in imperial China,

• How the keju system survived the Mongol conquest,

• What the tradeoffs in the imperial exam system can teach us about the future economic prospects of China and Taiwan.

Co-hosting today is Ilari Mäkelä, host of the On Humans podcast. 

Listen on Apple Podcasts:

Listen on Spotify:

Frictionless Autocracy

Jordan Schneider: Let’s start with Emperor Wanli 萬曆帝 and Henry VIII. How would you contrast these two figures?

Yasheng Huang: They lived close to each other in historical terms, but in dramatically different political systems. The basic difference was that Wanli didn’t have to deal with anybody to do what he wanted. Specifically, he wanted to nominate his third son as his successor, but that was being pushed back by Confucian bureaucrats. He was dealing with opposition, but he only encountered opposition from the bureaucrats on this one issue and this one issue alone.

Henry VIII, on the other hand, had to deal with peer opposition. The biggest peer was the Pope. He had to get permission to divorce his wife to marry Anne Boleyn, whereas Wanli didn’t need permission at all. He only encountered opposition from the bureaucrats on this one issue. Otherwise, he was completely free. That was the point of the story. The difference between the East and the West was laid down long ago, and that historical imprinting has some bearing on the differences between China and the West.

Jordan Schneider: We’ve got Henry VIII, who wants to marry this woman and has to fight tooth and nail against all these other forces in the system. Whereas Emperor Wanli, basically, no one was going to stage a coup against him. No one was going to really push back. There were no other power centers, and even all these ministers who kept giving him trouble, at the end of the day, he held all the cards when it came to his relationship with them. With that image, I’d like to fly all the way back to pre-Sui China. Let’s do the same contrast between what was going on in the Han and post-Han era and what you saw in the Roman Empire.

Yasheng Huang: Many early Western civilizations placed value on violence, warfare, and battle, and many of their luminary leaders came from military backgrounds.

When you look at early Chinese history, certainly there was violence and warfare.

But there was also something I didn’t quite see in the history of the West — emphasis on assessing human capital through artificially created metrics, essentially exams, rather than promoting or demoting people according to their record on the battlefield.

According to historical records, that goes way back, before the Sui dynasty in the 6th century. The Sui dynasty essentially institutionalized that method. For a bit of historical background, the Qin dynasty unified China in 221 BCE, and China remained united until 220 CE, when it collapsed into multiple kingdoms. Warfare broke out among them. The Sui reunified China from this fractured collection of kingdoms into a unified country, similar to what Qin did in 221 BCE. But one big difference was that the Sui dynasty invented the exam system, called keju 科舉  in Chinese, that kept China unified.

The Qin dynasty unified China but didn’t succeed in keeping the country unified. Whereas if you look at the era after the Sui dynasty, most of the time, China was united. There were periods when China fell into disunity — notably in the 20th century — but most of the time, China was unified. This was a dramatic shift from disunity to unification, which I attribute to the keju system.

The Roman Empire, on the other hand, kept its empire together mostly through military conquest, with some political governance methods as well. But they didn’t succeed in unifying the empire for long. It collapsed, and Europe never went back to the Roman Empire, despite efforts by many generals. Europe today basically reflects the fragmented situation that happened after the Roman Empire collapsed. That was the enduring difference between China and Europe.

Ilari Mäkelä: Bringing that moment of Sui as a kind of threshold, watershed moment in China’s history is really eye-opening. It raises a lot of new questions and gives a lot of new answers. Before we delve deeper into that, let’s take one more look at the time before it. There’s this period of fragmentation that you already mentioned between the collapse of the Han before the reunification, which you call the Han-Sui interregnum. You tongue-in-cheek called that China’s European moment. In what sense was this period, which most people don’t even really have a good word for, China’s European moment?

Yasheng Huang: The Han-Sui interregnum is an era that most historians don’t pay much attention to. The Han dynasty lasted 400 years, and the Tang dynasty is another glorious dynasty, as is the Song dynasty. This period in between is often overlooked. I call it a European moment in the sense that, it’s similar to the post-Roman Empire era in terms of fragmentation, political freedom, ideological freedom, warfare, constant changes of government, the importance of nobility, and the mobility of human capital.

Crucially, that was the peak of Chinese technological inventiveness. It was also the peak of Chinese humanistic creativity. If you look at the measures of technological development and humanistic creativity, they coincided during that era, and I don’t think it happened by accident.

Ilari Mäkelä: Could you talk a little bit about how those measures work? I think we were both quite impressed. There are some really fascinating graphs, but can you give a little more of an idea? What exactly are you measuring when you have technological development or humanistic development?

Yasheng Huang: That work is really standing on the shoulders of a giant — in this case, Joseph Needham, Professor of Cambridge University. He, his students, and colleagues compiled 27 volumes on Chinese science and civilization. The documentation was done by him and his team. There’s still a Needham Institute at Cambridge University today. Needham himself died in 1995.

What we did, and that was a collaborative project with Chinese academics, was spend six years digitizing this impressive collection of information. Needham, even though he himself was a scientist, never really looked at his material statistically or used a data approach to analyze the information he collected. I wrote a whole book on the Needham question. Together with my Chinese collaborators, we were responsible for creating this database. It took us six years with some 40 research assistants.

What we did sounds simple, but the process was incredibly difficult and complex. Essentially, we tallied up the number of inventions that Joseph Needham compiled and then divided that number by population. Chinese historians have come up with very complete estimates of the Chinese population, dynasty by dynasty. That’s another work done before us — there’s no way we could do that ourselves. Our contribution is digitization, analyzing the information using a data approach.

Amazingly, that data approach reveals insights that I don’t think we are able to get just by reading historical materials and telling historical stories. One of the fundamental findings from our work is that a peak happened during this European moment. There’s absolutely no way you can get that insight by just reading Needham’s 27 volumes.

We also have a measure of historical development in terms of humanistic creation. One was actually published more recently by a group of scientists using digital textual data to analyze the textual richness of Chinese historical documents. It turns out this Han-Sui interregnum had the highest level of textual richness, measured by how many writers refer to the text created during that era, compared with the text created in other eras.

It’s quite amazing. When I went into this, sometimes I get pushback by people saying that I’m ideological, that I had my mind made up before I began. I’m not a historian. The Han-Sui interregnum, the only thing I knew about that era was from Romance of the Three Kingdoms, which I read as a primary school student. I really knew nothing about that era. How could I have had a prior view to be so precise? It really just came from data.

That’s another thing I want to do in this book. I don’t invoke values or even theories. I let data speak. I let facts speak, and we follow data to their letter and to their spirit. I really want to push back against this view that automatically you have a Western ideological view because you emphasize diversity, freedom, and competition, and that somehow is ideology rather than fact. I’m telling that story from China’s own history. I do hope that I win some hearts from people who have an automatic immunity to Western ideas.

Jordan Schneider: One of the more interesting and challenging parts of your book is that people gravitate to stories and narratives. Your book, said with a lot of love, is very thoughtful and provocative, but there is a lot more drama contained in more narrative histories where you’re looking at personalities.

When you push back on a lot of the scholarship that has been trying to look at these questions of China’s technological rise and fall and what keeps it unified or not, you bring some interesting datasets to the field. I’m curious about methods for understanding China. Why do you think there has been so much overweighting on these sorts of narratives that you can kind of assert, particularly when it regards this question? Why did it take until 2023 for someone to write your book?

Yasheng Huang: As a professor at MIT, I do have some belief in the ability of systematic approaches and methods to provide us with insights. My book also has personalities and narrative accounts. But there’s a difference between just telling narrative accounts and using stories and accounts to illustrate insights. I’m trying to do the latter rather than the former because I’m not a historian.

To me, these are incredibly interesting things in and of themselves. But my ultimate interest is to reveal general principles and regularities in history, society, economy, and politics. Among China scholars, at least among the older generation, that has not been the primary motivation for going into China scholarship. Their interest is in history itself, in telling stories about Mao Zedong or Deng Xiaoping. Those are really important things. I’m not denying any value in doing that, but as a more scientifically oriented scholar, my interest is in revealing regularities and insights, rather than those historical details in and of themselves.

Younger scholars are doing more and more of that systematic research. But let me also add that the constraint in academia now is that the stories, arguments, and insights that we emphasize in these very systematic journals are getting smaller and smaller. It’s actually easy to be systematic and small. It is not that easy to be systematic and big. At least I try to be systematic and big. Maybe some people will say I’m not systematic enough, and other people may say I’m not big enough. At least those are my intentions, to do both of these things.

Ilari Mäkelä: I think it would be difficult to find people who say that you’re not big enough. It’s a wonderful big arc of history that you’re offering. But let’s continue the arc. At the moment, we see that during the Han-Sui interregnum, we have this Chinese European moment. But as you mentioned earlier, there are already seeds of using exams or a history of using exams on a level that we don’t really see in the West. Long story short, we get the Sui dynasty. We get a big, very systematic examination system where a lot of political power, although the emperor has the ultimate say, a lot of the middle management is more and more taken in via this standardized examination system. And that ends up being kind of a blessing and a curse for China. Is that a fair, quick summary of what’s happening next in your story?

Yasheng Huang: That’s very fair. Interestingly, a lot of the liberal intellectuals in China criticize the keju system because they think it’s really bad. They argue it’s just memorization, nothing else — conservative and even reactionary. I agree with that. But on the other hand, I also see that the keju system contributed tremendously to Chinese human capital development and literacy.

Let me just make sure that your audience knows this — it was only open to the male segment of the population, it was never open to the female segment. But there was a spillover effect. Mothers were mainly responsible for bringing up their boys and educating them. The preparation for keju started very early, at three or four years old. Thus, mothers had to be able to read and write.

It’s not an accident that in terms of 20th-century economic miracles, many of them happened in East Asia with the legacy of keju and its human capital. One of the things that keju did was homogenize human capital. We can come back to the bad side of that. But let me just emphasize the positive side.

When you work in a factory, when you work in manufacturing, when you try to scale your EVs, when you try to scale your solar panels, if you have inconsistent human capital from one worker to another worker, you cannot scale these technologies. Going back to the shirts that we wear, going back to the shoes that we wear, it’s not just high tech, even this low tech — anything that you have to do at scale requires consistency, requires human capital consistency. Keju, I’m not saying it’s the only thing, but it contributed critically to the formation of that human capital consistency.

Ilari Mäkelä: Before we go to the bad part, could I ask one more thing about the good part? One of the things that I was really surprised when reading your book is how much you suggest that there was genuine social mobility created by the keju. Because the really short story often told is that in Europe, you have to be an aristocrat to have political power. In China, anyone can take this exam. And I was always skeptical, thinking, "Yeah, okay. But no farmer is actually going to be able to train their son for this exam and actually succeed." It’s a nice story to tell, but actually, the outcome is the same thing. The aristocratic kids get a good education. The farmers don’t have a chance. And you suggested I’ve been a bit too bleak. Right?

Yasheng Huang: The historians who study keju use the term "social mobility." I may have used that term as well in my book, but more precisely, it is political mobility. Social mobility implies that you are a farmer, and you go up in social ranks, economic ranks. You can become an entrepreneur, you can become a professor, become a government official. That’s social mobility because it’s social rather than just narrowly political.

In the keju case, it’s really just political. You become an official, you become a bureaucrat. In that sense, it is limiting your range of mobility to one thing only: the imperial bureaucracy. You didn’t go into commerce, you didn’t go into universities, you didn’t go into other things like political opposition, for example. You didn’t go into the church. So, yes, there is that incredible mobility. You could be a farmer, and then you took the exam, you succeeded, and then you became an official. So in that sense, it’s not social mobility, it is political mobility.

Ilari Mäkelä: But there was genuine political mobility.

Yasheng Huang: Oh, absolutely.

Ilari Mäkelä: How would you convince a skeptic of that?

Yasheng Huang: Very easily. Again, going back to our earlier conversation about data, this is not something you can just use stories to illustrate. You kind of have to use statistics and data. An earlier historian, Ping-ti Ho 何炳棣 who really pioneered research on the keju showed that it was meritocratic. There are later historians who study keju, and they say, “Oh, so-and-so came from a prominent family, and he also succeeded. He got promoted.” But the problem with that is, how do you know it is the prominent family part that contributed to his mobility? Maybe he was extremely smart.

I’m not saying that the second view is necessarily wrong, but all I’m saying is that just telling that story itself is not convincing enough to make your point. In my work with Clair Yang from the University of Washington, we ran statistical tests to determine the effect of family backgrounds on exam performance. Whether or not you came from a rich family, whether or not you came from a politically prominent family, your father was a government official, your grandfather was a government official. Statistically, if that background influenced your exam score, we should be able to see it. We should be able to detect that effect in the statistical results we generate.

Indeed, because you had three rounds, in the first two rounds that were anonymized, we didn’t see any effect of family backgrounds on exam scores. That’s quite impressive — going back to the 6th century, 7th century, 9th century, and 13th centuries — that your backgrounds didn’t influence your exam scores. That means they had a pretty good system. It’s called anonymization. China actually invented the double-blind system. The examiner didn’t know who the examinee was. The examinee didn’t know who the examiner was. That was really incredible. That was an incredible invention, and China should get credit for it. To me, that’s more convincing evidence that the keju system was truly meritocratic.

Jordan Schneider: This is a nice transition to talk about court politics dynamics. There is one fascinating point that you brought up in looking at educational attainment and family background — at the very richest level, there was actually a bit of a negative correlation, because the emperor is smart, and they know that they don’t want to have a chief minister who actually has money, connections, and land.

This comes to the sense that you made very clear of there just not being other power centers. How did the emperor’s ability to literally handpick the top echelon jinshi 進士 class shape China for so many centuries?

Yasheng Huang: In the first two rounds of the civil service exams, family backgrounds didn’t affect the exam scores. However, in the final round, known as the palace exam, backgrounds were known to the examiner. This round included both written and oral components, with the emperor presiding as the chief examiner.

Surprisingly, candidates from wealthy families performed worse during this round. This is counterintuitive, especially when compared to contemporary educational systems where socioeconomic background often correlates positively with educational access and performance. Our research revealed a negative correlation in imperial China.

We attribute this to the emperor’s reluctance to appoint officials from independent power bases to central government positions. The final round selected the most important officials for the imperial court - those who would design future keju examinations, advise the government, and have direct access to the emperor. This system effectively marginalized the nobility and successful merchants.

This contrasts sharply with European royal families, which were interconnected and shared power. In China, the emperor maintained absolute dominance through a vertical system. Even imperial concubines were chosen from peasant backgrounds in remote areas, deliberately excluding those from prominent families.

The system’s cleverness in maintaining power is remarkable, though it’s unclear who specifically devised it. It likely evolved as collective wisdom over time.

Jordan Schneider: You also examined how emperors dealt with top ministers they disagreed with. Could you elaborate on this and its benefits to the system?

Yasheng Huang: Our research revealed an interesting pattern in Chinese imperial history. In earlier periods, ministers who disagreed with the emperor were often executed. However, after the implementation of the keju system, ministers typically resigned voluntarily when conflicts arose.

This shift can be attributed to changes in the nature of disagreements. Earlier bureaucrats and ministers might have posed fundamental threats to the emperor’s rule, necessitating their physical elimination to prevent potential coups. In contrast, later bureaucrats, shaped by the keju system, accepted the overall legitimacy of the imperial system even if they disagreed on specific policies.

Clair Yang and I are writing a book about China’s political evolution, using precise data to show that the frequency of coups decreased significantly after the keju system was established. The system served as an ideological tool to homogenize human capital in terms of both skills and ideology.

For instance, during the Wanli era, when the emperor abstained from ruling, no one considered overthrowing him despite his neglect of duties. This acceptance of the system’s legitimacy allowed for a more peaceful resolution of disagreements, where ministers could simply resign rather than be eliminated.

Ilari Mäkelä: Your work draws an interesting connection between the "frictionless autocracy" of Chinese emperors and the examination system. The keju system effectively centralized human capital and political mobility, preventing the emergence of alternative power centers. However, this raises questions about technological innovation.

You’ve presented data showing that Chinese inventions were more prevalent before the Sui dynasty, with a subsequent decrease. You’ve also noted a correlation between the prevalence of Buddhism and innovativeness, suggesting that intellectual diversity fosters innovation.

However, the Song dynasty seems to contradict this pattern. It’s often regarded as one of China’s most innovative periods, producing or refining many significant inventions. Shen Kuo 沈括, a Song dynasty polymath, is legendary perhaps to the point of da Vinci status. To many people’s eyes, it’s the Song dynasty that represents China’s european moment. How does this fit into your overarching argument?

Yasheng Huang: The Song dynasty does present a challenge to our thesis, and we address this in detail in our forthcoming book from Princeton University Press on the history of Chinese technology.

While the Song dynasty was indeed innovative, inventing three of the four great inventions (gunpowder, printing, and the compass), it’s important to note that it was still a unified empire trending toward a single ideology, unlike the European situation.

In our current research, we’ve developed a measure to assess the importance of inventions. Even when weighting major inventions more heavily, the Han-Sui interregnum still emerges as the most inventive period. This period saw significant advancements in pure mathematics and other important inventions that are less well-known than the "four great inventions."

Ilari Mäkelä: We haven’t discussed the role of commerce as a potential power base. Some scholars, like Daron Acemoglu and James Robinson, emphasize the importance of commercial power as a competitor to political power in England’s industrialization. How does commerce fit into the story of frictionless autocracy in China? Could the commercial activity in the Song dynasty explain its innovative streak?

Yasheng Huang: Commerce can impact both technology and politics. There’s likely a connection between vibrant commerce and technological innovation, which may have contributed to the Song dynasty’s achievements. However, commerce is just one of many factors.

In the context of the Western Industrial Revolution, commerce played a role within a broader framework of political and intellectual freedom. Commerce alone is insufficient to launch an industrial revolution.

Chinese commerce always operated in a restricted environment, similar to how Jack Ma’s commercial empire prospered but remained constrained by political factors. This restricted environment could foster technology to a point, but not to the extent of launching an industrial revolution.

Regarding politics, evidence increasingly shows that commerce alone doesn’t change political structures.

The Song dynasty had vibrant commerce but remained autocratic. In fact, it invented one of the most restrictive ideologies in Chinese philosophy — neo-Confucianism — while Buddhism declined.

Jordan Schneider: It’s interesting to consider how this tradition persisted even after interactions with border countries and foreign conquests. One of the more dramatic things you said at the very beginning, like one of the downsides of not valorizing generals and generalship is that you kind of lose more wars. The Han people did a lot of that over the past 2000 years. You probably wouldn’t expect nomadic horse tribes to all of a sudden decide that eight-legged essays 八股文 were the best way to run their country.

How did invaders like the Mongols and Manchus, who weren’t initially invested in Confucian ideals, end up adopting and perpetuating these systems?

Yasheng Huang: The reverse takeover of China by the keju system is a fascinating piece of history. The Mongols initially had no such system in their culture or civilization, as they were primarily focused on warfare. However, at some point, they recognized its usefulness for ruling their vast empire.

The Yuan dynasty, presiding over an enormous territory, needed a large number of capable bureaucrats and administrators. Keju provided the means to acquire this human capital and ensure consistency across the empire. The Mongols not only resurrected keju but also innovated by incorporating the most restrictive ideology into its curriculum.

Cleverly, the Yuan dynasty utilized two Han Chinese inventions, keju and the Neo-Confucianist ideology developed by philosopher Zhu Xi 朱熹 during the Song dynasty. They combined these elements to create the most restrictive institution in Chinese history. The narrowing of the curriculum, which began in the Song dynasty, reached its apex under Mongol rule.

The subsequent Ming dynasty, ruled by Han Chinese, adopted the Mongol modifications to keju. Even the Qing dynasty, not ethnically Chinese, quickly recognized keju’s utility. This demonstrates the system’s power as a toolkit for autocratic rule.

Jordan Schneider: Indeed, the key takeaway from this system is the trade-off between scale and dynamism. While having 10,000 bureaucrats well-versed in Confucian texts ensures a level of competence, it may not foster radical innovation or dramatic changes — for better or worse.

This principle extends to imperial succession as well. Primogeniture may not always result in the most capable ruler, but it provides clarity and stability, avoiding the bloodshed often associated with other succession methods, such as those seen in the Ottoman Empire or the Yuan dynasty.

Yasheng Huang: Your observation is excellent. When examining the political history of both East and West, we see that each system developed methods to resolve conflicts. Democracy allows for disagreement within established rules, while autocracy relies on force or indoctrination to quell dissent. Primogeniture is another conflict resolution tool, providing clear succession rules to prevent power struggles.

Wang Li’s proposal to violate primogeniture was potentially dangerous to the regime, prompting pushback from Confucian mandarins who recognized it as undermining a critical rule of succession. The Chinese system adapted by having Confucian scholars educate the heir apparent from an early age, instilling Confucian values and ethics as an additional safeguard.

Ultimately, these systems aim to resolve conflicts, either by relinquishing some control or by consolidating it. China opted for the latter approach.

The Downfall of the Imperial Exam System

Jordan Schneider: Let’s discuss the late Qing period when the system began to unravel. Increased commerce, exposure to the West, and military defeats led to a growing realization that changes were necessary. New ideologies emerged, such as those that fueled the Taiping Rebellion. By 1905, the keju system was abolished, marking the end of an era. Can you elaborate on this transition and the continuities (or lack thereof) between the imperial tradition and the subsequent Republican era?

Yasheng Huang:

Several factors contributed to this transition.

1. Population growth during the Qing dynasty made the keju system increasingly competitive, as the number of available positions did not increase proportionally.

2. The Qing dynasty, aware that keju favored Han Chinese due to their long history with the system, actually decreased enrollments, exacerbating the competition.

3. Ideological challenges arose. While keju had successfully suppressed Buddhism and Taoism, Christianity proved more difficult to contend with, arriving in China with significant force.

4. Western intrusion further weakened Manchu rule.

The Taiping Rebellion exemplifies the convergence of these factors. Led by Hong Xiuquan 洪秀全 — a failed keju candidate who embraced Christianity — it demonstrated the system’s inability to maintain legitimacy. Although the rebellion was eventually suppressed, it drained government resources, leading to the sale of official positions and further undermining keju’s credibility.

These factors collectively contributed to the collapse of the imperial system and the establishment of the republic.

Ilari Mäkelä: Another significant development was the creation of a modern army to combat the Taiping Rebellion. This led to the emergence of powerful military leaders, such as Yuan Shikai 袁世凯, which contributed to the empire’s downfall. How significant do you consider this aspect of the story to be?

Yasheng Huang: While the military’s growing power was indeed a factor, we shouldn’t overstate its importance. Civilians, not generals, primarily initiated the Republican revolution. It was a revolution driven by ideas and regional rebellions rather than a classic military coup.

The military largely attempted to defend the regime rather than overthrow it. The collapse resulted more from the loss of ideological narrative and the imperial system’s legitimacy. Increasingly, I believe the role of ideas and ideology to be a more significant driver of history than economics or military power alone.

Jordan Schneider: Let’s discuss Chiang Kai-shek, a leader with a unique ideological blend of Christianity, fascism, and Confucianism. What elements do you think he adopted from the imperial tradition, and were there aspects he should have emphasized more?

Yasheng Huang: The Nationalist Party, under Chiang Kai-shek and his son, struggled to balance scale and scope more than their imperial or communist counterparts. They never fully resolved the conflict between Western influences and Chinese autocratic traditions, resulting in an unstable arrangement that allowed for some diversity but lacked a decisive direction.

This lack of resolution led to ad hoc solutions and eventual democratization in Taiwan. Chiang Kai-shek attempted to maintain an autocratic veneer while incorporating some elements of scope and diversity, which is not an ideal combination. Democracies are generally better equipped to productively incorporate heterogeneity.

A similar pattern emerged under Deng Xiaoping in mainland China, but with different outcomes. While Taiwan evolved towards democracy and the institutionalization of scope, China moved in the opposite direction.

Ilari Mäkelä: To clarify for our listeners, when you mention scale and scope, you’re referring to the system’s ability to handle uniformity (scale) versus diversity and heterogeneity (scope). Is that correct?

Yasheng Huang: Exactly. Scale refers to economies of scale, producing millions of identical widgets or maintaining a single party and ideology. Scope encompasses diversity, such as having multiple political parties, liberals, and conservatives in a democracy.

My book explores how China initially grappled with these opposing forces before ultimately favoring scale at the expense of scope and diversity. In contrast, Western countries resolved this tension by embracing scope, creating systems that can manage conflicts while promoting economic development and preserving political and ideological diversity.

Ilari Mäkelä: The keju system seems to be a prime example of favoring scale over scope. You have a compelling line in your book, "Too much autocratic stability is detrimental. This conclusion is not based on Western values and ideology, but on China’s own history."

Yasheng Huang: I aim to convey this message through Chinese history, hoping to persuade people to reconsider their aversion to diversity and competition. China has historically prospered when it allowed for a degree of diversity, both in ancient times and in the contemporary period.

For those concerned with economic growth, development, technology, and science, China should celebrate diversity rather than suppress it. The evidence from China’s own history supports this conclusion.

Subscribe for next week’s edition where we take the story from 1949 up to the present

Is Zuck right that AI lab security is a lost cause? How much AI technology has China already stolen? What will the consequences be if authoritarians win an AGI arms race?

In this week’s ChinaTalk YouTube documentary, we explore the Leopold Aschenbrenner thesis. Let us know what you think!

“Why are Chinese Government Workers So Average?”

One former bureaucrat has some anecdotes to share from their time working at a Chinese government office. This post was translated by Moly at Weibo Doomscroll:

1. Our workplace intranet’s system often has a bug where you can’t open up the status bar and it really affects people’s work. Before I came along, people would just reset their computers, eat some snacks, drink some tea, and chat while waiting for the computer to recover. Then I came along and discovered this problem while working, so I asked an IT friend how to fix it. From that point on, if anything goes wrong with any computers at work, it’s my job to fix it.

2. Here’s an example. Our workplace hires an outside contractor to make our PowerPoints, and no matter what the quality is, they charge a couple hundred RMB. But if one of us makes it on our own, no matter how well you do, all you get is a word of praise. Now, aside from your actual job, they’ll put you in charge of making all the PowerPoints. You have to work overtime to do them, and if you don’t do it well enough, people will complain and demand you make changes. Now everyone in the office claims they have no idea how to do PowerPoints.

3. A new guy came who knows how to take drone footage, posts vlogs to his social media every now and then. Then, our workplace wanted to make a promotional short video and put me in charge. I was asking photography studios for a quote when the boss suddenly remembered, “Hey, doesn’t so-and-so usually do this sort of thing? Let him try.” And I was like, “I dunno about that, drones can have all kinds of problems, and if it broke, we’d have to pay for it.” And the boss was like, “Oh, then never mind.” I don’t know who this asshole heard the gossip from, but he thought I was trying to put him down, so he went and recommended himself to the boss. Then, his drone fell into the artificial lake and nobody’s ever said anything about compensating him, and it’s been two years.

4. You don’t dare to be anything other than average. When I first got hired, my coworker saw my resume and asked me to help tutor their kid. I agreed because I thought it would be fun, and I ended up doing a great job, so now all of my coworkers want me to go tutor their kid. Ever since then, my line is, “It’s been so long since my graduation that I’ve forgotten everything.”

5. Swapped offices, and my boss was going to some diplomatic training, and as his secretary, I got so bored that I spent an afternoon translating the English curriculum and itinerary, and even preserved all the tables they had in the original document. Now, all kinds of diplomatic work is falling on me as the secretary. From that point on, “I’ve been to Europe, but I don’t speak any English.”

6. Our workplace hired some big-name ad company to make a fancy but entirely useless PowerPoint that doesn’t follow any of our formats at all. They were trying to run special effects made on a mac computer on MS Office, and it was all fucked up. I had to pull two all-nighters to basically do everything over from the ground up. And then, all kinds of important power points ended up coming my way. From that point on, “I don’t know how to use Chinese software.” Even now, I’m just an average dude who knows how to do data entry and maybe make a few phone calls and run some errands. I don’t know how to write any lesson plans, translate languages, do calculus, or make slide shows.”

The comment section:

This is so real…

All I can say is that this institution has fucked up management. How long has it been since you’ve had a government job?

See, it’s against nature to have no mobility in the government.

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Why China’s New Cultural Confidence Is a Good Thing

William Han is a Taiwan-born and US-educated writer and lawyer. He has a couple of screenplays bouncing around Hollywood. Today, he’s here to discuss the film Creation of the Gods I: Kingdom of Storms (streaming on Amazon Prime).

The plot may well be too complicated and unfamiliar for Western audiences to follow. And that may be part of the point.

The film Creation of the Gods I: Kingdom of Storms 封神第一部：朝歌风云 came out in 2023, after a three-year delay due to Covid, to nearly universal acclaim within China. It also cleaned up at the box office, becoming the 26th highest-grossing film to ever hit the Chinese market and out-earning Hollywood blockbusters such as Avengers: Infinity War and Avatar. Part II of the trilogy is now slated for 2025, with part III yet to be scheduled.

The film was made chiefly for the Chinese audience. It’s an epic historical fantasy based on ancient Chinese history. If you haven’t studied Chinese history, you’ll need some background to understand the movie.

From a Bronze Age War to a Fantasy Epic

In the 11^th century BC, the Zhou state of western China was but a vassal of the ruling Shang Dynasty, until the Zhou revolted against the last Shang king. Led by their chief (the Lord of the West) and then by his son (the soon-to-be King Wu of Zhou 周武王), they defeated the Shang at the Battle of Muye 牧野之战 and established the Zhou Dynasty. It was a watershed moment in Chinese history — the Zhou would persist in some form for nearly eight centuries, and their fundamental impact on Chinese culture can be seen to this day.

That much is real history. Some of China’s most hallowed ancient texts attest to these events, but they are thin on details. Over the centuries, popular fictionalizations of history appeared to satisfy the folk imagination. Creation is officially based on two such fictionalizations.

The first is a huaben 话本 (literally, “vernacular speech book”) — an outline for storytellers in the Song Dynasty. Just as premodern Europe had bards and rhapsodes, marketplace storytelling was a common art form in ancient China. This one was first printed during the Yuan Dynasty in the 14^th century.

The second (and much more famous) retelling of this story is the 16th-century novel Investiture of the Gods 封神演义. Written during the Ming Dynasty, this novel organized the storytellers’ materials into a grand epic now known to every Chinese schoolchild. Thanks to Investiture, the tale of the great Shang-Zhou war grew beyond a military and political drama and became a supernatural fantasy.

The novel follows a cast of mostly fictional Daoist practitioners wielding magical powers, who fought on both sides of the war. When they were killed — or, in some cases, even when they survived to the end — these characters became gods (they were “invested,” if you will). 

One example is Yang Jian 楊戩 (aka Erlang Shen 二郎神, the “Second-Son God”). As a powerful practitioner of Daoist magic, he plays a major role in helping the Zhou army in Creation and Investiture. Those who have played the newly released video game Black Myth: Wukong 黑神话：悟空 will already be familiar with him.

China Can Now Make Movies Like Hollywood

Of course, the filmmakers also took some additional liberties, but their adaptation has been a resounding success. Creation is one of a wave of mainland Chinese films in recent years displaying full command of the craft of commercial filmmaking. The 2017 Wolf Warrior II 战狼II showed that the Chinese film industry was now fully capable of making a Hollywood-style action adventure with a Chinese hero. It was vulnerable to charges of jingoism, but no more so than Mel Gibson’s The Patriot or Michael Bay’s Pearl Harbor. The visually gorgeous 2023 feature Chang’an 长安三万里 demonstrated the industry’s mastery of animation, featuring the great Tang Dynasty poets and their verses.

As for Creation, I felt that the CGI was occasionally unconvincing, and the elderly character Jiang Ziya 姜子牙 sometimes approached the type of slapstick humor found in older Chinese films. But, in my opinion, it is easy to overlook these flaws.

Foreign film industries often struggle to master Hollywood-style screenwriting. The three-act structure — based on Aristotle’s Poetics and preached in Hollywood bibles like Screenplay by Syd Field and Story by Robert McKee — sounds simple but is surprisingly difficult to execute. Adapting classic novels with nonstandard structures poses an even greater screenwriting challenge. Peter Jackson confronted this difficulty and succeeded with The Lord of the Rings. Investiture is at least as complicated as LOTR, and the screenwriters and director of Creation have risen admirably to the occasion, making significant changes to the source material so that the story works for the screen.

By the Chinese and for the Chinese

But can a Western audience follow all this? Can a Western audience follow the motivations and actions of so many unfamiliar characters and their conflicts against an equally unfamiliar cultural and historical backdrop? 

Another thing Creation and Black Myth: Wukong have in common — they don’t care whether Western audiences can follow what’s going on.

Both Creation and Wukong are Chinese products drawing on Chinese culture made primarily for Chinese consumers. Foreigners who want to come along for the ride are welcome, but they’re not the main target audience. The same can be said for the animated film Chang’an: of course foreigners aren’t going to appreciate Tang poetry the way the Chinese, who all grew up reading and reciting these poems, can.

The arrival of these products signals a new cultural confidence on China’s part. Just as Hollywood expects the rest of the world to know about Superman, it’s now up to you to get up to speed on Sun Wukong and the heroes and villains of Creation. And if you don’t have the energy or interest to do so — well, that’s your loss.

Diversity with Chinese Characteristics

Some have greeted Wukong’s release with claims that it lacks racial diversity — which seems churlish given that it’s about a monkey in a fantasy version of ancient China. And the claims clearly have more to do with ongoing culture wars in the West than with the game itself.

Creation, though, is very diverse. The film’s director is ethnically Mongolian, as is the actor who plays the future King Wu of Zhou. The actor who plays the Shang king is multiracial, having a Taiwanese mother and an American father: indeed, in English, his name is Kris Phillips. Naran, the Russian model and actress who plays the Shang king’s favorite consort Daji 妲己, is ethnically Buryat. The actor who plays Yang Jian is from the Yi 彝 minority ethnic group spreading from southwestern China into Southeast Asia. There is even disability representation on screen: the actor who plays the Lord of the West has lost his hearing due to cancer.

It’s hard to imagine greater minority representation within the Chinese context. Of course, Chinese filmmakers aren’t motivated by Western social-justice concerns. I have no inside information as to why the makers of Creation chose such a diverse cast — it could be purely a creative choice. It could also be an intentional move to present a multiethnic vision of China, in light of harsh international criticism of Beijing’s policies toward ethnic minorities.

The diverse casting, though, does feel appropriate given the source material. Both Investiture and Wukong’s source material Journey to the West 西游记, were written during the mid-to-late Ming Dynasty. This was a time of religious syncretism in China. All three major teachings — Confucianism, Daoism, and Buddhism — were seen as converging toward the same destination. The great Confucian thinker Wang Yangming 王阳明 (1472-1529) famously used the metaphor of a house: the three teachings, he wrote, were like three different rooms of the same house. Buddhism, the motivating force of Journey to the West, had been a foreign import from India. But Chinese people saw this fact as irrelevant. Every race everywhere, Confucian intellectuals argued, must’ve been endowed with the same capacity for moral reasoning. If sages in India had figured out a way to Enlightenment, then we should gladly take advantage of it.

Although the Shang-Zhou war occurred centuries before the rise of Daoism and Buddhism, Investiture takes pains to acknowledge the latter’s wisdom for the benefit of its Ming Dynasty readers. Several supernatural characters are presented as future Buddhist deities, with the novelist explicitly noting that so-and-so immortal would later turn to “the Religion of the West,” no less valid than the teachings of China. Investiture thus reflects the ecumenical view of the world prevailing in Chinese thought at the time. Indeed, around the same time, Chinese intellectuals welcomed Jesuit missionaries like Matteo Ricci into their midst, believing that Christianity must also serve as simply another path to Truth.

Confidence Is Good, Actually

Historically, then, the Chinese have often been receptive to foreign ideas and careless of their foreign origins precisely when they are most confident in the strength of their own civilization. That version of China is the one I would like to see today.

Unless that’s Pollyannaish. Maybe that idealized China, confident and therefore ecumenical, is as much of a myth as Sun Wukong or Investiture. But I prefer not to think so. And films like Creation of the Gods I, along with games like Wukong, show a growing cultural confidence that is one step in the right direction.

Who knows? Maybe even Americans can be confident enough in their own culture to be receptive to Chinese films, games, and stories. Wouldn’t that be something?

Alexa Pan — Chinese Art Rock Song of the Week

“The Peacock Flies Southeast” 孔雀东南飞, by Wood Pushing Melon 木推瓜.

This song is for the art rock fans and ecstatic dancers. Formed in 2000, Wood Pushing Melon’s lineup hails from far corners of China: Jilin (northeast), Guizhou (southwest), Hainan (southernmost), Xinjiang (northwest). After a brief stint in Beijing’s crib of rock legends, Shucun, they went on hiatus and reunited in 2015, recording four studio albums since. Often compared to King Crimson and Frank Zappa, Wood Pushing Melon covers an eclectic range. Vocalist Song Yuzhe 宋雨喆 had spent his free decade blending ancient China, central Asia, religious, and contemporary music in his personal project Dawanggang. These influences feed into the Wood Pushing Melon’s sound: world music and folk fusion meets progressive and art rock.

“The Peacock Flies Southeast” plucks its name from a celebrated ancient poem describing a tragic romance. Under Wood Pushing Melon’s direction, it is a twelve-minute ballad with no words. In this musical ensemble iridescent as the bird itself, rhythm is the only constant; everything else — flute, organ, synthesizer, grating or rattling percussion, operatic voice flourishes — comes and goes in flushes (I particularly enjoy the banging piano chords and martial arts-like vocalizations around 6:50). For all the highlights in its musical fabric, I find the song a nice piece of ambience to work or relax to as well.

If you enjoyed this song, check out their first album.

We don’t do a ton of econ coverage on ChinaTalk, but had to make an exception for this truly epic piece of independent research by Jon Sine on LGFVs. He writes the Cogitations substack.

Cogitations

Writing that excavates the social scaffolding.

By Jonathon P Sine

In this essay we will tell the story of China’s LGFVs: that special type of state-owned enterprise (SOE) behind China’s infrastructure building bonanza. Along the way, we will look at the political and economic processes in China that facilitated their rise, and assess what we know and what we don’t know about them.

Data Before Narratives: The Lay of the LGFV Land

Let us begin with data. Today, there are nearly 12,000 LGFVs in China, 3,000 of which publicly disclose financials.1 Collectively, they are gargantuan. As of 2020, according to bottom-up surveys of LGFV financials, aggregated assets and liabilities equal 120% and 75% of China’s GDP, respectively.

LGFV Assets and Liabilities

LGFV’s financial situation is, to put it frankly, very bad. In aggregate, earnings (before interest, taxes, and depreciation, i.e., EBITDA) do not cover even their interest payments. Including government subsidies only occasionally pushes the interest coverage ratio above one. Moreover, the average borrowing cost for LGFVs, 5% or so, far outpaces their 1% return on assets, posing obvious sustainability problems. 2

Interest Coverage (LHS) and Borrowing Rates (RHS)

Cash flows paint an equally troubling portrait. Every year 80 to 90 percent of LGFV spending is funded by new debt. On the whole, LGFVs operating inflows do not come close to covering operating expenses. New debt is routinely added simply to make up the gap and sustain current operations.3

LGFVs Cash Flows

As is predictable from the above financials, the stock of interest-bearing LGFV debt has just about unceasingly expanded.4According to statistics from the IMF, LGFV’s interest-bearing debt has grown from 13% of GDP, or RMB 8.7 trillion, in 2014 to 48% of GDP, or RMB 60.4 trillion, in 2023.5

China’s Interest-Bearing LGFV Debt

LGFV interest-bearing debt is even larger than the IMF data above suggests. An unavoidable limitation of assessing LGFVs via bottom up data, as all of the above sources do, is that it only captures the 2-3,000 LGFVs that have issued bonds and published associated financials. Another 9-10,000 smaller LGFVs have never accessed the bond market and are therefore simply missing from the data.6 A simple way of trying to estimate the rest of the interest-bearing LGFV debt is to assume LGFVs follow a Pareto distribution.7 Doing so suggests IMF estimates probably understate debt by 25%. A more reasonable, if still likely conservative, estimate of interest bearing LGFV debt is probably 60% of GDP, or RMB 75 trillion, in 2023.8

Things Data Can’t Say

While the data tells a story of its own, there is also much it cannot tell us about LGFVs.9 Staring at data and getting proscriptive according to normative neo-classical doctrine risks turning us into IYIs.10 Understanding how we got here and the likely path forward requires other inputs.

What happens if we bring in the complexities of political economy? The incentives of organizational and social systems? The complexities of the past may shed light on the road ahead.

A Single LGFV Can Start a Prairie Fire

The protagonist of our story was born in a little known city in central Anhui province called Wuhu. The city, situated on the bank of the Yangtze, is just three hours south from another little known place with an important legacy: Anhui’s Xiaogang county, the place credited with pioneering China’s household responsibility system in 1978. Twenty years later, Wuhu would join its Anhui brethren in pioneering another defining feature of “socialism with Chinese characteristics”: the LGFV.11

If the household responsibility system unleashed market forces into China’s economy, then the LGFV brought the state surging back in—something Party-state leaders would likely have been keen on following destabilizing bouts of inflation in the late 80s and early 90s.12 But the direct desires of leadership were not the proximate cause for this novel feature of socialism with Chinese characteristics.

The LGFV, as we will see below, rather arose as an indirect result of three conjoined and systemic issues: fiscal centralization and decentralized local developmentalism, the Party-state’s organizational and incentive system, and the weakly institutionalized nature of China’s political system.

A spark only starts a fire in a flammable environment.

The Confederated States of China

In 1781, the United States was governed under the Articles of Confederation. That system had a glaring flaw: an utter lack of centralized fiscal revenue, which neutered central governance capacity. Within eight years a constitutional convention was called to forge a new system, which I would argue turned out better.

When China began allowing markets after Mao, the economic structure shifted beneath Beijing’s feet. SOEs crumbled, the tax base eroded, and tax evasion increased. Total government revenue and the center’s revenue share massively declined.13 Though one imagines the Soviet Union’s recent dissolution was top of mind, one could have also seen parallels between Beijing’s situation in the early 1990s and America under the Articles of Confederation.

The Partial Red-Herring of Beijing’s Fiscal Re-Centralization

In the early 1990s Beijing sought to re-affirm central authority. One of the more reliable ways to do so is to take control of the purse. Of this view were General Secretary Jiang Zemin and his Premier Zhu Rongji, who pushed forward a major fiscal and tax restructuring in 1994. Two big changes were wrought. First, Beijing decisively centralized revenues while keeping expenditures decentralized. Second, Beijing barred local governments from running deficits, and from borrowing.14 China, the most fiscally decentralized country in the world in terms of local expenditure share, overnight developed a stark vertical fiscal imbalance, with unfunded mandates at the local level.15 Nearly an inversion of the original problem. But Beijing was happy and that’s what mattered (to Beijing).

Ultimately, Beijing wanted revenues routed through its own coffers for purposes of control, most importantly over subordinate levels of government, and redistribution. That becomes evident once you realize the central government simply transfers back just about all the money. Indeed, once transfers are accounted for the oft-cited central-local fiscal gap disappears.16Unfunded mandates did materialize following the 1994 budget reform, but in a more nuanced way.

The problem was (and still is) in the nature of the intergovernmental transfer system. Beijing bureaucrats apportion funds to the provinces, who are in charge of apportioning funds to prefectural cities, who are in charge of apportioning among county level units, who are in charge of apportioning among townships.17 But sometimes the provinces send funds directly to the counties, by passing the cities. Each level also needs their own funds. And each level can take months before passing on the funds it received. By the time funds get from top to bottom, a year or more can pass.18

An Example of Intergovernmental Transfers

It’s fairly easy to understand how funds may also leak, be misappropriated, or miss their mark. The severity of funding problems ends up being highly geographically variable. The resource gap for many local governments is real, if overstated at the macro-level if transfers are not considered.

When we talk about China’s fiscal revenue, what is likely more important to understanding the evolution of China’s political and economic trajectory is the production bias baked into the system: 60% of taxes are on goods and services, just 6.5% on income.19

Share of major taxes in total tax revenue

Local government’s fiscal structure highly incentivized them to figure out how to boost production. So they turned to the task with their highly decentralized expenditure capacity and, more importantly, decentralized powers of off-budget liability-creation.20

The Decentralized Developmental State Gets a New Tool

The expenditure portion of the government income statement is more important than revenue in understanding the rise of LGFVs.21 This owes to the pervasive and multi-faceted role of local governments in economic activity, mobilizing for development.22

Local officials in China have long competed intensively within a hierarchical system that is both decentralized and weakly institutionalized. A combination of top-down and bottom-up incentives attracting them to or diverting them from enacting the center’s ambitions. This developmental modality post-Mao evolved into what is colloquially called the “mayor economy.”23 It is in large part an institutional outgrowth from China’s decentralized Maoist-Leninist system, and arguably traces even further back to imperial-institutional legacies.24 Along with previously noted fiscal incentives, a particularly noteworthy top-down feature has been the Party’s Organization Department and its control and influence over local cadres promotion.25 Mao’s death enabled the re-direction of the Party-state’s high-powered incentive systems to a new goal of production-oriented tournament style competition.26 Arriving at a period of burgeoning hyper-globalization, localities soon began to fight tooth and nail to lure FDI.27 A period of post-Mao capital deepening, urbanization, and transition beyond agriculture occurred at unprecedented speed and scale.

Local officials hunted within this incentive ecosystem for ways to increase their economic role.28 One seemingly win-win way for local governments to deepen their involvement was infrastructure—a role that arguably became their most important.29 To fully step into this infrastructure supplying role, however, local governments needed a new financing tool. Given the enormity of the task, no typical fiscal revenue stream would suffice. That’s where a little ingenuity from financial big whigs at China Development Bank (CBD) came in to play. Chen Yuan, son of famed Chen Yun and then head of CBD, helped local officials in Anhui and Wuhu concoct a simple but brilliant way to expand their economic footprint: create a corporate entity owned by, though at arms length from, local governments that could borrow unconstrained by the 1994 budget and regulatory regime. The entity’s raison d'etre was simple: (1) raise money and (2) build infrastructure. This was the “Wuhu model,” and in 1998 it birthed China’s very first LGFV: Wuhu Construction Investment Company.30

Over the next twenty years the Wuhu spark would engulf the country.

Land, Meet Finance

Leveraging land was Wuhu Constuction Investment Company’s distinguishing characteristic. Indeed, it was land finance that made the rise of LGFVs possible.

Local governments began selling land-usage rights in the 1990s, around the same time as Wuhu’s LGFV popped into existence. Once the land auction system was approved centrally and rolled out in the early 2000s, local government sales of land-use rights exploded.31

Proportion of state-owned land transfer revenue relative to local public budget revenue

For good and for ill local governments, uniquely empowered to requisition and sell land-use rights, used all means at their disposal to get land and ready it for sale, including mass evictions of those currently occupying it.32 The sordid history of local government land theft from China’s rural populace (re-zoning the land and selling it property developers) manifested in many cases as a Georgist’s worst nightmare, with self-immolation a not infrequent form of protest in the countryside.33 CPC led land reform in the early 1950s gave peasants their land, communization in the late 50s took it back. Marketization in the 1980s let the peasants work their land again, local governments began stealing much of it away in the 1990s. Such are the ebbs and flows in China’s countryside.34

By the late 90s, the local government revenue split began to take its contemporary shape, roughly equally divided into three parts: (1) central government transfers, (2) locally generated revenue, and (3) land sales.35

Land sales and locally generated revenue are highly intertwined. In the late 1990s, local governments began selling industrially-zoned land cheaply to attract companies that they could tax harvest. Selling land low seems counterintuitive until you realize locally derived revenue mostly comes from value-added and corporate income tax. Thus local governments became ever more perfect price discriminating monopolists: they sold residentially zoned land (居住用地) high to maximize one off revenue, but sold industrially zoned land (工业用地) low to maximize recurring revenue.

LGFVs took on two very important roles in the burgeoning land finance system. First, the pivotal role of preparing land for sale. Such preparation not only involves evicting rural residents and coordinating with the local governments on compensation (or lack thereof), but also requires multiple land development steps, known as the “seven connections and one level” (七通一平). LGFVs were used to build (1) road connections, (2) water supply connections, (3) electricity connections, (4) drainage connections, (5) heating connections, (6) telecommunications connections , and (7) gas connections. They also leveled the land in preparation for development. The extensive requirements of land development meant that often local governments were losing money on the land use sale (a problem that has only gotten worse in more recent years).36

Second, to finance these land-prepping activities, LGFVs ramped up use of the Wuhu land finance model. Local governments transferred more and more land use rights to these proliferating vehicles, who would in turn go to banks for loans using the land rights as collateral. And thus the land-industrial-complex began. Re-zone land. Transfer land. Develop land. Sell land. Buy land. Collateralize land.37

One need not be a Georgist to understand the unmatched power of land. Tax revenue would never have been capable of resourcing LGFVs the way land-finance did.

LGFVs, Property Developers, and Beijing’s Banking Balloon

No story on the rise of LGFVs could be told without a discussion of property developers and China’s banking system. If LGFVs are Batman, then property developers are Robin, and the banks are Wayne Enterprises (mileage may vary with this analogy).

The Wuhu model LGFV could take land from local governments and develop it for sale, but who would buy? Well, property developers. By the early 2000s, thousands of property developers had been established, eager to participate in China’s epic-scale urbanization process. Both sides of the would-be transaction, however, needed credit—particularly prior to the heyday of pre-sales in the 2010s. The LGFV-Property Developer crime fighting duo therefore needed their Wayne Enterprises.

Banks are the cornerstone of China’s financial system and were really the only game in town capable of facilitating a burgeoning land finance system. Most know about the big banks, but the stories slightly more complicated. To get localities on board with the 1994 fiscal overhaul, Zhu Rongji made a “grand bargain” with localities: in exchange for acquiescing to fiscal centralization, localities would get the right to establish their own locally controlled banks.38 As Adam Liu, whose research focuses on this topic, puts it: what is “rarely discussed is the most vital component of Beijing’s compensation package [for the 1994 budget reform]: local governments were offered the privilege of entering the banking sector.”39 When Beijing closed the front door with its budgetary restriction on lending in 1994, it opened a window.40

One can see the results: city commercial banks and other types of locally controlled banks proliferated. In 1995 the first city commercial bank was set up, and two decades later over 130 were in existence. The loan share of the big six banks collapsed from nearly 100% in the 1980s to roughly 25% today as a result of rising competition from locally controlled banks, e.g., city commercial banks, for deposits (as well as the 12 joint stock banks). The proliferation of state-owned local banks is an overlooked but consequential feature of China’s political economy, and core to the LGFV story.41

In the early 2000s banks were the primary funding source for the land finance system, on both the supply and demand side. Approximately 50-60% of real estate developers’ funding, for example, come from bank loans by 2004.42 That money, in turn, paid for land-use rights that funded local governments and, in part, their LGFVs. Meanwhile, LGFVs used their land-use holdings as collateral for loans (though in China’s weakly institutionalized system sometimes banks would lend without collateral).43 Bank loans made up about 90% of LGFV liabilities in that same period.44 China Development Bank and the big six state owned banks were core lenders, but locally controlled banks were players too, and their role would only grow more prominent.

LGFVs, property developers, and the banking system co-evolved.

Pouring Gasoline On a Fire: The 2008-10 Stimulus

Structural fiscal and developmental incentives likely would have continued to steadily drive LGFVs into ever greater positions of prominence within China’s economy.45 But it was the Great Financial Crisis of 2008 and China’s response to it that sent LGFV growth into steroidal overdrive.

No longer simply acquiescing to their use, Beijing began directing local governments to deploy LGFVs for countercyclical infrastructural stimulus and tasked the banking system with funding them.46 The People’s Bank of China explicitly called on local governments to use LGFVs to borrow, the banking regulator (CBRC) explicitly encouraged LGFV use, as did the Ministry of Finance.47 Buyer of narratives therefore beware, lest you fall victim to the woe is me central government fairy tale. This puts a bit of a lie to the notion that Beijing is effectively a responsible parent figure always trying to constrain misbehaving local officials.

When the center boldly announced its RMB 4 trillion stimulus plan to ward off recession, it did not intend to fund the stimulus directly but instead turned to local governments, now replete with bank licenses and financing vehicle. To this day we don’t know exactly how much China actually spent on its stimulus, though its clear the vast majority came off-budget via LGFVs. Only a trillion yuan shows up on the central government balance sheet.48 Beijing’s calculation of “official debt” accrual to LGFVs in 2009 and 2010 was RMB 3.6 trillion. But this number leaves out a substantial and non-transparent amount of LGFV debt.49 Some estimate LGFVs took on roughly a third of all new bank loans issued in 2009, and continued on in 2010 to account for 40 percent.50

As one example of what funds were used for, LGFVs mobilized to double-down on the build out of industrial parks and development zones. Parks and zones are used by local governments to attract companies, and thus revenue, jobs, and pad cadre evaluation, while from the central government perspective they are suppose to catalyze industrial clustering effects. From 2006 to 2018, officially recognized national and provincial level zones alone increased by 1,180, from 1,363 to 2,543.51 These numbers, large though they are, understate the extent of the build-out: they only include officially recognized zones above the city-level and do not reflect ongoing consolidation, merging, and cancellation of zones.52

One analysis of the post-2008 expansion stated that it “demonstrates that local governments are responsive to central commands.”53 Such a statement must be severely qualified. Local governments could not have been more eager to oblige Beijing in this instance, they tend only to respond with alacrity when doing so also corresponds with their interests. The host of epithets—from foot dragging, to bureaucratism, to formalism—is testament to the legion examples of local government non-compliance. But unleashing the LGFVs was also a boon for local cadres, their promotion metrics, and arguably for local development overall. It also made a fair amount of sense: local governments are closest to the ground and best understand what projects might work. And so China’s counter cyclical stimulus ran through local governments and their LGFVs.

Predictably, Beijing quickly lost what little control it had of the LGFV expansion process. Not only was the credit expansion much greater than Beijing intended, but LGFVs institutional role expanded and embedded deeper into the sinews of China’s economy. The analogy of LGFVs as Sorcerer’s apprentice is imperfect but apt.

Bend it Like Huarong

As they expanded, LGFVs moved out well beyond their initial infrastructural and land development remit. One analogy is that LGFVs have become akin to twelve thousand little Huarongs. Huarong, the country’s largest asset management company, was established just a year after the first LGFV in 1999. Colloquially referred to as a “bad bank” because it was set up to take non-performing loans off the Industrial and Commercial Bank of China’s balance sheet.54 Initially an asset recovery firm, Huarong metastasized into a massive conglomerate with dozens of subsidiaries involved as many different industries. The crazed expansion got so crazed under former Chairman Lai Xiaomin that the CPC decided to execute him.55 LGFVs have similarly spread out well beyond their original mission under increasingly complex corporate structures.

One categorization schema for LGFVs, offered by analyst Glenn Luk, divides LGFVs as follows: (1) The Infrastructure LGFV, (2) The Real Estate Asset Management LGFV, (3) The Structured Asset-Backed Warehousing LGFV, (4) The Financial Intermediary and Investment Holding LGFV, and (5) The Conglomerate “All-of-the-Above” LGFV. If the names don't immediately make senes to you, I invite you to read his post (see footnote).56 Suffice to say that after the 2008 explosion, NAO’s first audit in 2011 discovered that only half of LGFVs were strictly focused on government infrastructure projects, with 18% partly focused on them and a full third entirely focused on market-oriented projects.57 The issue has only exacerbated since.58

A recent Bank for International Settlement paper on the post-stimulus transformation of LGFVs shows just how far they have meandered beyond infrastructure. Between 2004 and 2018, only 20% of the investments made by the 4,432 they analyzed were into public goods sectors. They focus on Guizhou’s Dushan County as a concrete example. This LGFV operates across as many public goods sectors (e.g., electricity, heat production & supply, health, social security) as it does market sectors (e.g., software and IT services, retail, wholesale and real estate). The authors argue there is a U-shaped return to this sort of diversification, with some amount potentially helpful to growth but too much being harmful.59 Others, however, are much less sanguine, and see this expansion as potentially at the core of capital misallocation in China and the country’s overall productivity slowdown.60

LGFVs fed off a mix of moral hazard, unfettered access to credit, and indeterminant state responsibility for liabilities—that is, substantial state involvement under conditions of weak institutionalization. On their expansionary march LGFVs, from a more macro perspective, have cultivated an impressive web of investment linkages:

Red LGFV Over China: The Case of Zunyi Road and Bridge

Zunyi, a small city located in China’s southwestern province of Guizhou, does not often make the news. The city’s claim to fame dates back to the Long March in 1935, when it played host to a meeting that, according to Chinese Communist Party (CPC) lore, decisively established Mao Zedong’s leadership over the Party. Other than that, Zunyi is relatively unremarkable, a city of middling population and economic development, firmly in the 3rd tier of China’s unofficial city ranking system. One recent development, however, has once again brought attention to the city: the increasingly urgent Party-state effort to deal with LGFV debt. Zunyi Road and Bridge Construction (遵义道桥建设) is the star of the show. A snapshot of Zunyi’s corporate structure offers hints at some of the poblems.61

Zunyi Road and Bridge, like most LGFVs, is fully-owned by the local, in this case city-level, State Asset Supervision and Administrative Commission (SASAC).62 Established in 1993 and with registered capital of RMB3.6 billion, it is the second largest of of Zunyi SASAC’s 40+ holdings, many of which also appear to be LGFVs. Zunyi Road and Bridge is itself a holding company with at least 10 companies under its umbrella. Many of these firms are also LGFVs. Its largest holdings include: Zunyi Daoqiao Agricultural Expo Park Co., Ltd., Zunyi Daoqiao Hotel Management Co., Ltd., Zunyi New District Construction Investment Group Co., Ltd., and Zheng'an County Urban and Rural Construction Investment Co., Ltd.

Zunyi Road and Bridge Holdings

Road and Bridge’s subsidiaries also have subsidiaries. Take for example, its largest subsidiary: Zunyi City Baozhou District Urban Construction and Investment (遵义市播州区城市建设投资经营), with registered capital of RMB 1.6 billion. Baozhou Urban Construction itself fully-owns a diverse array of 10+ businesses, ranging from a funeral service company, to a financial leasing company seemingly focused on industrial equipment, to a water services management company, as well as a 49% stake in a property management company and a 5% stake in another diversified LGFV holding company.

Holdings of Road and Bridge Largest Subdiariy, Baozhou Urban Construction

The financing practices to go along with such a web of holdings have been similarly convoluted. One company may acquire loans or go to the bond market only to on-lend to its affiliated entities. There are hundreds, perhaps thousands, of LGFVs like Zunyi Road and Bridge and like the one in Dashan County mentioned earlier. These conglomerate LGFVs undertake what economist David Daokui Li describes as a “nested layering approach” to levergae. Companies at one level borrow funds, use that borrowed capital to secure additional loans at the next subsidiary level, and amplify debt layer by layer.63 All the while moving into more and more lines of business.

Evolving Liabilities: Bonds and Shadow Finance

Beginning almost immediately after their massive GFC-era expansion, Beijing turned from hot to cold on LGFVs. The center unleashed the National Audit Office (NAO) twice upon localities to try and scrape together the extent of the LGFV bonanza, first in 2011 and then again in 2013.64 The then bank regulator, CBRC (which then became the CBIRC and, as of 2023, the NFRA) also began keeping a comprehensive list of all LGFVs around that time, dividing them into “good” and “bad” and ostensibly demanding banks refrain from many types of lending to those on the naughty list.65

Constraints on bank lending, combined with the need to rollover short-term (~4 year) loans post-08, created huge incentives for LGFVs, local officials, and many other actors to devise alternative financing methods for these increasingly systemically important vehicles.66 A cat and mouse game had begun between Beijing regulators and localities.

LGFVs and China’s financial system proceeded to co-evolve.67 As LGFVs moved beyond plain vanilla bank loans, they played a huge part in spurring two other major financing channels: municipal corporate bonds and shadow banking.

Municipal Corporate Bonds

Municipal corporate bonds (MCBs) are bonds specifically issued by LGFVs (they are sometimes called chengtou). One informed analysis of them wryly describes them as the quintessence of socialism with Chinese characteristics: “MCBs are a perfect example of how planning and the market mix in the contemporary Chinese economy: They are implicitly backed by local government (hence “municipal”), but legally speaking they are issued by LGFV entities just like other regular corporations (hence “corporate”).”68

In 2006 only 17 LGFVs had issued a bond. By 2010 it was 1200. By 2013, 1700.69

The rapid growth owes to the central government’s stimulus-era decision to allow and encourage LGFVs to begin issuing bonds (enterprise bonds, a subset of corporate bonds, which at the time were regulated by NDRC, but as of 2023 are now regulated by CSRC).70 Data compiled by Fitch cuts a striking image:

The municipal corporate bond market really exploded in size, though, as 1-to-2 year short-term bank loans to LGFVs needed to be rolled over and re-financed.71 While the stimulus was the spark, the real acceleration came when it was time to rollover short-term debt.72 One study combed through bond prospectus of MCB issuers and disaggregated issuance according to stated purpose (prospectuses require issuers to state the purpose for the funds). The data clearly indicate a rapid rise beginning in 2013, precisely when the average short-term bank loan would have been coming due.73

Municipal corporate bond (MCB) Issuance by Purpose (2004-2016)

Rather than close, most “bond buyers preferred LGFV bonds because they offered higher yields than corporate debt, but were considered government guaranteed, even though they funded projects that typically had no capacity to repay the debt.”74

Most significant to the story, though, is who bought the bonds and how.

Shadow Finance: The Banks Shadow

Shadow banking is financial activity outside regulated channels. But in China, shadow banking takes on a double entendre of literally being the shadow side of banks. China’s shadow banking mirrors the rest of the financial system in being massively bank dominated. LGFV municipal corporate bond issuance was, as it turns out, mostly bought up by banks via shadow banking products.

Wealth Management Products (WMPs), or special funds set up to skirt regulations on deposit rates, are the most important shadow banking product. WMPs invested heavily in municipal corporate bonds. Chen and He et al calculate that 62% of all MCB proceeds came from WMPs. And it was banks that created those WMPs, of course with money that ultimately belongs to household depositors/lenders.75 Shadow banking and WMPs, much like MCBs, may not have precisely arose via LGFV stimulus, but massive pressure to rollover debt and refinance short-term stimulus loans created an extreme accelerant.76

Systemic incentives aligned to shift a substantial share of banking into the shade. Banks already engaged in regulatory arbitrage to get around the deposit rate ceiling and intermediate funds they otherwise wouldn’t have been able to.77 LGFVs got funds they wouldn’t have otherwise had access to. And households got higher returns via WMPs, which they viewed as fail-safe investments (owing to rampant moral hazard).78 Competition among banks to issue WMPs and compete for deposits, specifically between the big four and small and medium sized banks (SMBs), also intensified, going from luring deposits via offers of cooking oil, gold bars and cash to issuing higher-interest WMPs.79 As the figure below shows, WMP issuance as a share of all bank assets takes off in 2011, precisely when LGFV rollover needs are emerging.

Entrusted loans, meanwhile, were the second most prominent category of shadow banking, making up roughly 20 percent of shadow lending relative to WMPs 52 percent.80 Entrusted loans are loans between two non-bank entities that are facilitated by banks, a service for which the bank takes a fee but no exposure. The main characterstics of entrusted loans is firms with privileged access to China’s banking system, such as SOEs and larger LGFVs, channeling capital to those with less access.81 Most such transactions occur between affiliated parties, as between parent and subsidiary, such as in the case of Zunyi. This type of lending increases when credit conditions tighten, precisely as happened when Beijing tried to limit the credit deluge following its GFC-stimulus.82 Entrusted loans, a marginal part of total social financing relative to bank loans, clearly take off with LGFV refinancing.

Post-Stimulus Rise of Entrusted Loans (2002-2020)

Beyond WMPs and entrusted loans, trust companies also came onto the scene. Trust companies are “conduits that connect financial and non-financial institutions with asset classes that their licenses would otherwise prohibit.”83 Many trusts served as yet another mechanism to intermediate bank financing, in large part to LGFVs. The quintessentially convoluted process goes something like this: a bank makes a loan then sells it to a trust, the trust packages multiple such loans into a “trust plan,” then another bank’s WMP invests in that trust plan—investment banks would later serve as an additional layer, intermediating the second bank’s WMP investment into the trust plan.84 Such is the financial cat and mouse game.

Thus, all told, MCBs and shadow banking explode together around 2012 when LGFVs needed post-stimulus refinancing. The stimulus-through-LGFVs and follow-on regulatory tightening had the incidental effect of hastening development of China’s bond and shadow banking markets. LGFVs and the financial system co-evolved.85

Growth of shadow banking in China (2010-2020)

The evolution of LGFV liabilities reflects the tale. Based on a bottom-up estimates, Zhang and Xiong estimate loans fell from 79% of LGFV liabilities to 60% by 2015. That ratio has remained roughly stable up to today. In 2023, for example, global asset manager PIMCO estimated that the composition of LGFV debt was 60% bank loans, 30% bonds, and 10% other financing sources.86 Clearly bank loans still dominate, but given the extent of resources in play, the compositional shift was pivotal.

Evolving LGFVs Liability Composition

Beijing’s effort to conjure then control LGFV borrowing contributed to a sort of diversification of the financial system, including the massive expansion of the bond market. Many called for just this sort of change to Beijing’s bank dominated financial system. It’s a bit like a simulacrum of diversification, though, as banks remained the ultimate buyers, just with additional steps. But, at least when it comes to bonds, much debt was refinanced in substantially more sustainable manner. What’s more most of the ultimate lenders, via WMPs, were rich coastal Chinese folks. A potential avenue for common prosperity, and partial resolution to LGFV debt, could be defaulting on those bonds. That, however, could also risk seismic upheaval in a system laden with moral hazard and wherein not a single LGFV bond has yet to default.

The question of how to resolve the seemingly unstoppable freight train of LGFV borrowing lingered on.

Fiscal Reform Round 2: “Solving” The LGFV Debt Problem

As with property developers, the central government has been aware of problems with LGFVs for a long time and has been moving to resolve what they call LGFV’s “hidden debt.” As mentioned, regulations were first put in place in 2010 to impede bank lending to LGFVs. But the most important effort to try and resolve LGFVs debt and financing problems came with the country’s second big change to its budget framework in 2014, precisely two decades on from the last one. This time, a core purpose of the change was to deal with off balance sheet LGFV debt.

Most pertinent to resolving the LGFV situation, local governments were given a mandate and resources to swap off-balance sheet “hidden” LGFV debt with on-balance sheet bonds. Local governments were now given a clearer path to issuing debt themselves via bonds, and being actively encouraged to do so. The goal was to recognize contingent debt, refinance it with longer duration, lower interest rate bonds, and eliminate LGFVs within three years. Beijing’s “new budget law prohibits local government and their branches from borrowing in any other form, and unless otherwise specified by law, from offering any credit guarantee to any organization or individual.” Then the State Council issued Document Number 43 in September 2014 which aimed “to make these rules explicit” by stating LGFVs did not have “the authorization to borrow on behalf of the local government. If the only business of an [LGFV] is to borrow on behalf of the government, it should be shut down.” The goal, according to economists Chong-En Bai, Chang-Tai Hsieh, and Zheng Michael Song, “was to entirely eliminate [LGFVs] by replacing the debt of the [LGFVs] with local government bonds within three years.”87 If this was indeed the goal, then the reforms clearly failed.

China’s Interest-Bearing LGFV Debt

The failure has several causes. From the start, there remained debt classification issues with regard to what Beijing and local governments considered contingent liabilities. As a result, and the first big cause of the failure, is that a sizable amount of LGFV debt—equivalent to at least 13.4% of GDP, which the IMF’s 2018 Article IV derived from NAO estimates—was likely never transferred.88 Officially recognized local debt did shoot up as part of major bond swap program, and LGFV debt in turn fell from an estimated 32.1% of GDP in 2013 to 13.4% in 2014. But then LGFV debt as percent of GDP shot back to its original levels within three years.

Second, the new bond financing mechanism remained basically the same as the old one. The only difference was that Beijing actively used it. As before, all bond issuance has to be approved by the central government, via the State Council (and approved by National People’s Congress). In turn, provinces are in charge of issuing the debt and distributing the proceeds to all lower level governments. While controlling potential wanton lower-level behavior, it also creates an immense coordination problem lower levels and upper levels. Not only might upper levels not know what lower levels really need, lower levels may have incentive not to fully disclose how much they need. Low-level local governments would thus clearly find it easier to continue relying on channels they control (their banks) rather than official channels like special purpose bonds that are highly onerous, take a long time to get funds, and subject local officials to greater scrutiny.

Third and most important: nothing was changed with regard to local developmental incentives. Local officials were still highly involved in the economy, still controlled local banks and shadow institutions, and still stood to benefit in a variety of ways from credit finding its way to LGFVs. Predictably, new lending did not stop and LGFV debt continued to pile up.

Policies and Counter Policies (上有政策，下有对策）

The center’s hands have been far from clean in the LGFV clean up process. Throughout the winding road of LGFV growth the center has repeatedly stoked the LGFV fire only to then play fireman. The 2009 LGFV stimulus followed by crackdown is one example, but the same dynamic happened just prior to 2014 and again just after. In 2013 the State Council called upon local governments to increase infrastructural investment once more.89 Then, just after the big 2014 Budget Law change, “the State Council issued a new decree in May 2015 (document 40) that reversed its attempts to crack down on [LGFV] borrowing,” urging “financial institutions to continue to lend to [LGFVs].”90 Not only do local governments counter Beijing’s policies, Beijing often counters Beijing’s policies.

In more recent years, however, Beijing has gotten more focused and the drum beat of regulatory restrictions has intensified. Interestingly, though, they have also become more secretive.91 In 2018 the State Council made explicit the PRC government’s ambition to wipe out all local government hidden debt, calculated per 2017 numbers, within 5 to 10 years.92

In the ten years from 2014 to 2023, amid the LGFV diversification process we discussed earlier, local SOEs began to be classified and regulated according to three categories: competitive, functional and public welfare.93 The center is trying to rationalize the operations of LGFVs, limiting state subsidization and backstopping of those oriented toward the market while phasing out the weakest performers. In practice, the policy efficacy is dubious at best. LGFVs have mixed and matched assets not only to create conglomerates that might stand on their own feet in the market, but also as part of a cat and mouse game with regulators with the ultimate goal of keeping credit flowing and their operating capacity in tact. Conglomerates with diversified holdings (from pure public-welfare to pure market) become too big to fail for local governments. LGFV complexity and debt burdens have only grown.

Since 2018 an increasing number of regulatory documents have ceased to be made public. Some speculate there is fear and hesitation within China’s bureaucracy of taking ownership over this massive problem. Amid increasing clamor to better address the LGFV issue, the PRC government issued and circulated two guiding documents within its bureaucracy in 2023. Neither Document 37 or 47, as they are shorthanded, have been made public. But substantial information has leaked within China, and discussion on WeChat is ample.

One organization, an asset management and consulting company that focuses on local governments and their SOEs, has put together a helpful guide on how struggling LGFVs might “transform and develop in the context of today’s debt package.” The firm, Nanjing based Zhuoyuan, suggests:“If an urban investment platform in a region has weak qualifications and declining financing capabilities” it might want to consider “injecting more high-quality assets and integrating weak platform assets.” Alternatively, it might try acquiring high-quality listed companies so as to “broaden investment and financing channels for urban investment companies.”94

A new round of audits is apparently under way to re-assess the scope of the LGFV debt situation. A number of other steps have also been announced, including $1 trillion worth of bonds to bring LGFV debt on-budget and refinance at lower rates, to be handled by provincial governments in the 12 most struggling provinces. More policies and announcements are expected. But what will their efficacy be?

Conclusion: The Most Complex Economic Problem?

Having arrived at the end of our story on the rise of LGFVs, the fall remains untold. The winds of change have been blowing. But a precipice remains elusive. Metaphorical cliffs do exist in China’s weakly institutionalized, moral hazard laden system. And Beijing has shown a willingness to push things off. Need we discuss the rapid fall of China’s property developers?95 With the land market contracting, local officials and LGFVs will be hard-pressed to keep a land-financed based LGFV system intact.

Why though, one wonders, has there been no LGFV policy equivalent of the Three Red Lines? Is it because they are more embedded in “the system”? Consider how much greater the on-balance sheet exposure to LGFVs is than to property developers.

Or maybe it’s because, despite escalating central regulatory action against them, LGFVs remain useful to Beijing in a variety of ways. Beijing, as we have seen, often counters Beijing (上有政策，上也有对策). LGFVs are handy not just as shock absorbers against economic recession, nor just as levers to buttress growth and employment, but also as vehicles for carrying out country-wide goals such as extreme poverty elimination and shanty-town revitalization. But the costs of using LGFVs mounts.96

Whether or not shock therapy comes for LGFVs, the incentive ecosystem is shifting. Beijing has decided its bureaucracy must mobilize not principally to rectify backwards productive forces, but rather to remedy the “contradiction between people’s ever-growing need for a better life and China’s unbalanced and inadequate development.”97 At least one implication is clear: the land-finance system that for the last two decades has been the lynchpin for much of China’s development is being directed toward the dustbin of history. High-powered top-down incentives to boost growth are no longer so high-powered. Property developers have taken their hit, but LGFVs remain at large.

Ambiguous mandates render the future of LGFVs difficult to divine. What constitutes a better life, precisely? Growth is still important, but must be balanced with security and needs to be “high-quality.”98 Local experimentation is still encouraged, even demanded, but must comport with stricter top-down preferences.

Despite the diversification we have seen in the holding schemes, asset structures, and liability composition of LGFVs, there remains a lack of diversification where it matters. Local Party-state officials continue to control LGFVs and the local banks, and possess immense influence over many other facets of their local economy. In a remarkably concise passage from his book 置身事内, Lan Xiaohuan argues that “the root cause of the government’s debt problem,” and by extension of low-quality growth, “is not insufficient revenue, but rather excessive spending, as the government has taken on too many roles in developing the economy. Therefore, the debt problem is not simply a ‘soft budget constraint’ issue or a problem solved by modifying the government’s budget framework. Instead, it is fundamentally a problem of the government’s role.”99 LGFVs are the crux of this problem. And it is why property developers, most of which were private companies, have not posed nearly as vexatious a problem for Beijing.

A decade ago Beijing not only set out to constrain LGFVs, but to eliminate them. Fiscal restructuring proved insufficient. Today, localities still have dauntingly expansive roles and mandates, will new sources of financing materialize or will they be forced to abdicate? In this evolving context, will local officials face new incentives to keep their all-purpose handy man, the LGFV, alive and kicking? Will LGFVs whither away, as Lenin once promised the Soviet state would? Who will make them? With a new round of audits sweeping the nation alongside top-down inspection tours and the ongoing anti-corruption campaign, what might become of China’s 12,000 LGFVs?

A common saying in the Party these days holds that it is sometimes necessary to “turn the knife inward and scrape poison off the bone.” A fundamental solution to the LGFV problem, it seems, requires a deeper cut into the system.

References and Endnotes

3

You can also assess the weakness of LGFV financial performance relative to other firms, as the IMF did in its most recent Article IV for China (2023):

4

Multiple organizations exploit the spec of transparency offered by bond-issuances to estimate the LGFV debt problem. Estimates differ seemingly based on how many bond-issuing LGFVs get included in their bottom-up estimates.

At the upper bound of comparables, Rhodium Group, collated and analyzed annual reports from 2,892 LGFVs that have issued bonds.

A 2022 study by the IMF, presumably using very similar methodology as the Article IV consultations, used CapitalIQ’s more limited database to analyze 2200 such LGFVs. PIMCO used Wind Financial and perhaps some proprietary information to come up with its own bottom-up estimate of LGFV and other government debt.

6

The only data sources that include LGFVs beyond those issuing bonds are China’s official audits, conduced in 2011 and 2013, by the National Audit Office (NAO). See: National Audit Office, “2013 Announcement 32: Nation-wide governmental debt audit results,” (2013年第32号公告：全国政府性债务审计结果), 2013. https://web.archive.org/web/20140104011301/http://www.audit.gov.cn/n1992130/n1992150/n1992500/n3432077.files/n3432112.pdf

We have no more recent bottom-up estimates of the entire galaxy of LGFVs. Prior to 2020, the IMF appears to have simply projected forward those estimates.

Those data, however, are limited. As Bai et al (2016) describe: “the data on the Audit Office only covers "official" debt of the LGVs, which the Audit Office defines as "the debt that government has responsibility to repay or the debt to which the government would fulfill the responsibility of guarantee or for bailout when the debtor encounters difficulty in repayment.”” Thus Party-state data may tell us how much LGFV debt was used on infrastructure, but it does not give us the whole picture. As Bai et el (2016) note, the total debt in their smaller sample of bond issuing LGFVs is larger than the total given by the NAO See: Chong-En Bai, Chang-Tai Hsieh, and Zheng Michael Song, “The Long Shadow of a Fiscal Expansion,” Becker Friedman Institute, November 2016, page 11.

Here is an overview of the data accumulated in the NAO audits:

12

Inflation was 18% in 1988 and 1989, and after calming spiked back to 24.1% in 1994:

The high inflation of this period was perceived as a major problem among China’s leadership, considered one of Zhao Ziyang’s failings, and even a root cause of Tiananmen protests. See Julian Gerwirtz, “Never Turn Back,” Harvard University Press, 2022, pages 212, 214, 281.

21

This is also the argument Lan Xiaohuan makes in 置身事内

Also see Tsinghua ACCEPT’s very good paper on China’s post reform and opening development, which has a good explanation of how over-eager officials getting involved in the economy and stimulating excess production, among other maladies, is at the root of the economic problem as much, if not more, than fiscal imbalances. See “Summing Up 40 Years of Economic Reform and Opening,” 改革开放四十年经济总结, 清华大学中国经济思想与实践研究院 Academic Center for Chinese Economic Practice and Thinking, December 2018, page 17, http://www.accept.tsinghua.edu.cn/_upload/article/files/7a/3c/976c22ff48cfb1860f7288f6bd05/612c2ab9-2527-4237-b28e-7ce36ee2b379.pdf;

Local government spending favors production and growth oriented infrastructure rather than service oriented public goods, clearly shown via date from 1999 to 2006: Chengri Ding, Yi Niu, Erik Lichtenberg, “Spending preferences of local officials with off-budget land revenues of Chinese cities,” China Economic Review, 2014, https://www.sciencedirect.com/science/article/abs/pii/S1043951X1400131X

27

The crazed race to lure production resulted in intensive expenditure. Keyu Jin states that between 1998-2007 foreign manufacturing companies were the most subsidized type of firm in China, on average getting multiples more than SOEs. See Keyu Jin, “The New China Playbook,” 2023, page 101.

On strategies used see:

High Capacity

How China uses foreign firms to turbocharge its industry

(This piece builds on part of another piece I wrote on India’s EV strategy.) China uses foreign firms selectively to bring in technology and know-how, to build up its domestic suppliers, and to ultimately sow the seeds for homegrown Chinese companies to compete on the world stage…

Read more

7 months ago · 37 likes · 2 comments · Kyle Chan

31

“As Figure 1.1, taken directly from a CDB presentation, shows, land expropriation and the transfer of land rights are central to making the machine work, used for paying back the loan. “The city had land but no way to turn it into cash, so the government couldn’t get money,” researcher Yu says. “At that time, no one realized what Chen Yuan knew: that once the land price goes up, you have a second source of income.”” Henry Sanderson and Michael Forsythe, “China's Superbank: Debt, Oil and Influence—How China Development Bank Is Rewriting the Rules of Finance,” Wiley, 2012, page 8.

The role of Chen Yun, economic czar for decades, in creating the LGFV model is also noteworthy.

55

Huarong Financial Leasing (2006), Huarong Securities (2007), Huarong Trust (2008), and Huarong Real Estate (2009) were already licensed by the time of Lai’s arrival, but many more segments—particularly investment management related—were to come. Growth in assets in the years from 2014 to 2017 were 47%, 44%, 62%, and 32% respectively before decreasing in 2018, the year Lai Xiaomin was placed under investigation. From RMB315 billion in 2012, by 2017 assets peaked at RMB1.7 trillion, increasing by nearly 6x in only five years. Huarong’s assets based on its corporate filings:

Wang Zhanfeng, Lai’s replacement as Huarong Chairman, stated in the long delayed 2020 annual report: “Due to the aggressive operation and disorderly expansion of former Party Secretary and Chairman Lai Xiaomin, the Company has badly deviated from its main responsibilities and core business.”

56

reading, writing & investing

LGFVs: the Good, the Bad, and the Mierda, Part I

Last week, I started looking closely at the local government financing vehicles (LGFVs) that sit at the heart of many of the current economic concerns in the Chinese economy. Over the week, I continu…

Read more

a year ago · 5 likes · Glenn Luk

63

The East is Read

Part II: David Daokui Li's meticulous breakdown of "nested" dimensions of local govt & its debt

In a post on Friday, Dec. 22, we shared that Professor David Daokui Li of Tsinghua University recently unveiled a study - together with Zhang He at the Academic Center for Chinese Economic Practice and Thinking (ACCEPT) - that found China’s local government debt in 2020 was around 90 trillion yuan, 50% higher than…

Read more

10 months ago · 30 likes · 2 comments · Yuxuan JIA and Shangjun Yang

72

Provincial-level LGFVs accounted for 38% of total issuance in RMB value, prefectural cities 34%, and county-levels 29% (cities and counties issue far more bonds, but the average value of provincial bond issuances is far higher).

Based on above data, as of 2015, provincials accounted for 38% of total issuance in RMB value, prefectural cities 34%, and county-levels 29%.

Yongheng Deng, Understanding the Risk of China’s Local Government Debts and Its Linkage with Property Markets, IMF & National University of Singapore, 2015, https://www.imf.org/external/np/seminars/eng/2015/housingchina/pdf/Session%203_YDeng.pdf

96

MacroPolo has compiled information on the likely provincial-level debt drag stemming from LGFVs.

At a more disaggregated level, Rhodium looks at the county-level burden.

To discuss America’s comparative advantages in national competition and the structural forces that drive (and limit) innovation, ChinaTalk interviewed Kumar Garg. 

Formerly an Obama official in the Office of Science and Technology Policy, Kumar spent several years at Schmidt Futures focusing on science and technology philanthropy. He has been a mentor and cheerleader for ChinaTalk over the years, and he is the president of the newly established Renaissance Philanthropy.

We discuss:

• The inspiration behind Renaissance Philanthropy and its focus on mid-scale, field-transforming ideas

• Strategies for identifying underexplored, high-impact projects — including weather forecasting, carbon sequestration, and datasets on neurocognition

• Structural challenges for R&D funding at the level of government and universities

• The role of focused research organizations like OpenAI in accelerating progress and understanding long-term drivers of productivity

• A wide angle-view of US-China competition and strategic innovation

• The underresearched importance of alliance management.

Spotify:

Apple Podcasts:

The Classical Innovation Model

Jordan Schneider: Tell us about Renaissance philanthropy — what’s the backstory and thesis?

Kumar Garg: Renaissance is a young organization. Our name and thesis harken back to the Italian Renaissance. We’re inspired by how wealthy Italian families played an outsized role in supporting innovators, scientists, and thinkers like da Vinci. We’re exploring the role wealthy patrons can play today in driving a 21st-century renaissance.

There’s enormous untapped giving potential among today’s wealthy families. A study of 2,000 families with large fortunes showed they’re giving less than 2% philanthropically.

When asked why, they often cite two reasons: they’re still actively working and plan to give later, or they haven’t come across exciting ideas. These reasons stem from the same issue — they’re busy and not encountering compelling opportunities.

Rather than waiting for donors to reach a later life stage like Bill Gates, who exited his career to focus on philanthropy, we want to engage them earlier. In science and tech, it’s challenging to be strategic by just interviewing individual researchers, who are trained to pitch their next project rather than discuss field-wide challenges.

Earlier today, I was talking to somebody who was explaining the advances in neurotechnology. We have new methods and tools which should allow us to understand the way the brain works. At a technical level, these tools didn’t even exist three to five years ago. Now, we could actually build high-dimensional data sets that could allow us to understand the whole brain in a model organism.

The dataset they want to build is just too big for individual research projects, but it’s also too small for a major university capital campaign. These ideas often struggle to get funding from research agencies like NIH because they fall outside the scope of individual investigator awards.

Renaissance aims to identify these big mid-scale ideas — three to five-year efforts that could unlock a field — and match them with donors excited about the thesis. We want to draw more people into strategic giving by presenting them with exciting hypotheses and teams to support.

Jordan Schneider: How do you source these ideas and find CEOs who can execute $10-30 million projects? What should potential applicants from the ChinaTalk audience know?

Kumar Garg: Interested individuals can reach out through our website (or email info@renphil.org). We’re looking for ideas that go beyond incremental research steps to strategies that could accelerate entire fields.

We start with a field-level view, asking what strategies could help us progress faster. This requires identifying roadblocks, bottlenecks, and areas that are less incentivized for individual researchers but highly beneficial for the field.

When interviewing researchers, we often start by discussing datasets. Creating high-quality, multidimensional datasets is valuable for the community but not always rewarded in the current system. We ask researchers to describe dream datasets that could accelerate progress in their field, then work backward to determine what’s needed to create them.

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We also look for projects requiring close collaboration between researchers from different disciplines, which can be challenging to fund through traditional channels.

Another approach to locating gaps is working backward from important problems. For example, famed UChicago economist Michael Kremer made a general observation that AI is improving weather prediction.

Michael spends a lot of time working on sophisticated economic models, and one of his research areas is smallholder farmers. [Ed: Professor Kremer won a Nobel Prize for his contributions to development economics in 2019]

He considered how AI could benefit smallholder farmers by more accurately predicting monsoons. If you can predict monsoons farther in advance, that could potentially increase crop yields significantly in a whole bunch of countries, such as India. Farmers could figure out when they need to harvest their crops before the rains come. Because as an economist, he could estimate the economic value for that increase in the accuracy of monsoon prediction.

Once the value is written down, then it’s clear that somebody should fund this. It’s not just general improvement in weather prediction — this particular use case has really high social value. But those individual farmers left on their own will not finance that AI improvement. Somebody has to step in and say that aggregate value is really valuable.

To find a donor for projects like these, sometimes the gap is on the demand side — the demand is latent, and you need to define it to pull people in. Sometimes the gap is on the supply side, where certain types of organizational behaviors are undervalued, like data sets.

We are often just asking good questions — “How would we go faster, bigger, better in your field? Are those big ideas hard to fit in the current funding landscape, and if so, why?”

Writing down those details makes for a very strong application.

Jordan Schneider: This seems like a lot of work for you. Is there a way to do this besides just talking to many people? What’s the non-artisanal version of coming up with these ideas?

Kumar Garg: Creating archetypes for this way of thinking is essential. I was partly inspired the work I did with Eric Schmidt creating an organization called Convergent Research, which works with focused research organizations (FROs).

With Convergent Research and the FRO model, Adam Marblestone initially received meta-feedback on his paper about focused research organizations. Once we got some FROs funded and scoped, researchers could see concrete examples and generate ideas that fit the model.

Adam now has a list of 300 FRO ideas, not because he had 6,000 conversations, but because people are coming forward with ideas that fit this model. Our job is to assess funder demand for these ideas and potentially share them with agencies like ARPA-H.

Building out the right set of questions and showing replicable examples will be crucial as we launch various funds, enabling people to envision applications in their fields.

Jordan Schneider: Focused research organizations may sound nebulous, but OpenAI is a prime example. They started with Sam Altman declaring no clear path to profitability, focusing solely on making models smarter. With limited initial funding, they took risks that weren’t being made in academia, DeepMind, or Microsoft Research. It’s a great case study of what scientists can achieve under different institutional structures and incentives, freed from mainstream corporate R&D or traditional academic funding constraints.

Kumar Garg: It’s challenging in the modern university system. While individual researchers build labs with various related projects, the idea of collaboratively solving one mega problem requires both a structure and funding that accommodates it. This approach can have a huge impact, but it’s difficult to implement within traditional academic frameworks.

Jordan Schneider: Let’s consider the individual level. Does this require leaving the tenure track or a comfortable position? Who are the people who go from having a good idea to actually implementing it, potentially taking a lateral step in their career?

Kumar Garg: You find people at different levels of the spectrum, but a common trait is the ambition to move their entire field forward. There are several ways to approach this:

1. Agenda setting: Researchers can take a step back, identify transformative ideas for their field, and share them compellingly with private or public funders.

2. Government rotations: Top researchers can spend time at agencies like DARPA or ARPA-H, bringing their orientation to find the next generation of bets.

3. Alternative roles: Some researchers enjoy running labs but also want to push coordinated research programs with key results. They might become DARPA performers, FRO CEOs, fund managers, or startup founders.

The challenge is that these alternate models often feel invisible or difficult to pursue. We try to make these paths more legible by providing clear examples and explanations of different roles, such as running a focused research organization or becoming a DARPA program manager.

By making these alternate paths more visible and understandable, we can encourage more innovation in career paths, similar to how the concept of being a startup founder has been popularized and made accessible to more people.

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Jordan Schneider: It’s interesting because most of the time, you still need the person to get a PhD first. That process socializes you in a very particular direction. In early science, in the late 1800s and early 1900s, not everyone in the field had to go through this seven-year process where they couldn’t see the forest for the trees due to living under all these constraints. It takes an unusual person to be in that environment for 5, 10, or 20 years and still be able to recognize that everyone’s doing X, but if someone did Y for a while, it could have an incredible multiplier effect.

Kumar Garg: You raise a fair point. The computer science community is having an outsized impact partly because of AI’s rapid development, but also because of the field’s inclination. Not everyone gets a PhD, yet they can still do cutting-edge work. These individuals are now filtering through the broader science ecosystem, bringing down the average age of researchers.

Erika DeBenedictis figured out the importance of peer networks among young researchers when working on research automation. These networks can be leveraged to promote new ideas and tools. For example, to encourage more young biotech founders, engaging with the research networks of young biotech researchers and introducing the idea of founding a company can be effective.

These emergent talent networks are probably underexplored. This relates to the Renaissance point about the social networks that drive progress. In Leonardo da Vinci’s era, many interesting people were illegitimate sons of nobility who had access to resources but lacked predetermined social obligations, allowing them to forge their own paths.

The science community will always benefit from attracting people who want to go off the beaten path, but we also need to build more paths to make it less challenging for them.

Jordan Schneider: Let’s discuss the donor side. What range of net worth is worth 30 minutes of your time? Why do you think this approach resonates more than other options available today?

Kumar Garg: My involvement in philanthropy was somewhat serendipitous. While working in the Obama White House on science and tech policy, I realized that while the government brings enormous scale to its initiatives, the early work of identifying opportunities and organizing workshops is often too early for major federal agencies to get involved. This is where funders can play an outsized role.

Philanthropy and donors play a crucial part in an ecosystem where most R&D funding comes from the government. However, donors can contribute significantly to agenda-setting, identifying major opportunities, fostering interesting collaborations, and addressing overlooked areas.

Catalytic capital can have an outsized impact when used effectively. We’re at the beginning of unlocking this capital, and most of the giving that will happen hasn’t occurred yet. We have a huge opportunity to capture imaginations and harness resources for big public goods and ideas that solve problems.

When talking to donors, donor advisors, or staff members, I often help them understand that there is important work to be done. Many people feel paralyzed when faced with large-scale issues like climate change, where the government is already spending huge sums. The key is to provide them with a mental model at a more micro level of what’s not being done that could make a significant difference.

For example, we provided early funding for enhanced rock weathering, a climate solution that wasn’t widely known two years ago. 

Basically you can break up certain types of rock and actually use it as fertilizer and it actually functions as a carbon sink and as a fertilizer. I remember having this conversation with Eli Dorado a few years back where he recommended we look at enhanced rock weathering.

Those early grants from a small set of folks helped get that subfield going. Now, through the work that Stripe is supporting, this is considered a pretty important technology that might help with carbon approval. There are donors who work on smallholder farmers in Africa who feel this might be a core part of their strategy and increase farmer income. 

Giving people examples — and a sense of confidence that their ideas didn’t just miss the boat entirely — shifts their mental model. 

“We are figuring out new things. They’re going to be important to solving big problems, and you can help figure those things out.”

It pulls them in. My hope is that they get addicted to it, and their core motivation becomes making the world a better place. We all benefit from that.

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Jordan Schneider: It’s fascinating how your career experiences have led you to this point. You needed to be part of a behemoth organization to see its blind spots. The same goes for PhDs who become frustrated when they enter government.

Your background, including working for one of America’s wealthiest individuals, presumably helps when pitching to donors. What you’re proposing is fundamentally a high-variance, unconventional idea that isn’t typical philanthropy, like donating to Massachusetts General Hospital. It’s something that other philanthropists, such as those at the Hewlett Foundation, have overlooked when it comes to climate issues. It’s an interesting combination of factors that brought you here today.

Kumar Garg: Indeed. I benefit from seeing the system from various perspectives. This is why I recommend people enter government or move between different sectors, becoming “tri-sector athletes.” It broadens your understanding of what’s possible and what’s missing. 

One of the real blind spots in science and tech funding is that people often start from basic first principles, asking if an idea is good. However, if you’ve spent time in government, you’d ask why the government isn’t funding this idea if it’s so promising. There’s usually an entire agency dedicated to funding good ideas in a specific field. This line of questioning leads to interesting insights.

For example, I spoke with a venture capitalist in early healthcare who wasn’t familiar with NIH’s Small Business Innovation Research (SBIR) program. When I mentioned that SBIR’s funding matches the VC investment in early-stage healthcare (about $2 billion each), it raised questions about potential disconnects between government funding and commercialization efforts.

Being curious about why systems work the way they do and why certain opportunities are missed can lead to significant breakthroughs. You’re dealing with substantial funding flows, so understanding these dynamics is crucial.

Jordan Schneider: We’ve discussed the structural issues in government funding. Regarding established philanthropies involved in climate or science and technology, where do you see structural oversights in their programs and among their program officers?

Kumar Garg: Looking at both the public and private sectors, one significant gap becomes apparent when you step back: we allocate R&D money to some societal problems but not others. Once you realize this, it’s impossible to unsee.

As a society, we invest heavily in defense R&D, we allocate a decent amount to health and new therapies, and we spend smaller amounts on energy and space. After that, the spending drops off significantly. However, if we consider the major aspects of human flourishing — food, housing, work, learning, building strong relationships with friends, family, and community — we see a discrepancy in R&D investment.

We spend very little on R&D for criminal justice, education, workforce development, and housing. Midway through the Obama administration, around 2012, I read a paper suggesting agriculture would be a significant driver of future climate emissions. When I inquired about the R&D component for agriculture in our climate strategy, people were puzzled about what that might entail. Alternate sources of protein sounded completely random back then.

The same happened with transportation R&D early in the Obama administration. How could we make roads better? What do we need to do to prepare for the emergence of automated vehicles? What does the budget look like for impactful projects in these areas?

Of course we should have R&D in these fields, but we’re significantly underinvesting in R&D for social sector aspects.

This oversight leads us to discover innovations accidentally through national security spending. For instance, the Department of Defense has been a major funder of alternative medicine to ensure the health of returning warfighters, which is a prety roundabout way to fund that research. Similarly, some of the most interesting education and workforce experiments have been funded by the DoD because we allocate almost no R&D dollars to the Departments of Education and Labor.

If you’re a funder working on mental health, the environment, or homelessness, consider the R&D component of your strategy.

If you can’t identify one, don’t dismiss it—this might indicate a huge opportunity to develop that component. Otherwise, you’re simply waiting for accidental positive outcomes rather than actively investing in shaping the future.

Our view used to be that R&D should be the third bullet point of any plan. If you can’t articulate what the R&D would entail, you’re in an even worse position—people haven’t even conceived of that component of the strategy. This blind spot leads people to treat science and technology as a sector rather than a crucial component of any problem-solving strategy.

R&D on Strategic Competition Mechanics

Jordan Schneider: Let’s talk about China. What are the big picture questions you’re interested in regarding how the US should compete? 

Kumar Garg: Here’s my question for you, or at least the hypothesis I want you to reason out with me: If the US and China are engaging in strategic competition, to what extent should they emulate each other’s strategies? To what extent, especially on the US side, which I know more about, should we play to our advantages?

I’ll throw out a few key points:

First, talent. The US is a global magnet for talent. People, especially science and tech talent, want to move here. How much should the US lean into that?

Second, the US has deep capital markets, which have created substantial room for entrepreneurship and building emerging industries on top of our university system. How can the US leverage that?

Third, the US has been home to many platform technologies in biotech, such as mRNA and CRISPR, as well as the early computing revolution, mobile technology, and now AI. To what extent should the US frame itself as a place where platform technologies thrive? What are these platform technologies?

There’s also an interesting question regarding drones.

Finally, to what extent is the healthy relationship between research in universities, formal government research agencies, and the private sector an advantage or disadvantage for the US?

I often wonder about the IRA, which is partly treated as a set of subsidies for key industries, whether in clean tech or chips. To what extent will subsidies be a major part of the future picture versus these core US advantages?

So, what do we need to improve? What should we double down on? What should we copy?

Jordan Schneider: I’m going to approach this from a different angle. I’ve been reading a lot of Paul Kennedy recently, one of the greatest living historians. His 600-page tome, The Rise of the Anglo-German Antagonism, 1860-1914, has been particularly enlightening. It’s a deep exploration of diplomatic history, culture, religion, science, and media, examining how England and Germany interacted and ultimately became enemies, leading to World War I.

This book has challenged my thinking because many dynamics in the US-China context today are scrambled when considering Germany and England. For instance, England was the dominant power and Germany the rising power, yet Germany was the scientific powerhouse. Every consequential English inventor spent time in Germany to engage with their university system.

At the same time, Germany, despite being more advanced in some ways, still aspired to English culture. Their wealthiest children were sent to Oxford and Cambridge because that represented a life of luxury.

My takeaway, echoing Paul Kennedy, is that we need to zoom out further when considering a multi-decadal national competition strategy. It’s less about specific policies like subsidies or green cards, and more about the bigger picture. If you’re the larger economic power and you’re not mismanaging the transition from economic power into military power, you’re generally in a good position.

The US has a significant advantage: allies who comprise two-thirds of global GDP. If we don’t squander that, we can afford to make mistakes elsewhere and still be okay.

America’s growth, technology, and universities make us an attractive partner. There are enough repellent aspects of the CCP’s worldview and foreign policy choices that Japan, the EU, South Korea, and Taiwan probably won’t go align with China — even if the US doesn’t get everything right.

Kumar Garg: Wearing my policymaker hat, it’s clear that some of this won’t be under US control due to the two-sided dynamic. If other countries feel pushed by China, they might be drawn closer to the US. But it’s interesting to consider what US policymakers could proactively do to be better allies or to think about these longer-term trends.

Jordan Schneider: Absolutely. While we often focus on specific, tactical issues in ChinaTalk episodes, it’s important not to dismiss the broader view. If we’re risking 20% of global GDP going in a different direction, perhaps we need to increase our research tenfold to better understand what’s happening in areas like maintaining NATO and our alliance with Japan.

Kumar Garg: One reason I’ve been a huge fan of ChinaTalk is its focus on public goods — things that are valuable overall but often underfunded. While some aspects of foreign policy, like Middle East policy, are well-funded [Jordan: by Arab governments...Korea and Japan weirdly stingy both for think tankers and when it comes to influence operations and intel…], others that will matter significantly are not. We used to track this on the philanthropic side: how many people can actually speak the language and track work happening in key countries the US cares about? How much fresh analysis is happening?

My current view is that we’re moving in the wrong direction. The number of people I interact with who have active working relationships in China has been dropping for the past five years. This will impact our ability to understand how things are working.

Jordan Schneider: The structural problems you identified in the science and technology space absolutely apply to Asian studies. What I’m doing isn’t easily understood by government grants or even traditional US-China funders. There’s plenty of potential in both humanities and hard sciences, but it’s challenging to find support.

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Regarding tactical advantages, the cleanest heuristic is to focus on long-term productivity and economic growth. If you can tie your initiative to that over a 10-15 year horizon and it outperforms other options, that’s the policy or donor idea to focus on.

Kumar Garg: One area where we need more activity in DC is understanding the long-term drivers of productivity. When I was in the White House, I noticed that while senior folks in the National Economic Council (NEC) and the Council of Economic Advisers (CEA) recognized the importance of R&D, immigration, and commercialization for long-term productivity, often one person was responsible for all of these areas plus four others. Meanwhile, substantial resources were allocated to issues like marginal tax rate debates.

If we’re going to succeed by identifying and focusing on long-term economic growth drivers, we still have room for improvement in how we staff and prioritize these areas in government.

Jordan Schneider: It’s understandable that in a democracy, politicians focus on issues that are more immediate to voters, like marginal tax rates. However, if we’re talking about long-term competition, we need to think beyond presidential cycles. The gains from high-skilled immigration, for example, may not be immediately apparent but can lead to significant innovations. For example, Elon Musk founded Tesla in America as opposed to anywhere else in the world. 

This long-term perspective makes the challenges with NSF and NIH funding so frustrating. These institutions operate on longer timescales, and we would hope they can maintain their focus on long-term goals.

Kumar Garg: Indeed, politics is about balancing the important and the urgent. Policymakers must build systems to effectively balance these competing priorities.

Renaissance Book Recommendations and ChinaTalk Parent Corner

Jordan Schneider: How does coaching your children’s entrepreneurial ideas compare to advising me and ChinaTalk?

Kumar Garg: The challenge is that in the real world, people appreciate my advice. However, for my kids, it’s like an anti-signal. If I think something is good, they assume it must be outdated. This applies to fashion advice as well. Sometimes my daughters are in the car when I’m on the phone, and afterward, they question why I said certain things. I have to remind them that they only heard one side of the conversation.

Jordan Schneider: I hear your kids are trying to start an Etsy store, and you’ve been coaching them to find a comparative advantage as creative eleven-year-olds.

Kumar Garg: They signed up for a summer camp that promised to help them make art and sell it on Etsy. On the first day, they were disappointed to learn that the camp would only help with art creation, not selling on Etsy. They proposed selling slime, but I cautioned them that it might be challenging since every kid is into slime.

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Jordan Schneider: What’s their annual Etsy purchasing budget?

Kumar Garg: They spend all the money they can get — from grandparents or elsewhere —  on various types and textures of slime. They spend considerable time explaining to me how each type is different. We visited the Sloomoo Institute in New York, which is essentially a slime museum. Every eleven-year-old seems to know about it. I suggested they should open one in DC, as it would be an instant pop-up success.

It’s fascinating to observe future trends through my children. They recently mentioned that all their friends are into boba tea, which I now see everywhere among young people. Fifth-graders appear to be early trendsetters.

Jordan Schneider: To close, let me tell you about my favorite Renaissance books. Lauro Martines is one of the more entertaining historians I’ve encountered. He has a three book series on political history during the Medici era. I’ve read extensive Chinese, ancient Greek, and Roman history, but Florence offers a wealth of juicy sources. There are numerous diaries and letters detailing the conniving and intrigue, including murders in churches. It’s captivating because, unlike a monarchy, Florence had competing families and factions. With the Pope nearby and the French making appearances, it’s more thrilling than Game of Thrones. Martines’ work is essentially a historical beach read.

For primary sources, I recommend The Decameron. Written during a plague year, it’s framed as a dinner party in the hills where 15 young people attempt to outdo each other with stories while fleeing the plague. It’s incredibly relatable and alive, despite being 600 years old. It’s a funny, entertaining, and at times profound piece of literature that transported me back to that era more vividly than anything else I’ve encountered. While reading Machiavelli is one thing, imagining people having fun in the Renaissance was a unique experience.

How’s this for something deeply un-antisemitic from 600 years ago!

And lastly, some 1400s Venetian parenting advice:

Mood Music

Spies in Albany

Peter Mattis is the president of The Jamestown Foundation, served on the House CCP Select Committee, and co-authored “Chinese Communist Espionage: An Intelligence Primer.”

Today, Peter is here to discuss last week’s arrest of Albany operator Linda Sun.

[Linda] Sun in the Gears: The Unknown Casualties of Influence

On September 4, the US Department of Justice unveiled a criminal indictment of former New York state government staffer Linda Sun and her husband Chris Hu. The couple was indicted for acting as unregistered agents of a foreign power, fraud, money laundering, and other offenses stemming from Sun’s relationship with PRC officials at the New York consulate. If Sun and Hu are found guilty, the authorities will make public the details, methods, and consequences of their activities. As the debate about how to address Beijing’s interference in democratic societies reignites, such information is essential for gauging the appropriate response to this aspect of the China challenge.

The indictment describes numerous incidents in which Sun stripped out mention of Taiwan or prevented state officials from participating in Taiwan-related events. In one particularly egregious breach of trust, she also forged the governor’s signature in support of a visa application for visiting PRC officials coming to the United States. In appreciation of her efforts, Hu’s business received several contracts with PRC entities. The money “earned” from those ventures allowed the couple to purchase a 2024 Ferrari and multi-million dollar properties in Long Island and Hawaii. (To put that in perspective, Beijing paid General Lo Hsien-chi 罗贤哲 — the head of telecommunications and electronic information for the Taiwanese army — only six figures for classified information on Taiwan’s military and attempts to block US arms sales to Taiwan.)

Indictments and other court documents preceding a trial never tell the full story. The Sun indictment contains only the minimum information required to show that Sun had taken actions — sometimes on her own, sometimes at the urging of PRC officials — to further Beijing’s interests.

The millions of dollars in benefits that accrued to Sun and Hu, however, suggest that her impact went beyond changing a few lines in a speech or keeping the governor of New York away from Taiwanese officials.

If Sun was willing to scrub references to Taiwan and Uyghurs from a speech or block meetings with Taiwanese officials, what might she have done if a Taiwanese business reached out to the governor’s office? Would she have blocked potential investment in New York? Or, given recent cases where Chinese-American activists were spying for Beijing, how would Sun have handled complaints or concerns expressed by Chinese diaspora communities about CCP harassment and intimidation? Those communications could be buried just as easily as words could be struck from a speech. The distrust that has stemmed from local authorities’ lack of responsiveness to such harassment may, in fact, be a deliberate byproduct of the Party’s influence through proxies like Sun.

The view we have into Sun’s activities is limited by the scope of the federal charges against her — here, that she was acting as an agent, receiving and acting upon foreign direction. But Sun has a fifteen-year history of working in New York politics. With her experience, connections, and — as is evident from the indictment — awareness of her potential influence, Sun is likely to have informally advised others in New York politics outside of her official duties.

These activities almost certainly will not be a part of the trial — but uncovering the full story will be necessary to assess the extent of the damage.

Learning the full truth about Sun’s activities would require a long forensic investigation of Sun’s files, communications, and activities with the public, with companies, and with other New York officials. Such an investigation would also probably necessitate federal involvement — because the limited resources and potential embarrassment of New York may prevent the state from effectively conducting its own investigation. The rub, of course, is that the DOJ is investigating thousands of other cases involving Beijing’s espionage, technology theft, influence, and transnational repression — the DOJ doesn’t need to investigate Sun’s activities any more than is necessary to gain a conviction.

But identifying consequences is an important exercise for the authorities. The consequences of Linda Sun’s influence are still unknown as of yet. New York Governor Kathy Hochul called Sun’s activities “a betrayal of trust”; there may be others, especially in Chinese-American communities, who also had their trust in their state government betrayed. They need an opportunity for their stories to be included in our understanding of the case.

The debate rages on — how should the US counter Beijing’s foreign influence activities and diaspora policies? How can we ensure the crackdown is consistent with democratic values and doesn’t stoop to racial profiling?

This is not a simple challenge. Investigations are hard. Resources and qualified people are rarer than one would think. And in a democratic society, law enforcement should stay focused on illegality, not poking into every potential entanglement with the Party. 

But knowing the real cost of Sun’s activities will be incredibly valuable — the facts of this case will frame our options for response. Beijing is engaging in a campaign of covert, corrupting, and coercive interference in our democratic society. Without a concrete impact assessment, it will be impossible to determine what kind of efforts are needed to counter this activity, and how aggressive those efforts should be.

We did a show a few years back on Peter’s book on Chinese spies with his coauthor. Have a listen!

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Tech Chokepoint History: China and Ballpoint Pens

The following is a cross-post from Mary Hui’s excellent a/symmetric Substack.

The idea of technological “chokepoints” lurched to the forefront of the Chinese collective imagination half a decade ago when Washington slapped sanctions on two Chinese tech giants, cutting their access to US technology overnight.

The “ZTE incident” and “Huawei incident,” as the 2018 and 2019 episodes are known, forced a reckoning across Chinese industry and government: dependence on a geopolitical rival had grown so acute that a flick of a pen from halfway around the world could, at least temporarily, cripple two domestic technological crown jewels.

China has gone into overdrive to uncover and dismantle latent chokepoints and prevent new ones from forming. Beijing set up a national technology security system to better protect its high-tech firms. The government’s main science funding body launched an emergency project to study and solve the “chokepoint problem.” And state media published a list of 35 chokepoint technologies on which China urgently needed to reduce its foreign dependence.

Ballpoints and chokepoints

The humble ballpoint pen is a cautionary tale.

There is what’s regarded in China as a “classic” question of manufacturing: why can’t China make a ballpoint pen?

As it turns out, the ballpoint of the ballpoint pen — a tiny metal ball bearing that “mimics the action of roll-on deodorant,” rotating freely in a small socket to dispense a smooth stream of ink — is fiendishly difficult to make, requiring super precise machinery and high-quality steel made to very specific standards.

While China claimed a breakthrough in 2017, manufacturing a ballpoint pen all by itself and “ending a long-term reliance on imported [ballpoint pen tips],” as of 2021 the country was still reportedly 80% dependent on imported pens.

In fact, Chinese imports of ballpoints pens (comprising the ballpoint and ink reservoir) have more than doubled since 2017, from US$12 million to nearly $28 million last year.

As Lin Xueping 林雪萍, an expert on manufacturing technology, wrote in an article last year, it was one thing for a single Chinese company to make a technical breakthrough, and another to get the rest of the market to adopt it.

“Taiyuan Iron & Steel [太钢] finally decided to overcome the difficulties and finally made steel ball materials,” Lin wrote, referring to the Chinese steelmaker that made the pen tip breakthrough. “But domestic ballpoint pen manufacturers are unwilling to use it at all.”

There’s a larger point to all of this: China’s struggles with the ballpoint run in tandem with its efforts to make high-end machine tools.

Machine tools: a technical challenge or an economic one?

Machine tools are machines that make other machines. China is a leading producer of machine tools, accounting for about 31% the world’s output in 2021 (p.10, fig. 12) — ahead of Germany (13%), Japan (12%), the US (9%), and Italy (8%). But China is heavily reliant on foreign technology for high-end machine tools: in 2021, it was 91% dependent on foreign firms for the most advanced machine tools.

That’s in spite of a national-level initiative, dubbed “Special Project 04,” launched in 2009 to boost China’s capabilities in high-end machine tools. But still China has not quite cracked it.

Perhaps the problem is less technical and more economic. That’s the assessment from Lin, the manufacturing expert who’s also affiliated with a think tank run by China’s Ministry of Industry and Information Technology.

Top-notch machine tool beds, Lin reckons, demand very specific kinds of cast iron, with strict requirements for things like smelting method, casting temperature, and presence of trace elements. The problem is that demand from Chinese machine tool makers for this kind of cast iron is too small to make economic sense for iron foundries to work on developing the specialized materials.

“Made in China has two weaknesses: one is ‘can’t be made,’ which is a real technical chokehold; the other is ‘can’t be used,’ which is often stuck on non-technical barriers,” Lin wrote. “Ballpoint pens and cast-iron machine beds — both have stumbled for this reason.”

Implications for industrial policy

What lessons can we draw from China’s ballpoint pen travails?

Perhaps one is that just as the free market alone can’t solve certain problems — industrial policy may be more suited for tackling certain challenges than others.

In the case of China, it seems that its brand of top-down industrial policy has worked well for electric vehicles, batteries, critical minerals, shipbuilding, high-speed rail, and solar panels — but less so for semiconductors, machine tools, and ballpoint pens. One hypothesis is that the latter group of technologies requires a far more complex coordination of the industrial ecosystem. As such, the sheer force of the state’s will is more likely to run up against the fundamentals of market economics.

The upshot, for the US and the West, is not to parrot Chinese industrial policy, but to play to existing strengths. That means using government intervention to shape incentives, trigger certain behavior, and target market failures and distortions — but then stepping back to let the market solve for things.

China has long been dependent on imports of the tiny steel ball bearings that dispense ink from pen to paper. Beijing didn’t like that. In 2011, its science and technology ministry launched a national research project aimed at developing and industrializing “key materials and preparation technologies for the pen manufacturing industry.”

State-owned steelmaker Taiyuan Iron and Steel (TISCO) got the memo and got to work. Five years and 60 million yuan in state funding later, it declared success. Domestically made 2.3mm ballpoint pen tips began rolling off factory lines. TISCO’s shares jumped nearly 30%.

Chokepoint unblocked and chokehold broken? Not quite.

Today, China is still reportedly 80% dependent on imported ballpoints. Though TISCO did notch a technical breakthrough, domestic ballpoint pen manufacturers were reluctant to use the China-made ballpoint pen tips. The new steel balls didn’t work well with existing Swiss precision machine tools. They were not readily compatible with imported Japanese and German ink. And it made little economic sense for domestic steel mills to set up a new production line for such a tiny output of ballpoint tips.

In short, China made an isolated technical breakthrough on ballpoint tips that was of little use to the broader Chinese industrial system.

Pinpointing a systemic problem

Semantically, chokepoint implies a single point of dependence and failure.

But as the ballpoint pen story above illustrates, fixing a chokepoint requires far more than making a single breakthrough. Any solution has to be congruent with the existing network of suppliers and manufacturers, and their incentives, cost structures, and business models.

“The chokepoint problem involves the intersection of multiple supply chains and multiple nodes. It is extremely difficult to exhaust the problems simply from one industry or one industrial category,” writes Lin in his book, Supply Chain Attack and Defense 供应链攻防战.

“To tackle the problem, it is far from enough to just list the chokepoints,” he adds. “Chokepoint products are just the tip of the iceberg. Their underlying related factors below water can only be detected if there is a systemic understanding.”

There’s a larger industrial policy lesson here. Certain strategic and emerging industries require government prodding to kickstart, attain viability, or retain. But there are also lots of technologies where the market will always know far more than technocrats; just look at China’s wasteful ballpoint pen foray. The first step to breaking chokeholds is sorting out the real ones from the fake outs.

Chinese vs. Western Horror Movies

A translation from our friends at Weibo Doom Scroll.

A discussion on the difference between Chinese horror and western horror:

Western horror: You come home to see that your three-year-old son is dead, his guts are all over the floor, and your cat is licking up the blood. Chinese horror: You come home to find your cat is dead, its guts are all over the floor, and your 3-year-old son is meowing.

When you mention Chinese horror, the first thought that comes to mind is Grave Robbers’ Chronicles 盗墓笔记, where Wu Xie 吴邪 was in the cave, and he found Lao Yang’s 老痒 corpse and photo ID. But Lao Yang is outside the cave staring at him.

One is a sensory shock, one is a psychological shock. Chinese horror is better at leaving you with PTSD. Here’s an example. Western horror is like: you walk into a pizza store in a bad part of town, and just as you’re about to pay, you find the owner has a knife in hand, with a bloody piece of pizza in his mouth, staring at you with a furious expression before he leaps at you. You run and hide and finally manage to escape from him. Are you going to be scared of pizza stores from now on? Sure. But you’ll stop and check outside the store to see if the owner is a tiny, cute girl or a muscular guy before you decide whether or not you go in.

Chinese horror is more like: you go buy bread, and a kind old grandma hands you the bread and tells you with a smile, “Go on and eat it.”

You don’t think anything of it in the moment, but when you return to the street, everyone on the street turns to look at you with the exact same smile and tells you, “Go on and eat it.”

When you get home, your parents stare at you, smile, and say, “Go on and eat it.”

You’re freaked out and go to the bathroom to wash your face, and the you in the mirror smiles at you and says, “Go on and eat it.”

Even if nothing happens in the end, I think you’ll never go buy bread again, whether it’s a cute little girl selling it or an old grandma.

It’s really simple. Western horror makes sense, and Chinese horror is all about things not making sense. When things don’t make sense, you get a strong sense of dissonance and feel uneasy.

Here’s an example. Five people enter a haunted house and get attacked by a ghost. In the end, three people survive and get out, and two people die.

That’s very logical: go into a haunted house → get attacked → two people die → three people survive is a very complete line of logic. Everything makes sense, and it’s how Western horror stories work.

But if five people go into a haunted house and get attacked by a ghost, and six people walk out in the end, and everyone is really happy that they all survived and skip on toward home — that’s Chinese horror.

Right? Isn’t that freaky?

Because it doesn’t make sense.

It doesn’t make any sense that five people walked in and six people walked out.

Why does Chinese horror feel oppressive? Because your imagination goes wild when things don’t make sense. It’s basically you scaring yourself.

Does the movie director know what scares you? Probably not. But if you’re in charge of scaring yourself, of course you’re gonna get scared, because you know exactly what you’re afraid of.

Your imagination goes to your precise fears and you get freaked out.

Have you seen the classic horror movie Nightmare on Elm Street? Freddy kills people in their dreams, and people die when they are killed.

That’s very logical. Whether you have money or not, you die if you’re cut into pieces with a chainsaw.

It’s very bloody, but it’s not that freaky.

But in the classic Chinese horror movie A Wicked Ghost 山村老尸, does Aunt Mei 楚人美 walk around with a chainsaw? Does she cackle in people’s ear?

No.

They even play a piece of Yue Opera at the end, and that high-pitched singing sets your hair on end.

But as a piece of traditional Chinese opera, why would Yue Opera make you feel so freaked out? Why would it cover you in goosebumps?

Because it doesn’t make any sense.

When a lot of things that don’t make any sense come together, the conflict in logic makes you doubt yourself. And when you start scaring yourself, Chinese horror has won.

I saw a ghost story once that there’s a superstition that you can’t leave your shoes pointing at the bed, or ghosts will crawl into bed using the shoes. One night, the wife couldn’t sleep late at night, and while the husband got up to go to the bathroom, she kicked his shoes all over the room and then waited to see how he would react. But after the husband was done, he came back and started wandering around the bed muttering, “Where did the bed go?” When I read that, I literally felt a chill go down my spine.

A single line in Chinese horror can give me goosebumps for half a month. I remember a short story where a girl came home to find the power was out and the elevator wasn’t working, so she called her mom to come downstairs with a flashlight and help her up the stairs. Along the way, she chatted with her mom about her day at school like normal, and when they reached her door, her mom suddenly smiled at her and asked, “Do I look that similar to your mom?”

Alexa Pan — Chinese Song of the Week

This week’s song is Goalkeeper 守门员, by Chinese Football.

Chinese Football is a habit that’s hard to kick. Formed in 2011, the band tends to make light of their origin: guitarists Xu Bo 徐波 and Wang Bo 王博 met as fellow fans in Wuhan when there was “still a bit of punk feeling left” in the city. Their band name is as much a tribute to Illinois indie rockers American Football as it is a silly publicity stunt.

Self-described as “emo,” their style evokes equal parts nostalgia, apprehension, and hope. (For those who see music: sunlight dancing off shattered glass and dew.) The emotional songs come playfully packaged: the soccer motif pervades their first, eponymous, album, while later works borrow video game aesthetics and metaphors.

“Goalkeeper” hails from the first album. In a way, the song is as straightforward as the goalkeeper’s job, opening with a two-chord progression, melodies running back and forth in the penalty box. The guitars weave a net of sound, both more orderly and elastic than the typical wall, catching every kick of the drum. The lyrics, rich with soccer allegory and puns pairing Pelé (贝利) with paradox (悖理), describe a goalkeeper lost on the field, eventually leaving their post and moving forward. One could interpret this story as the band’s own: they’ve long aspired to “break out of Asia, step into the world, give it our all, leaving nothing behind.”

If you liked this song, catch Chinese Football on their upcoming North American tour.

ChinaTalk Editor Lily brings us a debate roundup from the Chinese internet.

The first US presidential debate went viral on the Chinese internet. China’s censors had to shut down the ensuing conversation about Biden’s age due to the striking parallels with Xi Jinping.

Now that Biden has stepped down, Chinese state media has updated their talking points faster than the GOP! Here’s what official and popular independent outlets have to say about the debate between Kamala Harris and Donald Trump.

No Winners Here! — State-Sponsored Cope and Russian Collusion

The official narrative on the debate is that both candidates are liars, and America’s democratic process is entertaining, unrepresentative, and unserious.

The central government news platform, CCTV 央视, went with the headline, “90 Minutes Chock Full of Lies, Complaints, and Abuse — The Debate Between Trump and Harris Had No Winner.” Xinhua news reported the same angle, with a montage of Harris and Trump accusing each other of lying.

The most diligent reporting of this narrative comes from Zhou Deyu 周德宇, who has a PhD in political science from the University of Pittsburg. Writing for nationalist-adjacent news outlet Guancha 观察者网:

Both sides performed as expected, and nothing surprising happened.

After this debate, there may be some fluctuations in the polls, but these fluctuations will most likely be chewed up and forgotten by the time the election happens.

Most of the time, the US election debates are just a formality, providing voters with some tasty soundbites [literally: “electronic pickled veggies” 电子榨菜1], which will not have much impact on the election results. It doesn’t matter what the two sides say, anyway — both will talk big game 满嘴跑火车, both will spin tales promising bread they can’t deliver 画下实现不了的大饼, both will accuse the other side of lying and incompetence…

Due to the unique electoral system in the United States, the results of the entire election are actually determined by a few swing states rather than the entire country, so specific local conditions can override the national trend. …

Therefore, what ultimately decides the election is still how many people the candidates can mobilize in the swing states to actually cast a vote on the election day. Everything before that, whether it is polls or news, is just a reference and not a conclusion; all advantages before that are only theoretical, and will not be a decisive victory. Small fluctuations such as changes in voter turnout caused by bad weather in a swing state on election day may become the factor that tips the scale.

Really? Nothing surprising happened?

Guancha also called in reinforcements from Russia, amplifying quotes from Maria Zakharova, the mouthpiece of Russia’s Ministry of Foreign Affairs.

But if the winner of the debate is irrelevant, Russia Today certainly didn’t get the memo. RT’s China office has been working overtime to churn out Mandarin translations of pro-Trump Kremlin talking points — for example, that Harris used Bluetooth earrings to cheat, that Harris is a Marxist, and, hilariously, that Tim Walz is a Chinese sleeper agent.

These stories were all torn apart in the comments. Note: “The hairy ones” 毛子 is a derogatory term for Russians.

Trump got thrashed this time around. All I can say is, there’s a rock for every scissor.
这把特朗普被对方控场了，只能说一物降一物

😂 The hairy Russians are really cutting deep. 毛子真是犀利啊

The hairy ones are like, “everything’s fine, nothing to see here!” 毛子：都得完！[doge]

Simultaneously arguing that no one won the debate and that Harris won by cheating epitomizes a classic tactic used in Russian propaganda: for any issue, respond with several overlapping narratives. It’s actually good if the different layers contradict, because that helps cultivate the feeling that truth does not actually exist.

Put simply, throw everything at the wall and see what sticks.2

Such tactics are not standard for Chinese propaganda, though — which perhaps explains why RT has taken matters into its own hands and opened a Mandarin translation office. We’ll see if critical responses to Russia’s propaganda are allowed to stay up.

Those Who Love to Laugh Won’t Have Bad Luck 爱笑的人运气不会太差

Regular Chinese internet users were largely impressed with Harris’s debate performance and endeared by her facial reactions to Trump’s lunacy. Here’s the top comment from the top video on Bilibili about the debate:

Big Sister Ha-Ha-Harris 哈哈姐 came well-prepared this time. She gave strong statements on core Democratic issues like healthcare, abortion, Israel-Palestine, small businesses, and tax cuts for low-income groups. She even had a rebuttal for Trump’s question about why the border-security policy wasn’t passed. On the other hand, Trump didn’t have much new to say regarding NATO allies, and when it came to healthcare, he slipped up and admitted he didn’t have a plan.

The Chinese internet loves to bestow nicknames. The debate performance has earned Harris some titles like Big Sister Ha-ha, Ha-Ha-Harris 哈哈哈哈里斯, and Laughin’ Lady 笑婆 (which comes from a Chinese parable about staying positive and looking at the bright side of life).

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Nicknames aside, the way of writing Harris’s actual name in Chinese has become an easy way to spot nationalist affiliation.

In Chinese, the names of American politicians are usually written phonetically with nonsense characters — Obama becomes 奥巴马 Àobāmǎ, which sounds close enough but uses characters that mean something like “obscure clinging horse.”

But Kamala Harris has an authentic Chinese name, 贺锦丽, pronounced Hè Jǐnlì in Mandarin or Ho Gam-lai in Cantonese. The literal meaning of the characters is something like “celebrated intricate embroidery,” and there’s a phonetic similarity to “Kamala” in Cantonese as well.

Who bestowed this name on Kamala Harris? When Harris was campaigning for district attorney, ballots in San Francisco were available in English, Spanish, and Chinese. Harris’s longtime friend Julie D. Soo 蘇榮麗 thought that an authentic Chinese name would give Harris a competitive edge at the ballot box, and asked her father to give Harris a suitable name. Harris even reportedly learned how to introduce herself in Cantonese.

Chinese critics of Harris, on the other hand, usually choose not to use her Chinese name, arguing that it’s a cheap tactic to pull votes from Asian Americans. Instead, they use a meaningless phonetic transcription of her name, 哈里斯 Hālǐsī.

But to be fair, the phonetic transcription lends itself to nicknames more easily.

Kamala Harris, Pro China? 贺锦丽亲华？

Harris did well in the debate. Why are the wolf warriors disappointed?

Before Biden stepped down, Chinese media didn’t often report on Harris. What little academic commentary there was portrayed VP Harris as being in lockstep with President Biden. For example, in a 2021 article on Biden’s China policy, Song Jing 宋静, associate professor at Shanxi University of Finance, and Lora Saalman wrote:

Vice President Kamala D. Harris (Chinese name “He Jinli”) is of Indian descent and represents the interests of Indian technology giants in Silicon Valley. She once supported the passage of the “S.386 Fairness for High-Skilled Immigrants Act” with obvious anti-Chinese tendencies.

With the improvement of India’s national strength and strategic position, Indian scholars have gained more voice in the US strategic community.

But again, there was very little coverage of Kamala Harris before Biden stepped down. The day after Harris began her campaign, typing her Chinese name into Baidu auto-filled “Kamala Harris Pro-China,” followed by “Kamala Harris Modi.”

Evidently, people were eager to know whether having a Chinese name meant Harris would deviate from Biden’s tough-on-China foreign policy positions.

But it seems the debate has dashed those hopes. It’s no wonder they called in the Russians.

Quick Notes from Jordan on the Debate

Right at the top of the debate we had a really interesting exchange that touched on tariffs, industrial policy, and export controls.

DAVID MUIR: … Do you believe Americans can afford higher prices because of tariffs?

FORMER PRESIDENT DONALD TRUMP: They aren’t gonna have higher prices — what’s gonna have and who’s gonna have higher prices is China and all of the countries that have been ripping us off for years. I charge, I was the only president ever — China was paying us hundreds of billions of dollars, and so were other countries, and you know, if she doesn’t like ‘em, they should have gone out and they should have immediately cut the tariffs — but those tariffs are there three and a half years now under their administration … [goes on inflation riff].

DAVID MUIR: Vice President Harris, I do want to ask for your response, and you heard what the president said there — because the Biden administration did keep a number of the Trump tariffs in place, so how do you respond?

VICE PRESIDENT KAMALA HARRIS: Well, let’s be clear that the Trump administration resulted in a trade deficit, one of the highest we’ve ever seen in the history of America. He invited trade wars — you wanna talk about his deal with China. what he ended up doing is, under Donald Trump’s presidency he ended up selling American chips to China to help them improve and modernize their military, basically sold us out when a policy about China should be in making sure the United States of America wins the competition for the 21st century. Which means focusing on the details of what that requires, focusing on relationships with our allies, focusing on investing in American based technology so that we win the race on AI and quantum computing, focusing on what we need to do to support America’s workforce, so that we don’t end up having the on the short end of the stick in terms of workers’ rights. But what Donald Trump did — let’s talk about this with COVID, is he actually thanked President Xi for what he did during COVID. Look at his tweet. “Thank you, President Xi,” exclamation point — when we know that XI was responsible for lacking and not giving us transparency about the origins of COVID.

DAVID MUIR: President Trump, I’ll let you respond.

FORMER PRESIDENT DONALD TRUMP: First of all, they bought their chips from Taiwan. We hardly make chips anymore because of philosophies like they have and policies like they have. I don’t say her because she has no policy. Everything that she believed three years ago and four years ago is out the window. She’s going to my philosophy now. In fact, I was going to send her a MAGA hat. She’s gone to my philosophy. But if she ever got elected, she’d change it. And it will be the end of our country. She’s a Marxist. Everybody knows she’s a Marxist. Her father’s a Marxist professor in economics. And he taught her well …[goes on immigration riff].

A few quick thoughts:

1. I did not have semiconductor export controls as a Kamala attack line on my bingo card.

2. Trump has a point that a lot of the Biden China policy is a continuation of what he began from a tariff, export control, and even industrial policy standpoint (the CHIPS Act can trace its origins back to the late Trump administration). It’s an odd attack line to begin with as you’re basically praising your opponent’s policy, then saying trying to double back and say “by the way she’s actually a Marxist even though she’s just doing what I would’ve done anyway” doesn’t land at all.

3. Though it may have been a smart thing tactically to keep Trump’s blood up by not giving him credit for anything, the more intellectually honest Kamala answer would’ve started by acknowledging that a broken clock is right twice a day and then saying, “even though his instincts weren’t totally off on this one he was blinded by flattery.”

4. Overall, Kamala’s China vision about how technology is central to what may turn into a century-long competition sounds a whole lot like what we preach about here every week.

In the midst of Trump’s dogs-and cats-riff, he detoured for a sentence into how a Harris Administration would kick off WWIII:

FORMER PRESIDENT DONALD TRUMP: First let me respond as to the rallies. She said people start leaving. People don’t go to her rallies. There’s no reason to go. And the people that do go, she’s busing them in and paying them to be there. And then showing them in a different light. So, she can’t talk about that. People don’t leave my rallies. We have the biggest rallies, the most incredible rallies in the history of politics. That’s because people want to take their country back. Our country is being lost. We’re a failing nation. And it happened three and a half years ago. And what, what’s going on here — you’re going to end up in World War III, just to go into another subject. What they have done to our country by allowing these millions and millions of people to come into our country. And look at what’s happening to the towns all over the United States. And a lot of towns don’t want to talk — not going to be Aurora or Springfield. A lot of towns don’t want to talk about it because they’re so embarrassed by it. In Springfield, they’re eating the dogs…

Trump then came back to the theme during his Ukraine answer:

And in fact, when I saw Putin after I left — unfortunately left because our country has gone to hell — but after I left when I saw him building up soldiers, he did it after I left, I said oh, he must be negotiating. It must be a good strong point of negotiation. Well, it wasn’t, because Biden had no idea how to talk to him. He had no idea how to stop it. And now you have millions of people dead. and it’s only getting worse and it could lead to World War III. Don’t kid yourself, David. We’re playing with World War III.

Peter Harrell and I have written an op-ed on which candidates’ policies are more likely to lead to great power war, and we’re looking for somewhere to run it. If you edit an op-ed page, just respond to this email to see a draft.

Caleb Harding is a senior studying CS and Chinese at BYU. He previously interned at the US Embassy in Jakarta and Doublethink Lab in Taiwan. This summer, he and ChinaTalk’s resident mathematician Lily Ottinger ran the numbers on China’s power production. Here’s what they discovered.

AI development is facing an imminent electricity bottleneck. Data centers collectively make up 3% of total US electricity demand, and some predictions indicate they could consume up to 8% of electricity demand by 2030.1 And already, energy-consumption concerns have stalled some US data-center construction.

This leaves companies in a tough spot: if they can’t get enough energy to train their models, they will fall behind.

In response, some companies have quietly walked back promises of carbon neutrality, pivoting away from renewables and burning fossil fuels to pick up the slack. Meanwhile, Amazon has purchased a data center right next to a nuclear power plant to ensure an adequate supply of green energy.

China is staring down the same bottleneck. Today, we’re exploring China’s plan to unlock green energy abundance on the journey to become a world leader in AI.

Your firm should be sponsoring this post! Respond to this email, and I’ll send over a media deck — we’d love to explore how to partner.

China’s Plan: Eastern Data, Western Compute

Back in 2020, China started a national initiative to deal with the energy demands of computing.2

The plan, called “East Data, West Compute” (EDWC) 东数西算, aims to build out a network of eight computing hubs in western China and ten data clusters in eastern China. Western computing hubs draw on the region’s plentiful renewable resources to store and process less frequent-access data, while eastern computing hubs are free to focus on data with high network requirements.

EDWC has been hailed as the solution to the energy bottleneck. The plan has two key goals: make data centers green and make them efficient.

Let’s see if either goal is realistic.

Make It Green 

Chinese data centers used 130 billion kWh of electricity in 2022, and they are expected to use 380 billion kWh per year by 2030. To avoid breaking the carbon budget, the Chinese government’s set policy goal is to power new data centers with 80% green energy by 2025.

That’s a gargantuan shift from the status quo — 70% of the electricity currently consumed by China’s data centers is supplied by coal. Non-fossil-fuel energy sources are reportedly still prone to outages. From Huawei’s Data Center report:

Still, the utilization of green energy is unpredictable and cannot provide a long-term stable power supply, which may lead to fluctuations or even collapses in the power system. (pg. 43)

然而，绿色能源的利用具有不可预测性，不能长时间持续稳定的供电，可能会导致电力系统的波动甚至崩溃。

The problem: solar and wind are intermittent.

Thus far, the strategy for powering data centers with renewables has been two-pronged:

1. Expand the overall build-out of green energy in the grid generally, thereby indirectly raising the proportion of green energy used by data centers. 

2. Directly wire renewable-energy capacity into the power systems of the data centers, so that computation can draw from renewable generation when the power is available. A pilot project in Horinger New District, Inner Mongolia, for instance, has achieved a green electricity substitution rate of 43% by using this method.

Even so, neither of these strategies can conquer the intermittency problem. The guaranteed source of fallback power is still the broader coal-dominated energy grid.

So how can intermittency be defeated? Huawei’s 2023 report boldly proclaims that data centers will be 100% green-energy-powered by 2030. The report champions wind energy as the best solution, pointing to a data center Huawei built in the ultra-windy Inner Mongolian city of Ulanqab in 2013.

The Huawei report is far less optimistic about the potential of solar energy, which is currently limited to powering auxiliary systems in data centers, such as lights, elevators, and the coffee machine in the break room.

The authors are quick to clarify, however, that more storage capacity — ie. batteries — and grid support would allow solar to play a critical role.

So, can brute-force battery deployment overcome intermittency?

Let’s do the math.

Assume the goal is to power data centers with 100% renewable, intermittent energy, as Huawei recommends. And from the projections above, assume China’s data centers will require 380 billion kWh per year by 2030.

That means data centers will require 43.4 GW of continuous output.3 Assuming each day contains 12 hours of all-you-can-store sunshine and 12 hours with no sunshine,4 and assuming that batteries have 10% energy loss, China would need 573 GWh of battery capacity to cover daily solar fluctuations. 

For reference, one gigawatt of electricity is enough to power roughly 650,000 American homes for a year.5

And remember, these are just back-of-the-envelope calculations. In reality, wind energy could provide some nighttime power, but you need battery support to deal with wind inconsistency, too.

Disclaimers in mind, is this level of battery deployment possible? Well … never say never. China manufactured 904.5 GWh of total battery capacity in 2023. Today, Chinese battery producers face staggering overcapacity and an increasingly unfriendly export environment. Those leftover batteries have to go somewhere.

Even if battery deployment is not an insurmountable obstacle, effectively developing grid architecture to integrate this much battery storage will pose an even greater challenge.6

To be sure, in addition to solar and wind, Huawei’s list also mentions hydropower, which is enticing for its ability to provide large amounts of consistent electricity. A recent study found that untapped hydropower could provide as much as 30% of China’s energy needs, and the first zero-emission data center in China (三峡集团东岳庙数据中心) is powered by electricity from the Three Gorges Dam. Beijing has plans to build a mega dam in Tibet’s Medog county, upstream from India — if successful, the electricity generated by this project would be three times that of the Three Gorges Dam.

But even hydropower’s potential is complicated: despite increasing hydropower capacity by 18% over the last five years, China’s hydroelectric power generation has fallen by 1% due to severe drought. That’s putting aside the geopolitical headaches caused by damming up rivers that flow into neighboring countries.

The energy solution that must not be named

The public EDWC plans do not mention nuclear energy at all, which is suspicious. For decades, Beijing has been aggressively expanding its fleet of nuclear reactors, including plans for a bunch of inland reactors that appear to be in the middle of nowhere. And just the other day, on August 19, China’s State Council approved eleven new reactors in a single day.

Unlike renewables, nuclear power doesn’t suffer from intermittency problems. However, conventional nuclear power plants rely on water for cooling, which isn’t ideal for generating power in China’s desolate desert interior.

But this is by no means a dealbreaker. China leads the world in cutting-edge next-generation nuclear technologies that require no water. China has built successful pilot projects for cutting-edge reactor designs, including sodium-cooled fast-neutron reactors, liquid-salt/gas-cooled thorium reactors, and small modular reactors (SMRs).

Among the new projects approved on August 19th is the Xuwei 徐圩 Phase I reactor, which will be the world’s first commercial-scale high-temperature gas-cooled pebble-bed reactor.7 China’s research on this reactor design began with the explicit intent of eventually building a fleet of nuclear plants in water-scarce interior regions.

Taken together, these innovations indicate that nuclear power could be a dark horse in China’s green compute race.

So why has nuclear power been excluded from the data center discussion?

One possibility is public sentiment. In the late 2000s, anti-pollution protests swept across China. The 2011 Fukushima meltdown made nuclear energy a target and energized protests into a perfect storm — 50,000 environmental protests broke out across China in 2012 alone.

After Fukushima, China’s central government placed a moratorium on approvals of new nuclear plants, and the party spent a year debating whether nuclear power was safe. Provincial officials in the dry, tectonically active western regions did not want nuclear reactors built in their backyards.

Even after the moratorium was lifted, mass protests succeeded in shutting down a uranium fuel plant in Guangdong (2013) and a waste reprocessing facility in Jiangsu (2016).

Inland reactor construction never resumed. The flagship Xianning nuclear power plant 咸宁核电站 was heralded as China’s first commercial inland reactor, cooled by water from the Fushui River. It’s been listed as “planned” since 2010 (and appears on the Bloomberg map above), but there’s no evidence that construction ever began. As of 2024, the reactor site appears to have been transformed into a solar farm.

Thus, nuclear could be included in the “other” (等) sources of green power (风电、光伏、水电等可再生能源).

But if that’s the case, the government prefers not to advertise it.8

Perhaps the contributions of nuclear power are already priced in. Even if Beijing can’t build inland reactors for some time, adding conventional nuclear power plants near the coast makes the whole power grid greener. Computing from China’s western regions draws power from the broader grid, so even the distant conventional reactors will help fuel the power-hungry data centers.

But there’s another explanation for excluding nuclear power: maybe China isn’t actually serious about making data centers green.

That would be majorly bad news for the climate, and ChinaTalk will be reporting more on that possibility in the future.

Make It Efficient

To manage the energy demands of data centers, the second key component is increasing efficiency. Due to US sanctions, advanced chips like Nvidia’s Blackwell may be out of reach for China.

Data centers, however, have plenty of cuttable energy overhead.

A primary measurement for evaluating data center efficiency is power usage effectiveness, or PUE — the ratio of the overall energy used by a center to the energy used by the compute resources. The ideal ratio is 1.0; the lower the PUE, the more efficient the data center is.

At the end of 2022, China had 153 “green data centers,” with an average PUE of 1.27. However, 85% of China’s data centers have a PUE between 1.5 and 2. (For reference, Google’s data centers average 1.10.)

The Chinese government has set a standard for new large-scale data centers: achieve a PUE of 1.3 or less — otherwise, they will face elimination (不达标的数据中心将面临淘汰).

Potential avenues to improve PUE include opting for stripped-down “hyperscale” data centers, assigning compute tasks more efficiently, optimizing site selection, and halting model training early. But China is also exploring the commercialization of relatively new and yet unproven technologies like submerged chips.

Broader Criticism

Chinese commentators have questioned not only the technical feasibility of building green data centers, but also the underlying economics. In April 2022, Chen Gen 陈根, a guest lecturer at Peking University, argued that the government-led buildout of high-efficiency data centers ahead of demand would artificially decrease prices and lower profits, thereby hurting tech companies.

Another Chinese researcher, Wang Yuanzhuo 王元卓, argued in a March 2022 piece that the initiative should focus on demand-driven applications:

From past experience, the high social interest and economic benefits of national-level projects easily produces “bandwagoning” and “blind construction and investment,” as seen in new energy vehicles and chip manufacturing, resulting in unfinished projects and even harm to local economic development.

从过去的经验来看，国家级工程因为社会热度高、经济效益好，很容易出现各地“一哄而上”“盲目建设投资”的情况，新能源汽车、芯片制造都出现过这样的情况，最后出现了烂尾甚至影响到地方经济的发展。

These fears are not unfounded. When rolling out new computing initiatives in 2021, one of the government’s stated goals was to increase the utilization of western data centers from 30 percent to more than 50 percent — which indicates a lack of commercial demand for the data centers already built in the west. Adding additional capacity without making those data centers more commercially desirable is unlikely to accomplish much.

The Push Continues

Solar, wind, hydro, and nuclear energy all face significant challenges as Beijing seeks to build a unified national computing network (全国一体化算力网). Just as in the US, China has no easy answer to the impending bottleneck — hence the highly public conferences held in June and August of 2024 dedicated to brainstorming solutions to this juggernaut of a problem.9

3

See below:

Michael Collins is the acting chair of the National Intelligence Council (NIC). He has spent 28 years in the intelligence community, starting as a career analyst focused on East Asia before moving into leadership roles. He served as chief of staff for the CIA deputy director and worked on modernization efforts in the agency.

We discuss:

• How the intelligence community informs high-level policymaking,

• Why different institutional approaches are needed to collect intelligence on non-state actors vs nation-state adversaries,

• Challenges in assessing China’s technological and military capabilities,

• “Narrative Intelligence” and areas where intelligence agencies have a unique edge,

• Strategies for improving long-term forecasting and avoiding groupthink.

Listen on Apple Podcasts

Listen on Spotify

Intelligence and Capitol Hill

Jordan Schneider: Let’s have you introduce yourself. Can you briefly tell the audience a little bit about your journey through the intelligence community and what the NIC is?

Mike Collins: I’ve been in the intelligence community now for 28 years, and came in as a career analyst long ago after doing graduate work in international affairs.

Most of my career was as a career analyst, mostly on East Asia. I became a manager in various capacities, and worked a bit overseas to get a feel for the mission as well. At one point I was the chief of staff for the deputy director. I was privileged to work on modernization reviews in the CIA.

At one point, I was the deputy director of one of our integrated mission centers at CIA — the East Asian Pacific Mission Center — where I got a feel for bringing together all the pieces of the intelligence world for what the agency can accomplish. Previous to this job, I was the chief strategy officer at the CIA, working for Director Burns on a number of things. In particular, the initiative he put forward to review the structure and posture of the CIA for major power competition at its core and all the different derivative recommendations that came out of that. I could speak to some of that.

Then I got an opportunity to come over to the National Intelligence Council. The National Intelligence Council at its core is the lead representative and producer of the US intelligence community’s overall analytic view of issues in the world. It’s distinguished from all the individual agencies in that we speak for the entirety of the US intelligence community, not one agency in particular, and again, the lead producer and representative of that.

In the spirit of ensuring our policymakers receive the widest, most diverse, and most inclusive view across the community, we take seriously the role we have in bringing in the private sector. We are constituted right now by 18 different programs.

National Intelligence Officers make up the NIC. Those are the senior representatives in each of the regional or functional aspects that we cover in the world. Their task is to be the principal lead in their respective area.

Most importantly, our signature products are the national intelligence estimates, the long-term future anticipatory products of the US intelligence community, looking at key trends and strategic developments in the world, as well as the signature global trends product that’s produced every five years. Now we will be going out to 2045, assessing where the world will be trending then.

In recent years, this NIC has become very busy as well with direct policy support for policy meetings downtown. When there is an intelligence briefing required to start a national security conversation, the practice is to have the Intelligence Community brief an assessment pertaining to that issue. The National Intelligence Council is taking the lead on providing the intelligence on a recurring manner for that, truly at record numbers, historic numbers.

Finally, I would just say our role as the lead analytic representative for outreach and engagement. Kind of what we’re doing actually here to relate more, to inform and to support our government’s conversations with America, frankly, about the analysis we produce and the collaboration we need as well for the use of such analysis for our engagements with partners around the world.

Comparative Advantage in Asia Analysis

Jordan Schneider: You and Kirk Campbell, also a former China Talk guest, are among the few folks who’ve risen to very senior levels of government and have decades of experience engaging deeply with East Asia.

This perspective is fascinating. In the 1990s, intelligence officials who studied the Soviet Union all of a sudden ended up working on Iraq policy. Now, a lot of people who studied the Middle East are involved in East Asia policy. 10 or 20 years from now, it’s likely that we’re going to have a lot more people with deep engagement and experience in East Asia running a lot operations in different regions.

As someone who has been studying Asia since the beginning of your career, what has it been like to watch your region enter the spotlight? What makes your perspective unique compared to newcomers who are strictly focused on understanding the PLA?

Mike Collins: At a broad level, it’s important to reflect on the expertise and experience we have covering what we call, “hard target challengers” of the United States and the world — those countries that are viewed as strategic competitors of ours. We call them hard targets because they’re hard to understand and hard to collect on relative to what we call the global coverage arena. That’s sort of the rest of the world that we have to be conversant and understanding of.

Throughout my initial time thinking of East Asia, I came to appreciate all the more thinking of China as part of East Asia and of course, the dynamics that relate across that region in terms of relationships and influence and standing, understanding the governments of the region themselves and the populations themselves and the relative sort of standing our government has or what we stand for in the region relative to those of a different state, in this case, China in particular.

I would highlight three things in particular over the years that have deepened my thinking, not just in this arena, but also around the world.

1. Over the last couple of decades, we have come to appreciate more the inherent normative roots, if you will, of the conflict contestation we have with the PRC.

This is what the PRC (and under Xi Jinping in particular) defines as a geopolitical competition — they describe it as such themselves.

But when you peel the onion, at its core, it’s a difference between what we stand for, how we govern, and what we advocate in the globe — and what this authoritarian state stands for.

Especially now that Xi Jinping is increasingly doubling down.

We have to appreciate that more, and we have to understand the dynamics within China, not to think of it just as a monolith in terms of the conversations it’s having with its people, its business community, its tech community, etcetera.

Sometimes I’m asked, “When we double down, are you just focusing on China? Does that mean we don’t need to focus on anything else?”

On the contrary — it means we actually have to be better at understanding the rest of the world. What makes the rest of the world tick? Where do these populations stand, as I said earlier, in the global competition? What are the roots of and sources of unrest in the rest of the world?

For the last two decades, the intelligence community understandably focused on terrorism.

Now we’re getting back to thinking more about the study of international relations more broadly in the world.

We have to understand that increasingly all the more certainly apply that in the work we do at the NIC.

The last area is those domains that increasingly will matter for this major power competition. Technology clearly is one, and we all talk about that a lot. Obviously, we prioritize that. Director Burns certainly did when we did the reviews in the agency.

These domains that govern international affairs— we also have to be increasingly smart on, conversant on, and appreciative of the role they play, including through the gray zone. The gray zone is that area within which rivals are trying to compete with the United States without resorting to direct major power conflict, but also still right of what we consider traditional or accepted forms of statecraft.

Those areas, I’ve appreciated all the more, beginning with my works, if you will, on East Asia and thinking of East Asia itself as a region and a collective, and now thinking more broadly in this capacity, applying the same to the global landscape.

Jordan Schneider: There is an ideological competition with ISIS, but we aren’t super worried about their quantum advancements.

Reflecting on your time doing this reorganizational work in the CIA, what needs to happen at an institutional level in order to effectively analyze a country like China as opposed to the Taliban?

Mike Collins: I was asked a very similar question early on in the process of the review. In any strategic approach to reform, you try your best to parsimoniously get at what at its core will most improve your strength. When I responded to that question, and I still do hold to this today, it’s about relationships and collaborative, more integrated relationships, and leveraging capability where it exists.

I’m a career CIA officer. One thing I really appreciate when I think of the agency and its five directorates — that place is really strong in leveraging all of the unique capabilities and authorities that each of those directorates have, whether they’re as service providers or as their mission executors.

I’ll speak here for the NIC. The National Intelligence Council is not an entity unto itself. We are actually a relatively small unit. We probably only have around 100 analysts in the National Intelligence Council, give or take, covering the entire world. We succeed to the extent that we leverage the unique strengths of analysts across the entirety of the IC, as well as increasingly experts in the private sector, be they in academia or in the business or commercial sector. This is a more federated approach to taking and utilizing capability where it rightfully sits.

I say that in part because those analysts, for example, who are sitting in one particular area, bring to that analysis something very unique because they’re part of something or living in something that not everybody actually does. If you think of an analyst who works for a company whose job it is to make money selling products around the world — they’re thinking differently about their risk analysis. I could apply the same to the analysts in the State Department, the analysts in DIA, the analysts in CIA, each of which are stronger in a unique way because of where they actually sit. We have to leverage that more.

Again, I would say at its core, on the various reviews I’ve been a part of, if I had to distill it down to one thing that was probably most critical, it wasn’t necessarily about new structures or necessarily new positions, but can we maximize the strengths that come from a more, if I will, federated, but at the same time more collaborative and integrated effort, whether that’s on the responsibilities and mission execution capability of a unit or its enablement, be it substantive or be it, say, in the training or workforce or governance domain.

Jordan Schneider: I want to talk about the comparative advantage of the intelligence community, both on a domain level and a time horizon level.

Let’s do domain first. You mentioned I can totally see that IC would have an advantage in understanding some particular artillery piece in an adversary’s army, just because there’s no other body in the private sector or academia that would spend the time or money on that.

But when thinking about understanding the Chinese economy, the advantages you get from secrets insight are less obvious, to me at least. How do you think about allocating resources? What do you guys think you can and will continue to always be able to do better than other agencies? What areas benefit most from outside perspectives and voices?

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Mike Collins: I love the question in a couple of ways. Let me set the table first by stressing one of the things I’ve learned in my career — the increasingly important and yet unique role that intelligence itself plays for our security as a national security asset.

It’s noteworthy that our national security strategy now includes references to intelligence as one of those categories of national power.

Heretofore, most national intelligence security strategies would reference military, economic, and diplomatic power — those normal, traditional elements of power. But now we’re talking about intelligence itself.

When I talk about intelligence, I mean that in its purest literal sense — that is, I’m more intelligent and smart about something than I was a year ago. Even in a competitive sense — am I more knowledgeable about this issue than my adversary?

One of the things we try to take advantage of to be competitive and what the intelligence community can provide are our relationships, our partnerships around the world, and increasingly our deeper partnerships with the private sector and the commercial sector. We benefit from the fact that the United States is as big as it is, and we’re as present as we are around the world. We benefit as well because we have responsibilities, therefore, unlike any in the world, to stay on top of those same issues.

In so doing, you have to have eyes on a lot of issues around the world to ensure you’re providing maximum coverage for the policymaker. But in so doing, you’re learning something beneficial that will inform the analysis we produce.

We know there will continue to be an exquisite need for the hardest of the intelligence we can collect that gives us a unique perspective on the motivations and thinking of our adversaries around the world. Increasingly, as these adversaries are clearly trying to cooperate even more together, we will need that. But even to that end, to be successful, we know we need partners and avenues to allow us to accomplish that effectively.

At the same time, we know increasingly, for all the expertise and insight that can be acquired and investigated openly in the open source arena, we would be hurting ourselves if we weren’t doubling down on that as well. We have to leverage, and we are leveraging all the more what academics are studying, but even more so what scientists are learning from what they’re doing, what commercial practitioners are learning from their experience, what the financial community is learning as we take advantage of the globalized arena.

The last point on this I would highlight for the NIC as an example. We recently launched this new external research council as a council for the council effectively, whereby we’re maintaining on a recurring way experts in all of our different portfolios, whose job it is effectively to help us stay ahead of the research and the understanding, the expertise that’s being built in all our portfolios that we may not simply have the time ourselves to stay on top of as much. But the idea there is we’re acquiring and collaborating on collective analysis. I know we’re benefiting as well those on the outside who have an interest in studying the same, whether they’re in universities or in the private sector. Again, taking advantage of what work is already being done in many areas.

Jordan Schneider: Let’s stay on this one more second. You alluded to a few things — leadership intentions, hard power, and military capabilities are probably the two that most obviously come to mind as the things that no one is ever going to be able to do outside, better than the US intelligence community. What are the other things that you think are always going to have to sit within the intelligence community?

Mike Collins: There are a number of things that will always have to sit in the intelligence community. As you well know, we don’t speak about sources or the methods and the means by which we acquire what we do. There are second or third-order derivative aspects of things we do in the intelligence community that obviously we don’t speak to for the reasons I just said.

But on top of what we might be able to uniquely understand about the motivations and intentions from centers of power around the globe, I’d probably add to that — this increasingly challenging geopolitical landscape around the globe is to some extent different than the Cold War. Big countries around the world are not necessarily taking sides, nor are we asking them to raise their hand to choose sides in this sort of geopolitical competition in that way.

Related to an earlier point about intelligence and the national security strategy, a lot of what we accomplish in the world and understand about the world does happen quietly. The disposition of foreign partners and governments around the world to work with us — not just the intelligence community, but the US government — is often gleaned uniquely from what we know our partners around the world are potentially willing to do for us in more sensitive areas.

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I do think that will be an increasing source of unique expertise that we do have. Again, as we appreciate the more behind-the-scenes, sort of quiet ways in which we’re trying to form and collaborate.

It’s just not going to be as likely that people will be raising their hand and voting between one side or the other. But let me add one more point. As clearly as I know we can acquire and understand and think about our leaders in various ways from what we uniquely do, we are also reaching out to look at other ways by which we get indicators of intent — through behavior, sentiment, narratives, public conversations leaders are having with their individuals, through what they’re doing with their economy.

You know this just as much as I do — somebody on the outside can make powerful judgments about what the intentions or readiness or inclination of a country might be, based on other indices they observe in the public arena.

Those are things that are increasingly important for us as well, because they sometimes can illuminate and provide strategic warning of where something might be going, even if it can’t provide the proximate sort of indicator of what time and space that might occur within.

Jordan Schneider: What can The New York Times and The Economist not grasp that you can? Does the edge of the intelligence community hold up over time?

Mike Collins: You’re not going to find a report today that says what will the global order look like 25 years from now. But again, our job is to put together a set of variables, a set of drivers that determine where that might be going, one of which is clearly the motivations and plans of countries around the world. What are they intending to accomplish? What are their strategies gearing them toward? What do they tell themselves internally about what their metric of success is 10, 15, or 20 years from now? The motivations of countries, where do they want to be? That piece is very critical.

At the same time, of course, as another variable we look at capability, do we objectively believe they have the capability to get to where they want to go? And to the same, do we understand? Do we believe what we objectively say about their capability is what they also agree their objective sense of their capability is? The latter is something, again, we might more uniquely understand than somebody on the outside potentially might. But you can glean that as well from what they say publicly, often to their audiences.

The last variable in that same forward-looking anticipatory analysis is what’s the rest of the world doing? That permissive environment. Its motivations, its capability. But what’s that arena look like, is it vulnerable? Is it permissive? Is it resilient or not? Is the rest of the world responding differently?

Those are all areas that we have to look at when we do our forecasting. But you’re right in saying that as we get further and further ahead, the less arguably relevant, although not completely irrelevant, is the unique information we have on what countries are planning internally.

Intelligence and Long Time Horizons

Jordan Schneider: I’m interested in the longer-term perspective, particularly from the standpoint of capturing policymakers’ attention. If you drive down to 1600 Pennsylvania and say, “We think Putin’s going to invade Ukraine next week,” that’s obviously something people will wake up and pay attention to. But you have to think about the long term as well. How do you approach the challenge of selling the idea of 5, 10, and 20-year horizons to the people who are spending money and making decisions today?

Mike Collins: I’ve thought a lot about this. It’s a great question. I’ve been honored to brief various senior government officials and leaders. That question often comes up when considering whether to provide analysis beyond the four or eight-year cycle. My response is, to the point I just made about the strategic trajectory 20 or 25 years from now, what the world will look like in terms of the balance of power between China and the United States — to the extent you can be objectively accurate in what you say, “When historians look back 20 to 25 years from now, they will examine decisions made on this particular issue, at this particular period, to determine what was critical to the trajectory.”

When we do national intelligence estimates or global trends, we prioritize those factors in our estimates. Even if we’re estimating 10, 15, 20, or 25 years out, we owe it to every policymaker to identify the factors most influencing outcomes, and particularly, what can be done about those factors now. When you approach it that way, you get traction and a response.

The last point is that you must be clear about your metrics of analysis — the indicator set. If we see development trending in certain ways, we should constantly revisit it. Whatever the issue might be, we should establish a framework. Every year we’re seeing if it’s moving in expected directions or not, objectively suggesting whether the forecast we warned of or anticipated may be happening. This keeps you in conversation with the current group, not just writing for those who may come into power two decades from now.

Jordan Schneider: We have an upcoming interview with Kumar Garg, who spent eight years at the Office of Science and Technology Policy for the Obama administration. We discussed getting policymakers focused on drivers of long-term competition. His point was that in the White House, they had 20 people focused on some marginal tax rate policy and only one or two focused on high-skill immigration, which plays a big role in the future of American innovative capacity. My initial thought was that it makes sense because people vote on their tax rates, and politicians have to get reelected.

Broadening that insight to a systems competition level, we could have a long discussion about the extent to which China is actually long-term and strategically minded. The fact is, America has really done this in fits and starts over the past 75 years. Even looking at the Cold War, there were many different directions that governments went in defining long-term competition and what policies they thought would lead the Cold War to end positively. Do you have any thoughts or reflections on this?

Mike Collins: In the intelligence community, we don’t comment on or inform what our leaders decide from a domestic political standpoint. We recognize our elected leaders have other factors that weigh into their decisionmaking. Our responsibility is to lay out the national security implications of issues around the world and what can be done about them. It’s then up to the decision-makers to consider all factors.

If we’re not effectively drawing attention to these dynamics that we believe are truly significant for national security, we’re probably not doing our job well enough. If we really think it’s that critical, we should be doing more about it.

One of the things I admire about what Director Haynes and ODNI are doing, and we’re a big part of it, is their transparency initiative. We are more openly sharing our judgments and views of the world with the public. You see this every year during the annual threat testimony, and increasingly on our webpage where we release analysis for public consumption.

We have a responsibility to inform the larger narrative about what matters in the world if we’re going to be effective. That’s part of the reason for the transparency initiative — to open up and engage in a broader conversation with the larger American and global audience about what we see in the world. We do this hand-in-glove with policymakers.

We also do this because we need to be challenged. We need talent and insight from the private sector, and we need to avoid groupthink. We take seriously our responsibility for modeling objective critical thinking not influenced by politics, to ensure that what we write does not look like it was written specifically for a political or policy agenda.

Jordan Schneider: Staying on the domestic theme for a moment, let’s consider the concept of net assessment. Some of the CIA’s most famous accomplishments over the ’70s and ’80s with respect to the Soviet Union were doing this long-term economic analysis and grasping — way before much of the broader community — that the Soviet Union was growing a lot slower than maybe even someone in the Kremlin understood.

When doing net assessment, it’s fine for you to compare Western military capabilities to Chinese ones. But as you’re thinking about other domains of competition, like emerging technologies or international trade and investment, there’s a unique handicap in not being able to comment directly on American capabilities and policy options. How do you think about getting around that challenge?

Mike Collins: That’s a great question. Across the Intelligence Community, we’re looking more seriously at how we understand and can work with non-state actors or entities. This relates to domains that increasingly matter for raw US geopolitical national security, but also transnational security in the global commons — climate, health, and disease. We know we need to be doubling down on engaging with and understanding these arenas and the experts in them. We need their talent, expertise, and tech. We also need to think about the threats they themselves are under because they matter increasingly for national security beyond the traditional military domain.

To that end, we are starting to flex our muscles, using the net assessment concept, sometimes literally, sometimes metaphorically, to look at those other domains. We’re examining the balance of relative strength in techno-economic categories, media, education, science, and all those different areas of international affairs that reside outside of traditional state-to-state diplomacy and are in the private sector arena.

Obviously, we do not collect specifically on the United States, but to better understand the severity of a threat that would come from an adversary being more dominant in microelectronics, biomedical, media, or any other issue, we do need to understand and be conversant on the relative strengths and resilience of the United States in that same area, as well as our partners around the globe. This helps us truly understand the threat that would come from another country, an adversary, or a geopolitical challenger being more dominant in that space than they currently are.

It also informs our domain analysis, helping us step back and think about what determines success in these areas. There’s a lot of talk about AI, for example. As you can imagine, there’s a lot of work being done on the relative strengths of various ecosystems in the AI space.

This net assessment idea is increasingly what folks should start to hear more from us. We obviously have to do it in partnership with experts outside of the US government to be effective at it.

Jordan Schneider: Let’s come back to this idea of transparency. It’s one thing to write and publish more unclassified material about long-term trends and threats, but it’s another to do what we’ve seen over the past few years, particularly in the lead-up to the war in Ukraine. We’ve also seen this with the PLA purgings and the water and rockets arc that rippled through global collective consciousness over the past year or so. How do you think about those types of disclosures, maybe in the China context in particular?

Mike Collins: I’ve come to appreciate what I sometimes call “a new INT,” — NARRATIVE INT. Narrative warfare, information warfare — sometimes people refer to it as narrative contestation. There’s a lot of talk in the national security conversation lately about misinformation and disinformation in the global arena. Frankly, that’s both a supply and a demand problem.

We look at, investigate, identify, and talk about the threats our adversaries are attempting through the use of misinformation and disinformation. What President Putin did before the Ukraine operation was an act of misinformation, trying to disinform and misinform about what was going on in Ukraine. The same is happening in China. The conversation the government of China is having with its people would arguably benefit from some rigor in terms of separating fact from ideology.

When you step back and appreciate what’s happening through the use of social media and what it has enabled relative to what traditional media can provide in a more credible sense, I worry a great deal not just about the provision of misinformation and disinformation, but increasingly about the resilience of human beings to the truth - what the truth really is, what it represents, and whether people care about the truth.

One of the realities in this great power competition we have with geopolitical challengers is the difference in our relationship with the truth. Unlike us, our authoritarian rivals are often not accountable to the truth. Increasingly, as you look at what they’re doing to double down on their security architecture and what they’re doing to surveil and control narratives at home, in many cases, they fear the truth for what it represents in terms of things that have happened in their own country or what’s really happening broadly around the world.

I think this is going to be an increasingly powerful means through which we compete and succeed globally. It’s not just a one-off release of information. We need to call certain things out, but I think to the extent that we’re seen as more credible and impactful, we should be driving more open conversations about narratives that are out there that we can say, with objective, empirical evidence, are just not true.

We should think about the relationship between the state of an authoritarian competitor and its people. What do its people fundamentally believe about what’s true, for example, about what happened with COVID? We talk about vaccines and the cooperative approach or lack thereof towards sharing information pertaining to that disease. You know this as well as I do — what that doctor in Wuhan was trying to express. The state of China did not want the truth to be exposed, and we should reflect on that.

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Jordan Schneider: We’re recording this on July 26, a few days after Biden gave his “I won’t run for reelection” address. One of the lines that really stuck out to me was him saying, almost as an aside, “When I came into office, the conventional wisdom was that China would inevitably surpass the United States. That’s just not the case anymore.”

When I reflect on the past five years of that narrative shift, I don’t think that was some CIA operation or psyop to convince the world of this. What ends up changing people’s minds are economic growth rates and how different countries relate to each other. You can only play so many games around that in altering people’s perceptions.

You mentioned the COVID thing, and hopefully this wasn’t your fault, but I have to bring up the article in Bloomberg which related a story, I think coming out of the Defense Department, where they paid for information operations in Tagalog saying that the Chinese vaccine was going to make your kids autistic or something.

My piece of advice to you, Michael, is that I think you’re almost underrating the power of truth, accuracy, and empiricism to win out over the long term. You can only really play games a little bit on the margin, but I don’t think the Chinese people are stupid. I don’t think the American people are stupid. I don’t think folks in the rest of the world are stupid. A strategy that bases your information operations agenda around trying to pull the wool over people’s eyes is not one that’s going to serve you well over the long term.

Mike Collins: I’m going to challenge that, Jordan. I’m not talking about pulling the wool over somebody’s eyes — to the contrary, I’m speaking about exposing the facts. I’ll be the first to admit we’re not always going to be right, but if we’re seen as trying to expose credible facts about something, the more successful we are in getting those facts out and understanding them over time, the better. We leave it to others to debate that.

I’ll just highlight the one fact I conveyed before — that poor doctor was trying to express that something was happening in Wuhan, and he was prevented from doing so. That’s a fact. That’s an example of the differences between our norms and values and freedoms of expression, as well as the liberties that we stand for relative to what the state of China stands for.

That’s an example of a fact which, not to say it was the reason millions of human beings around the world died, but it was a reason for how quickly that disease started to spread before we got our hands around it. Maybe it was a week, maybe a couple of weeks. But again, it’s a fact and a representative fact about the difference between our relationship with the truth and their relationship with the truth that we should reflect on and be conversant about.

Jordan Schneider: Reflecting on the past few years of America and strategic transparency, this was clearly not your decision to basically stop talking about the balloon. More broadly, not everyone has bought into this line of logic. Could you talk about when it isn’t necessarily in America’s interest to air the financial or extramarital dirty laundry of strategic adversaries’ leaderships, for example?

Mike Collins: In studying the impact of objective narratives around the world and what tends to stick, often it’s when you connect with something that’s important to another human being or polity around the world. If all we’re doing is being seen countering something or denigrating or criticizing something, that’s not good enough. There’s a role we can play in objectively trying to drive an understanding, as empirically founded as possible. People will always challenge it, and we all have our warts in our respective systems around the world. But truly, the benefits of a liberal democratic approach to governance and what we actually stand for, as much as we trip and stumble over ourselves as we attempt to adhere to those principles.

In many cases, a more proactive conversation about what is better for not just national security, but transnational human security is needed. One of the things I worry about in a forecasting sort of way, getting back to the China conversation — we’ve seen it all the more in recent weeks and years, is Xi Jinping doubling down on an autarkic approach to technology in the interest of self-reliance and protecting China from his clearly articulated definition of strategic industries they want to be the leader in.

Are we potentially moving into a bifurcated approach to technology and even science? One of the challenges we face is as the world is wrestling with issues for which we need cooperation, we’re at the same time contesting over the norms by which those issues are being explored. It’s about proactively driving a conversation about what is best for solving a problem, as opposed to just being seen as criticizing somebody to knock them down.

Jordan Schneider: I want to reflect more broadly about the role of intelligence. In the closing of his book Engineers of Victory, which looked at different operational campaigns over the course of World War Two, Paul Kennedy said initially he was going to have a whole chapter on how to win the intelligence war. But the more he looked at it, the more he saw over the course of World War Two that the study of intelligence over that period was like a whole lot of study of failure.

Broadly, does any of this even matter in the end? If national power is just downstream of economic growth and productivity growth and military capabilities, can a clever memo from an intelligence analyst really bend the arc of history?

Mike Collins: It’s not that easy if we just put out a formula and an algorithm to say what the future forecast of our economy will be relative to some other country.

Relationships and intellect do matter, and agency, frankly, matters. I’ve studied different theories of international relations from the most structural to the most constructivist, and the differences between what the structural forces will bring about inherently, as opposed to looking bottom up at what constitutes the agency of various actors and the decisions they make within the system.

One of the techniques we apply is the art of the alternative futures tool, whereby you begin with an outcome and then we try to talk about how you can get there. Classically in the intelligence community, we want to begin with the worst-case outcome.

But what I challenge the analysts to do is to pick an outcome where we win. The world trends in a way, or the issue trends in a way, that the United States and our partners come out on top and then work it back as diagnostically and precisely as possible for all the ways in which we could see this vector.

There are many unanticipated events that could happen. Weather events, natural disasters, tsunamis, are great case studies from what happened in the South Pacific years ago, not just the one in Japan. The impact our response to that actually had on our positioning in Southeast Asia for how the US military, for example, came to support that same be true in Japan.

We do these global trends forecasts, and we’re very honest and humble. We don’t have the magic formula, but we try to apply both. We apply what the structural data says as you apply them to the algorithm. But then you have to look back — what are those key decision points along the way? Where do individual leaders particularly matter?

Understanding Xi Jinping — he’s been arguably one of the most disruptive figures in what was happening in the US-China relationship and more broadly, of China’s place in the world.

He’s the one who said, forget about hiding capabilities and biding our time 韬光养晦. He said, now is our time to be 有所作为.

Leaders and when they come up can in fact matter.

Challenge ourselves, and certainly, be humble in the predictions we make. But at the same time, I don’t believe that it’s as easy to just say, well, look at the balance of economies would go forth. The relationships that exist among various countries and non-state actors in our countries increasingly matter. What individuals themselves think about these issues, as I said earlier, the individual will increasingly matter to a lot of issues going on in the world. As we talk about contestation in the gray zone and other areas.

Jordan Schneider: Let’s close maybe on a call to action or two. What are the biggest open analytical questions you see? What do you want to read more papers about? How can folks get in touch?

Mike Collins: Thanks for the advertisement. We, especially in the National Intelligence Council, are open for collaboration. That’s my opening pitch. We convey this through venues like this. We convey this through various addresses we have. We convey this to the External Research Council. I just described another venue we have where we’re offering up to help others.

We have a lot of talent in the United States and around the world who want to work in the intelligence business. We also have a lot of partners who work in the private sector who are studying something for some other reason that we may be able to help them as well in a collaborative way. As universities are training students who might want to get into the intelligence community business, we can help them to think through the programs they’re teaching and the things they’re studying that benefit us but also showcase our work out loud.

There are three areas, as I think about things that I particularly want to double down and think about where work needs to be done. Let me be as precise as possible:

1. We need to look at our geopolitical challengers, our geopolitical revisionists, trying to change the world in a different way than it currently is, in understanding them in greater detail than as a monolith. We should not just think about them as a unitary state and the leader of that state. Every country around the world has different views and pressures within them. At the end of the day, these heads of state are ultimately, in various forms, to be fair, politicians. They’re responsive to something at home that they’re probably most worried about and most focused on. We need to think more about the conversations that are happening between those leaders and their citizens and their populations in getting at potential areas of dissent and disagreement that may not show themselves as evidently as we expect in the form of, say, protest. When money moves, when people leave, when people are laying flat, that suggests some degree of disagreement or dissonance, at a minimum with what a state is providing.

2. Gray zone activity. This landscape is being determined. This contest is happening not necessarily as much as we warn about militaries fighting militaries, gray hull ships on gray hull ships, nor is it happening in that legitimate diplomatic, political, economic, above board, international institution governed arena. It’s happening increasingly in that area for which norms have not been established, be it in cyber, be it in foreign malign interference, technology contestation, and the private sector is in the middle of that. We have to appreciate that and study that all the more for all the reasons I said.

3. We in the intelligence community and with the collaboration with those on the outside, we’ve got to go beyond thinking about national security in its traditional, kinetic sense. We have to think about what determines the commercial and business success of entities in the international arena, and understand and appreciate that is the role of business and the role of commerce in international affairs. Because ultimately, if the companies of one ecosystem are thriving commercially and from a business standpoint, it’s not just from a profit standpoint, but increasingly, from a strategic standpoint, that is another area that we have to broaden our aperture and our appreciation for what national security really is.

Jordan Schneider: How should our readers reach out to ODNI if they want to chat?

Mike Collins: Reach out through our ODNI website.

Jordan Schneider: What do you think about the Cold War analogies for the situation between the US and China today?

Mike Collins: I don’t know if the entirety of the national security community has sort of come to grips with this issue in some ways, but there are parallels to understanding lessons from the Cold War confrontation when we speak to the normative and the ideological underpinnings of it and kind of what we’re facing now with China — not China itself, but the Communist Party of China. For what this leadership has been espousing and advocating for and in their own writings when they talk about what this China is trying to accomplish around the world.

The term [Cold War], broadly speaking, refers to a contestation, a challenge within which one country is using all elements of power to achieve something in a geopolitical sense at the end of the day without having to go to hot war. We see this in the descriptions and the narratives of what the leadership under Xi Jinping is trying to broadly accomplish in terms of China’s place in the world. I’m not saying they’re looking for a hot war. To the contrary, they’re trying to compete with us and challenge our standing without having to get there, but utilizing all purposes of power.

This is as much a competition over the norms, the values, the liberties we stand for relative to the norms and values that our authoritarian rivals stand for.

Mike’s Mood Music Selection