January 25th, 2024

China truly lives up to its name of “Middle Kingdom.” It’s a crazy pocket universe that’s interdependent but culturally disconnected from the rest of the world. It has definitely succeeded in modernizing without Westernizing. Sure, there’s Starbucks and air conditioning, but its society and culture remain very, very Chinese. Probably the easiest version of this is that WePay and Alipay remain insanely annoying for outsiders without a Chinese bank account. I truly don’t know how tourists are supposed to exist in any real fashion.

In the short term, China is a formidable competitor. I visited Huawei campus and talk with a family member who works there. It’s absolutely insane the sheer pace of China. “We’re like an ant colony” is how he phrased it, able to move mountains together. Huawei phones and in fact, HarmonyOS are really good. 5G is actually 5G. Christ, American 5G is so slow, lots of people prefer LTE. That’s insane! Even more impressive is China’s electric cars. While Apple has spent years “kicking the tires” on their electric car, Huawei went from “board room OKR” to pre-order-able cars in less than three years. The cars are cheaper yet better built than Tesla. You can 100% still see the same society that manifested the Great Leap Forward (and the subsequent Great Famine). China’s ability to “catch up” is immense. Even in software, xiaohongshu and douyin are as good or better than their American equivalents.

America suffers from an artificially high cost of labor. Some of it is America’s wealth: people are richer so they need more money to be incentivized to work. But an enormous amount is because of our social choices, healthcare and cars being two super obvious cases. Healthcare is widely known to be stupidly expensive in America. You can blame some of it on the R&D investment that America shoulders, but any experience with healthcare makes it pretty obvious how stupidly expensive it is. Combine that with America’s obesity and opioid epidemics, which are minor and non-existent in China, and you have a massive healthcare bill.

Secondly, you don’t need to own a car in China. Think about that. After housing, a car is most people’s second most expensive purchase. In China’s cities, you just take the subway. It’s fast, clean, cheap. Cities are built around public transit. Make no mistake, their subways are not remotely profitable, but…are America’s roads “profitable”? No, they are infrastructure. Cars create massive, hidden costs. Highways are noise and air pollution. Congestion hurts productivity and health. Visit SF and street-parked cars occupy an immense amount of space. A street-parked car occupies ~150 sqft in a city where housing costs >$1000/sqft. Gas stations, auto shops, dealerships are neighborhood blights. All indirect costs borne by society.

Compare cost of living of America vs China’s most expensive cities, it’d probably be half. For a second tier city, it’d be even cheaper. Yes, incomes in China have risen, but social structure will ensure Chinese labor will always trade favorably against American labor. The American perspective focuses on the worker, but with human capital, it takes a village. Yes, simpler manufacturing is moving to Vietnam or Mexico, but the sheer scale of China allows for complex, nimble manufacturing ecosystems that these smaller economies will have a hard time supporting.

That being said, China’s ability to catchup seems to hurt its willingness to startup. When relentlessly copying is the modus operandi, it seems a bit hopeless to try and win against the giants. Autonomy creates experimentation. Elon Musk is weird, but only a weird person would have joined/hijacked/funded an electric car in 2004. My feeling is that China, as a society, doesn’t care that much about fostering innovation. The same large firms that rapidly clone Western ideas are going to do the same to domestic startups.

In the long term, China’s demographic crisis is very real. The first order effects aren’t nearly as bad as the second order effects. The One-Child policy has left a social mark. Women who grew up as the only child were raised as “sons”, complete with the prestige and accompanying pressure in what is already a very competitive society. These same women are in no mood to have more kids in a society where raising children is high pressure and high cost. I don’t see how that’s going to change in a slowing economy.

I really doubt it’s going to lead to some crisis (the last few years have taught me that most crises are media-manufactured), but it will likely lead to a long period of economic languor, akin to Japan or South Korea. My guess is this will accentuate the flight of capital and talent to the West, as American dynamism and mobility are still huge draws.

China has lost some of its confidence in the last few years. There’s probably a myriad of reasons, but overall, that feeling of limitless economic opportunity has vanished. I suspect the rest of the decade will be one of uneven and halting progress. Great strides for the country’s pride and joys (like EVs and microchips and solar panels) but stagnation for its property markets.

Edit: Dan Wang’s 2023 letter is once again spot on. His discussions on Chinese rùn culture match my own perception and are rooted in China’s focus shifting away from growth. I love this sentence on Xi:

The trouble with Xi Jinping is that he is 60 percent correct on all the problems he sees, while his government’s brute force solutions reliably worsen things.

As with most things, you are your own worst enemy. China got used to solving huge problems with huge solutions. But what remains are problems that require a lot of micro-adjustments, like fostering entrepreneurship or artistic expression to diversify your exports. Not plowing billions more into capital intensive industries that soak up talent but have limited returns. However, it is his discussion of the China-US rivalry that I think is the most valuable takeaway:

It also has to contend with China’s strengths because it’s a lazy exercise to look only at a country’s weaknesses. …the US is treating its deficiencies — an inability to build stuff or create a functional system for admitting high-skilled migrants — as mysteries to be endured rather than problems to be solved.

How to exactly apply this takeaway is an exercise left up to the reader, in their own life and industry.