Following 2020 letter - China, Dan Wang wrote a new post about China in 2021. Some notes/quotes:

Megaregions

Each region has a different personality. The north is economically dysfunctional. Large parts of it suffer from resource dependency, environmental problems, and the population loss that results from these trends.

Beijing

Everything that can go wrong in urban design has gone wrong in Beijing.

The climate is arid and prone to northerly sandstorms. Its streets are unwalkable, but a stroll would reveal that its imperial heritage, made up of alley houses called hutongs, is slowly being taken over by its socialist heritage, made up of gray Soviet blocks that tower over all. Beijing is therefore a desert steppe city with Stalinist characteristics.

But Beijing is redeemed by its intellectual life. It is the center not just of state power, but also universities and the biggest-dreaming startups. For those who can work up the courage to confront the mess of its urban city, a sparkling dinner awaits.

Beijing however has bucked the region and seen strong growth. It is the political center of the country and reaps every economic advantage from that status.

Whereas a lot of the entrepreneurs in Shenzhen are dreaming of building billion-dollar businesses, those in Beijing are at work building the kind that reach hundreds of billions of dollars.

Beijing’s boulevards are so unwalkable because they are designed less for pedestrians than for army parades.

The Greater Bay Area

The Greater Bay Area is a bit more of a mystery to me, given that I lived in the failing part—Hong Kong—rather than the growing part: Shenzhen.

The Shenzhen region is harder to write about given its patchwork nature. Shenzhen surpassed Hong Kong to be the region’s richest city in 2018. But it hasn’t been able to wrest leadership away from Guangzhou, which jealously guards its political power.

Hong Kong, meanwhile, is a world unto itself. Since the political problems there over the last three years, the central government has made it obvious that it can think of the city only with exasperation.

Shanghai

A hundred years ago, Shanghai (where I currently reside) was the city in Asia where the ambitious could live comfortably while making a great deal of money. A rough few decades later, that fact is true once more. Shanghai is by far the most westernized city in China, attracting perhaps the majority of foreign nationals as well as Chinese who have spent time abroad.

Local government districts compete against each other to host companies, and are constantly asking how they can help.

Many people, including northerners, move to Shenzhen for its relaxed political climate. Shanghai is a bit more of a middle ground between Shenzhen and Beijing.

Prophets, not pragmatists

There’s a little joke that the ideal company is led by a Beijinger, who would provide the vision, leadership, and government-relations savvy; its finances would be led by someone from Shanghai, and its operations managed by someone from Shenzhen (who would hire people from Sichuan and Anhui to do the actual work).

Shanghai and Shenzhen are creating wealth and leisure; Beijing is trying to lift their gaze towards its banner of utopia.

A distinctive feature of Chinese governance is to continuously fix slogans, like “reform and opening” to move the country away from socialism, and the more recent “common prosperity” to move it back.

A summer storm

Beijing’s goal is to channel entrepreneurial spirit towards useful goals. Profit cannot be the final standard of value, and the country’s best and brightest must work towards national salvation. I see that dynamic playing out in the regulatory campaigns this year.

While Beijing has restrained internet companies, it has done nothing to hurt more science-based industries like semiconductors and renewables. In fact, it has offered these industries tax breaks and other forms of political support.

The 14th Five-Year Plan, for example,places far greater emphasis on science-based technologies than the internet. Thus one of the effects of Beijing’s squeeze has been prioritization of science-based technologies over the consumer internet industry.

It’s entirely plausible that Facebook and Tencent might be net negative for technological developments. The apps they develop offer fun, productivity-dragging distractions; and the companies pull smart kids from R&D-intensive fields like materials science or semiconductor manufacturing, into ad optimization and game development.

Beijing recognizes that internet platforms make not only a great deal of money, but also many social problems.

Consider online tutoring. The Ministry of Education claims to have surveyed 700,000 parents before it declared that the sector can no longer make profit. What was the industry profiting from? In the government’s view, education companies have become adept at monetizing the status anxieties of parents: the Zhang family keeps feeling outspent by the Li family, and vice versa.

That has arguably been the story in Silicon Valley over the last decade: Intel and Cisco were not quite able to compete for the best engineering talent with Facebook and Google. Beijing wants to change this calculation among domestic investors and students at Peking and Tsinghua.

Internet platforms aren’t the only industries under suspicion. Beijing is also falling out of love with finance.

The attitude of business-school types is to arbitrage everything that can be arbitraged no matter whether it serves social goals. That was directly Chen Yun’s fear that opportunists care only about money. High profits therefore are not the right metric to assess online education, because the industry is preying on anxious parents while immiserating their children.

Beijing’s attitude marks a difference with capitalism as it’s practiced in the US. Over the last two decades, the major American growth stories have been Silicon Valley (consumer internet and software) on one coast and Wall Street (financialization) on the other.

The Chinese leadership looks more longingly at Germany, with its high level of manufacturing backed by industry-leading Mittelstand firms. Thus Beijing prefers that the best talent in the country work in manufacturing sectors rather than consumer internet and finance.

A more serious risk with Beijing’s crackdown is its potential to dampen economic dynamism writ large. People working in online education today suffer from PTSD. Jack Ma has been mostly out of the public eye for a year. Meanwhile, many of the most successful Chinese founders have stepped down or into the background. No public figure in China dares to be too visible today. One motivation for dreamers to start companies might be to enjoy the outrageous excesses of being billionaire playboys. While I’m on the subject of Elon Musk, we should note that he did after all make his fortune in consumer internet before he embarked on manufacturing.

Strangling the cultural sector

But there’s a serious problem with the regulatory squeeze. The summer storm has battered industries and left people feeling adrift. The trouble is that the party-state looks like the God of the Old Testament: a wrathful entity that demands harrowing displays of fealty to demonstrate commitment to a values-based faith.

Government officials subsequently emerged to assure people that common prosperity will not mean egalitarianism. Still, precisely what it will mean is still not scoped out. Beijing reined in its control tendencies only after it had thoroughly terrified people. The essential bet of top leader Xi Jinping is that there will always be a large stock of dynamism in the country, and the job of the party-state is to steer that energy in the right directions. That bet might turn out to be successful, but this push is also demonstrating the odium of never-ending restrictions on personal liberty.

By my count, the country has produced two cultural works over the last four decades since reform and opening that have proved attractive to the rest of the world: the Three-Body Problem and TikTok.

At the same time, the propaganda authorities have weaponized the public sphere to wring out dissent. A critical comment posted to Weibo or WeChat might prompt the platform to delete one’s account. If that doesn’t happen, then the internet mob will pounce. In spite of the greater visibility of this internet mob, I think we are still only scratching the surface of Chinese nationalism.

One of Xi’s legacies has been to push officials to err on the side of implementing controls too tightly, such that party officials are now trying to prove themselves to be more Marxist than the general secretary.

The consequence is that there’s little way for Xi to achieve his exhortation this year for China to make its image more “lovable and respectable.” Instead, the country is more likely to be seen as a land of censorious commies. In the developed world, China’s unfavorability ratings have reached an average of 60%, according to Pew Research. Foreign agitation against the regime used to be contained to Chinese dissidents and niche groups on the political spectrum; today, it is a generalized phenomenon.

Beijing worsens the situation with its need to answer every insult with insult.

Thus China today faces a global surge of dislike. That’s due to the operation of detention camps for ethno-religious minorities, a political crackdown in Hong Kong, abusive threats against other countries, as well as other issues.

The party-state *really seems to believe that the rest of the world must love China because of its economic growth*. The joke is on them, because Americans and Europeans do not admire economic growth and have dreamed up a thousand reasons to avoid it for themselves. They care instead more about cultural issues, which is why people have fond views of Japan, South Korea, and Taiwan, which have combined economic growth with cultural creation.

Comprehensibely deepening reform

But Beijing’s control tendency isn’t the only story in this country. That spirit is resented by Shanghai and Shenzhen, which mediates it with their commercial tendencies. Pushback from local governments can occasionally mitigate Beijing’s worst ideas. Shanghai and Shenzhen are also sometimes able to help improve the institutional capacity in Beijing. The Chinese growth story is not simply produced by the government or by entrepreneurs. *It is a heterogenous entity *where different regions dialectically engage to obstruct and improve each other.

Economists have said for years that China needs to deleverage its property-driven economy, and this year the leadership decided to do so.

The influence of Shanghai and Shenzhen are visible in the trajectory of economic improvement. Air quality has also substantially improved in Beijing and Shanghai over the last decade.

Outside of the security and propaganda apparatuses, government departments work as they would in the US or Europe, only with greater digitization.

Although I’m pessimistic about the creation of Chinese cultural products, I acknowledge a possible exception in visual art. There’s energy in the art scene in Shanghai, driven by the buildout of new museums.

These are ideal conditions for art experimentation. If anyone can push the art paradigm beyond displaying long-dead masters in a white cube, Chinese spaces are a good bet.

*China’s space program, for example, might be years or decades behind NASA, but it has shown the capability to learn from past missions and take on increasingly difficult tasks.*

For someone in the middle class, there has never been a better year to live in China.

China has strong entrepreneurs as well as a strong state, and these two sometimes reinforce each other.

An important factor in China’s reform program includes not only a willingness to reshape the strategic landscape*—like promoting manufacturing over the internet—but also a discernment of which foreign trends to resist. These include excessive globalization and financialization. Beijing diagnosed the problems with financialization earlier than the US, where the problem is now endemic. The leadership is targeting a high level of manufacturing output, rejecting the notion of comparative advantage. That static model constructed by economists with the aim of seducing undergrads has leaked out of the lecture hall and morphed into a political justification for only watching as American communities of engineering practice dissolved. And Beijing today looks prescient for having kept out the US social media companies that continuously infuriate their home government.

If the Metaverse will exist in China, I expect it will be an extremely lame creation heavily policed by the Propaganda Department. Xi’s speech on common prosperity in October noted that: > “The rich and the poor in certain countries have become polarized with the collapse of the middle class. That has led to social disintegration, political polarization, and rampant populism.”

The Metaverse, which represents yet another escape of American elites from the physical world, can only exacerbate social differences. It is too much of a fun game, like cryptocurrencies, played by a small segment of the population, while the middle class dwells on more material concerns like paying for energy bills. It might make sense for San Franciscans to retreat even further into a digital phantasm, given how grim it is to go outside there. But Xi will want Chinese to live in the physical world to make babies, make steel, and make semiconductors.

The new peer competitor

The US, for starters, should get better at reform. The federal government has found itself unable to build simple infrastructure or coordinate an effective pandemic response. Somehow the US has evolved to become a political system in which people can dream up a hundred reasons not to do things like “build housing in growing areas” or “admit people with skills into the country.” If the US wants to win a decades-long challenge against a peer competitor, it needs to be able to improve state capacity. China by contrast has invested a lot more in domestic competitiveness and to make its economy more resilient.

Since the US government is incapable of structural reform, companies now employ algorithm geniuses to help people navigate the healthcare system. This sort of *seventh-best solution is typical of a *vetocracy**. Its response is usually to make things more complex (like its healthcare legislation) or throw money at the problem.

The US is ahead of China on the sort of mathematical economics that win Nobel Prizes. But China is ahead of the US on the actual practice of political economy. One study I enjoyed this year noted that the Chinese government sends more jobs through state-owned enterprises to counties with greater labor unrest. I wonder how different the US would look today if the government did more to help workers. The US critique that “China stole the jobs” looks instead like a critique of its own economic system.

For the most part, American firms are unwilling to think too hard about the moral issues of doing business in China, choosing instead to say that Beijing’s actions are outside their scope of control. Their strategy is to keep out of the headlines while figuring out how to make more sales. One of the smart things that Beijing has done is not to retaliate against American companies for the actions of the US government; for the most part, Beijing has hugged them even closer by loosening restrictions in manufacturing and finance. Thus American companies are quietly localizing more of their Chinese production to remove their products from the jurisdiction of US controls. The response by Congress to this perverse consequence is to introduce yet more complex restrictions, like a possible national-security review mechanism for US outbound investments. It’s still early days in this big story.

Untangling the jumble

China is, in other words, a place that both moves fast and breaks things and moves fast and breaks people.

It’s possible, perhaps even likely, that China will fail. But it’s a mistake to assume that it will happen as a matter of course. Instead we should expect that it will become a major competitor to the US, which should not only do better itself but also make better assessments.

The good and/or bad thing about China is that everything changes every 18 months.

Not only will China fail to create successful cultural exports, its speech restrictions and detentions of minority groups en masse will invite further global condemnation.

But global hostility won’t be quite enough to derail its economic success. The rest of the world won’t be able to avoid that through continued condemnation. It demands a more serious effort to compete.

I’m not going to write many more of these letters. After five, the end is in sight. Therefore I’m trying to terminate this annual burden. I think I will write these again, but not more than one or two. => :‘(