(Roughly) Daily

Each of the last five years, Dan Wang, a Canadian-raised, U.S.- (college) educated technology analyst living in Shanghai, has written a year-end letter. This year’s missive recounts a long bicycle trip through China, explains why Cosi Fan Tutte is (he argues) Mozart’s best opera, and shares the best books he read in 2021 (including one of your correspondent’s all-time faves, Vernor Vinge’s A Fire Upon the Deep). But mostly, he ruminates on China and on its relationship with the U.S…

Internet platforms aren’t the only industries under suspicion. Beijing is also falling out of love with finance. It looks unwilling to let the vagaries of the financial markets dictate the pace of technological investment, which in the US has favored the internet over chips. Beijing has regularly denounced the “disorderly expansion of capital,” and sometimes its “barbaric growth.” 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. For good measure, I’ll throw in a rejection of capitalism as it is practiced in the UK as well. My line last year triggered so many Brits that I’ll use it again: “With its emphasis on manufacturing, (China) cannot be like the UK, which is so successful in the sounding-clever industries—television, journalism, finance, and universities—while seeing a falling share of R&D intensity and a global loss of standing among its largest firms.”

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. Personally, I think it has been a tragedy for the US that so many physics PhDs have gone to work in hedge funds and Silicon Valley. The problem is not that these opportunities pay so well, rather it is because manufacturing has offered dismal career prospects. I see the Chinese leadership as being relatively unconcerned with talent flow into consumer internet and finance; instead it is trying to fashion an economy in which the physics PhD can do physics, the marine biology student can do marine biology, and so on.

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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.

A willingness to assess foreign imports as well as a commitment to the physical world combine to make me suspect that Beijing will not be friendly towards the Metaverse. Already state media has expressed suspicion of the concept. 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 Chinese state has long placed greater value on resilience over efficiency, which has dragged down its performance on metrics that economists care about, like return on equity. In my view, that is as often an indictment of the economic profession. The US focus on efficiency has revealed the brittleness of its economy, which has neither the manufacturing capability to scale up domestic production of goods nor the logistics capacity to handle greater imports. Decades of American deindustrialization as well as an aversion against idle capacity has eroded domestic manufacturing….

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. I don’t see that the US government is trying hard to reform institutions; its response is usually to make things more complex (like its healthcare legislation) or throw money at the problem. The proposed bill to increase domestic competitiveness against China, for example, doesn’t substantially fix the science funding agencies that are more concerned with style guides than science; and the infrastructure bill doesn’t seem to address root causes that make American infrastructure the most costly in the world. Congress is sending more money through bad channels. That’s better than nothing, but the government should attempt to make some bureaucratic tune-ups.

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. China’s main activity was to invest in domestic competitiveness, thus becoming attractive to American firms, which relocated operations there. Meanwhile, the federal government did little to help disaffected workers at home. If there was a problem with this arrangement, fault should be on the US government for failing to restrain its firms or retrain its workers…

There’s so much more– including an acute look at (at least some of) the risks that China faces and the weaknesses (many self-inflicted) with which they have to cope: “2021 Letter,” from @danwwang. Eminently worth reading in full.

* Patrick Mendis

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As we take stock, we might recall that it was on this date in 1941, in the midst of the China resistance to the Japanese invasion during World War II, that Chiang Kai-shek ordered Mao Tse Tung’s Communist Party New Fourth Army disbanded on January 17, and sent it’s commander Ye Ting to a military tribunal. It was the end of any real cooperation between the Nationalists and Communists.

Mao quickly reorganized the force under a new commander and continued to fight the Japanese– though as guerillas, independent of Chiang Kai-shek’s command. When Japanese surrendered and withdrew, the Nationalists and Communists turned on each other.

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