Host: Hi everyone. Welcome to this podcast with my special guest Oscar Krberg. He's an adjunct professor teaching at NYU business school and he is also the author of What You Should Know About Chinese Economics and highly recommend that book and today it's a great honor to have you here in my podcast author.

Oscar Krberg: Yeah, very glad to be here. Thanks so much.

Host: Yeah. So, first question I have is for you is I'm really interested like how did you get into this field of study like Chinese economics like what made you like be interested in this topic?

Oscar Krberg: It basic yeah, I I basically got into it by complete accident. So at university I had nothing, I studied nothing related to economics. My major was actually comparative religion. I was interested in ancient Buddhism. And things like that. Um and um spent a lot of you know my coursework looking at Asia so India and China both but from a you know not from a modern history or uh politics or economic standpoint. Um and then I went into journalism after that and was a freelance writer for newspapers and technical publications for for a number of years. Um and um I wound up um traveling a lot in Asia because my wife at the time was a US diplomat was assigned first to India and later several times to China. And when we were living in India in the late 80s, I started to perceive that um a lot of the political discussions there had kind of economic underpinnings that people weren't paying that much attention to. So I started to get interested in economics and when we moved to China in the early 90s it was right about the time that Dunia had launched his nonshin which resto uh restarted reform after the uh lapse um and so it's very interesting time to be in China to witness the transformations that were going on in the economy and the business environment and I kind of got hooked. So after doing that for a number of years on a freelance basis. I set up a company in Beijing in 2002 to, you know, do a more formal um uh be able to study the Chinese economy more formally. And that's, you know, that's where it's where I've been for the last almost a quarter century.

Host: Awesome. Like what kind of um lead you to write that book? I really like your book and to be honest like the the first time I saw your book I read it this is the first book I read about Chinese economics without too much emphasize on ideology you know like a lot of books right around like either in English or Chinese you're either pro the CCP regime or you're against it like there's no balanced view like

Oscar Krberg: Yeah. Yeah. So what led me to to uh to write it was well I was I was um invited by the publisher Oxford um to write the volume. They they were interested in doing something in the Chinese economy and a number of my professional economic academic friends recommended me. Um and you know basically what what I and the editor felt was that there was a a gap in the market. There was a need for a book that would simply describe how China had gotten to where it was and this was around 2015. So, uh it had risen quite a lot, but it's not um obviously a lot has happened since then. Um yeah, so there was a there was a need for a book that um would describe China, you know, how it got to where it was in a in a way that was sort of normal people could understand. So it was not intended to be a book for specialists. Um, so less technical but also uh just very straight and as you say non ideological and that's you know I think that's what the publisher wanted and that's what I wanted to write because I agree with you a lot of the discussion about China Chinese economy and what's going on there basically winds up being a debate about its political system and people exactly smuggle political arguments into discussion economics and you know it's it's perfectly reasonable to debate China's political system. That's a that's a worthy topic of conversation. Um but uh I think a lot of the economic discussions particularly in the more popular media get polluted by political assumptions that people don't really question. So my standpoint throughout my career has always been to be to to downplay the ideology um and try and just be data driven and and look at at the facts. And you know, one of my one of my mantras is that economics is not a morality play.

Host: Exactly. I totally agree.

Oscar Krberg: What happens in economics is, you know, has a lot of implications for societies and how they're structured and so forth. And um, you know, those need to be taken into account, but economic forces themselves are are distinct from from a from a sort of moral discussion. And it's possible to evaluate an economy on its own merits without getting into a bunch of value judgments. Um, so that's what I generally try to do.

Host: Yeah. So by that time when you start to write that book, uh, how many years you've been living in China or like maybe visiting China and doing observations?

Oscar Krberg: Yeah. Well, I first moved to China in 1991 and I lived there mostly uh, full-time until 2016. So I'd been there, you know, about a quarter century. Some gaps in there but was most of it and then I was half and half in China in the US until about 2020 and then since then I've mainly been living in New York.

Host: Got it. Yeah. Okay. So now I'm going to dive in the first question. You know you see the screen here. Uh this uh professor his name is Chinuay. So he's uh from a top university in China like he teach history there. So economics not his major like focus. But recently he did a podcast and he basically argued that the Chinese uh economics uh growth in the past like 30 years I would say like after the you know tenia changed the policy it's primarily due to the low human rights advantage that's his core argument he thinks that like China's system is artificially lower the factor cost by surprising the rights especially like you ban those independent unions you cannot easily form a labor union to negotiate your wages and also So the government can seize the land without any fair compensation which happens a lot like 20 years ago I'll say. So this is like similar to how the slave holding south out compete the north in America pre the civil war America. Do you agree or disagree with that kind of argument?

Oscar Krberg: Well, I agree with it part with part of it, right? And I think Shinu is a very insightful scholar and I I think has uh you know very very good observations on um you know how China works. And I what I would agree with is there's no question that the Chinese economic model depends on a lot of um efforts by the state to repress certain costs, right? And so I think the the point about uh labor unions uh and and just sort of labor policy generally is absolutely correct. So essentially starting in the 80s they set up a system where labor was free to move into the cities which it had not been able to do during the Mau area when the cities in the countryside were strictly segregated. So you if you wanted to work in a city you could move there but you didn't gain any civil rights in that city. Didn't gain access to the local pension system or the welfare system or anything. Uh and so it created a certain kind of um instability or insecurity. Um uh and it it tended to lower the cost because the localities that were doing the hiring didn't really have to bull the bear the full social burden in terms of social welfare and so forth of of uh hiring these people. Um and the prohibition on independent labor union organization and other things indeed I think has um you know tilted the balance in in China over the last few decades in favor of capital uh at the expense of labor to some degree.

Oscar Krberg: Uh so I I think that's true. Uh you can look at you can look at other things you know um a commonly cited thing is um you know environmental compliance costs costs in China for many years were way lower than elsewhere. They were willing to uh sustain higher levels of pollution. That's normal, you know, in pretty much every developing economy. That's not unique to China. But then the other thing is financial repression. Uh and so the government basically controls the financial system, determines where things can be invested um and um um and is able to keep the cost of financing pretty low. And so again, that is a benefit for for capital. So I would agree with those elements of the argument. Where I would disagree is that you could compare this in any way to the the southern United States pre- civil war or anything like that because the other part of what was going on was an intensely competitive um uh industrial system and it was in competitive in two ways. Mhm.

Oscar Krberg: One that was there's a very fiercely competitive domestic market where yeah, you can get your cheap inputs and so forth, but then you have to compete against all the other companies that are also getting those cheap inputs and the state generally speaking is not going to um guarantee success to to any one actor. Uh so in order to survive in that environment you have to have something other than cheap input costs because everyone else has the same input costs.

Host: Correct.

Oscar Krberg: And then second uh they focused on export oriented manufacturing. Um and the point there is that every successful development story Japan, South Korea, Taiwan, um uh Germany after World War II, uh has depended on exportoriented manufacturing as a way of stimulating, you know, technological upgrading. And you could say, well, okay, these these things gave China an unfair advantage in global markets, and that's I think partly true, but it's also definitely true that because of the need to export and the need to compete in the in the domestic economy, the companies got very innovative. And I think a lot of China's growth is coming from that that innovation and that technological upgrading, not just from cheap inputs.

Host: Mhm. And also I think especially nowadays like China is no longer the cheapest labor market. You know like you get much cheaper labor from other like South Asian countries but still China still dominates in certain manufacturing areas.

Oscar Krberg: Yeah that's absolutely correct because what China has been able to do is yeah they have the cheap inputs but they also have first class infrastructure and they have for many years.

Host: Yeah.

Oscar Krberg: Uh and very few countries have both lower labor costs and first quality uh infrastructure. And now I think what you're seeing today is that the benefits of creating this very large um manufacturing ecosystem where you can scale up products very quickly are are coming to to fruition. Yeah. So yeah, cheap inputs definitely part of the story but but but only a part

Host: only a part. I I don't know if you kind of uh see the similarity. I think like both China and US have this kind of similar dual citizenship um status like you know in US you have a lot of um they call it illegal im uh illegal immigrants or like you know like im immigrants without any legal status for that type of person they contribute to a lot of like lower cost service and goods provided in US market but the US government don't have to cover their any social welfare in China you have that similar similarity, right?

Oscar Krberg: Well, yeah, this is, I think, a great example of where it's easy to fall into false equivalence. So, yes, both of those things exist, but the scale is completely different. So if you look at the United States, I think the the total foreignb born population in the United States is I think about 25% of the total population. And you know the vast majority of those people are documented and um you know have full legal rights. And so I I don't know exactly what the undocumented uh immigrant uh population is, but I would venture to guess it's probably, you know, on the order of 3 or 4% at most of the total workforce. In China, it is still the case that onethird of the population of urban China and the population of urban China is about 800 million people. Onethird of those people do not have full UKO or residence rights.

Oscar Krberg: Um so the the number of people um uh in China who are in this kind of secondass labor situation is a population greater than the entire population of the United States. Yeah. Um and and on a workforce basis, you know, it's probably equal to the entire equal to or greater than the entire labor force of the United States. And as a share of China's work workforce, it is very very large.

Host: Yeah.

Oscar Krberg: Um so yes, this phenomenon does exist to some degree in the United States, but it's tiny, whereas in China, it's absolutely central. And I think that's where Chin has a good point that this was this was not just some um incidental part of the uh development process. It was pretty central for a very long time.

Host: Yeah.

Host: Okay. Then uh the second question becomes very interesting like a lot of people kind of argue like the current Chinese um debt problem you know like the economic downturn a lot of people analyze it to uh similar to Japan what happened like after their uh real estate bubble um burst but also uh another scholar he's also a very reputable one uh in US uh professor Shu he argued that like China's current situation is like the Soviet union in the 70s. Uh the argument he had is like you know um China doesn't have those like independent labor union or any collective bargaining rights and also you have this uh government that's like cannot really pivot to the consumption model and really hitting uh they call it I don't I don't like institutional ceilings like in the system it's it's a hard institutional ceiling instead of just like hitting a market cycle and that's why he argued that the political system if not really fully reformed is going to exhaust all the economic potential and really kind of suppress efficiency now like do you think his argument I I know it's a little bit tilted towards ideological part but like do you think his argument is correct or his uh analogy is like a reasonable

Oscar Krberg: Yeah well if you if you don't mind me taking a little while I want to address both these two comparisons separately the balance sheet recession one and the institution ceiling one because they're both pretty widespread and it's understandable why why people you know uh support them. I I don't really disagree I don't really agree with either one of them. So um and you know so fundamentally I think that China is a much more dynamic and resilient system than either Japan of the 90s or the Soviet Union in its late era and so its prospects um are are much stronger. So let me explain why. Mhm.

Oscar Krberg: So, Japan um this was a comparison that was common among western economists two or three years ago when China had a very anemic uh recovery from the COVID pandemic. Um and you know the debt problems of the local governments and um the state enterprises became you know very prominent. Um and so the idea was look, you know, Japan in 1990 they they had a lot of debt. They had a big real estate collapse. The economy stagnated for about 15 years. It took a lost decade of very low growth and deflation. And China according to some people was, you know, basically headed to the same thing. Um, and I thought this was wrong for several reasons. The the central one is that if you look at the financial structure of Japan circa 1990, it had what I would call a unified national balance sheet. Mhm. Uh which is to say that financial companies banks owned equity in industrial companies. Industrial companies owned equity in the banks. So there were these cross shareholdings. And when times were good, this was very beneficial because the industrial companies could get cheap finance and so forth. Um

Oscar Krberg: But at the bottom of all of this unified balance sheet was land values that had just exploded. So land values in in um Japan increased by about 600% during the 1980s. And by 1990, it was common to value Japanese companies not by their profits or what they did, but how much land they own and how much that land was worth, right? Um and so the problem was that those land values had just been propped up by a financial bubble. And when they collapsed and ultimately they failed by about 80%. What that meant is that the equity value not only of industrial companies but also the entire financial sector also shrank because everything was built on this this um uh basis of land values. And when the industrial companies collapsed, the the financial companies also uh collapsed because much of their um value was in the shares that they owned in the industrial companies. So everyone was tied together and they all sank together. China has never allowed that. They've never allowed cross shareholdings between industry and banks precisely for this reason. They saw that problem. They saw problem similar problems in Korea. They said never let that happen here. So yeah, you wound up with a real estate bust in China since 2020. And that's bad for the real estate developers. It's bad for the local governments. Uh it basically has very little impact on the financial system. Uh particularly the big systemic banks who did not have large real estate exposures and it had zero impact on the the tech companies, you know, the the Huawei's and the BYDs of the world. Uh they were totally unaffected and so they could invest massively. Uh and so if you look at what happened in Japan in the 1990s was that there was a collapse in investment across the board. In China, what you saw after 2020 was a collapse in investment in real estate and a gigantic boom in investment in manufacturing. So it's a completely different dynamic and has led to a much more positive result. So that's I think the central difference between China and Japan.

Oscar Krberg: The Soviet institutional ceiling argument is sort of a repackaging of an argument that has been around for basically as long as I have been going to China. And I first went to China in 1985 as a tourist. And since the beginning of reforms in the 1980s, people have said, look, you've got this dynamic, you know, re somewhat capitalist economy with a big private sector and you have this Leninist authoritarian centralized government on top. These two things are fundamentally incompatible and one of them is going to break.

Host: Yeah.

Oscar Krberg: And so for a long time people said, well what's going to happen is the economic system will break the political system and they'll have to do political reform. And you know the the counterargument has always been no that the political system will strangle the economy and they'll stop growing, right? You know, and every iteration of this argument for the last 40 years has been wrong.

Host: Yeah, I know.

Oscar Krberg: You know, the economy continues to grow. Uh it's now the second biggest in the world. Slowed down, you know, a bit, but it's still one of the fastest growing economies in the world. Um, it, you know, is the world's biggest manufacturer, biggest trading nation, very dynamically integrated with the rest of the world. And the Communist Party is still very much in control and uh doesn't seem to be going anywhere. So, just because an argument has been wrong for 45 years doesn't mean that it couldn't be right in the future. But you do have to ask yourself, yeah, okay, what what's going on here? And I I think what this ignores is um again if you look at the structure of Chinese institutions political economic institutions for a very long time they have been very very different than they were in the Soviet Union.

Oscar Krberg: Even going back to the plan period if you compare Mauist China to the Soviet Union during Krushchov or BRP's time China was way less centralized the central government controlled far less prices. You had this very distributed um idea where each locality had to produce all its own stuff because Mao was was paranoid that China would be invaded. So he wanted there to be duplicate industrial infrastructure everywhere. Um uh so it was in fact it was formally centralized but it was in fact much more decentralized and the central government had le much less uh sway over what was going on at the at the local level even during ma

Oscar Krberg: And what that meant was that when you liberalize in the 1980s there were a lot of local actors both government and private sector that were completely unconstrained in what they could do and they just said oh it's now okay to make money let's go make money and so they did. Um so that was a very different baseline condition right uh and then second if you look at the way that China has tried to develop its economy they've been very very clear that they wanted to avoid the pitfalls of the Soviet Union which they've studied carefully so again they focused on export manufacturing so they open to the outside world they did not uh pursue autarchy which is what the Soviet Union did uh and they focused very very um diligently on how do we create different mechanisms for technology transfer to upgrade our abilities and they've uh you know had as I said a a much more competitive economy for a very long time. So it is the Chinese economy bears no resemblance whatsoever to any iteration of the Soviet or or Russian economy at any point in time.

Oscar Krberg: Now I think I think what professor Hugh is is pointing out and I think he's absolutely correct in this is that okay maybe this was true for a while but clearly under Shinjinping you've had a very strong move to centralize power uh to increase the power of the state reduce the power of private entrepreneurs and the private sector put capital allocation much more back in the hands of the state than in these non-bank financial institutions and so forth. So yeah, is the system more centralized, more authoritarian, more state directed in control today than it was 10 years ago? Absolutely.

Oscar Krberg: And does that increased centralization, state control that you slowly start to suffocate the the engines of of innovation in China and um and creativity? Absolutely those risks are there and I think it's totally appropriate to point those out and I think if you just look at China's growth performance over the last uh decade it's very clear that as this centralization you know grew China started growing slower and part of that was natural but I think the last several years uh it's very clear that China is growing slower than it potentially could its potential growth rate is a point or two higher what we're actually seeing. Um, and the government and Xiinping seem to think that's okay because we the technology a bit is doing well. Um, so I think I think it's I think it's right to point out that there's increased risk of this kind of institutional ceiling. But I have to say that if you look over many decades, what you find is that time and again, China has seemed to run up against institutional limits of one kind or another. And then the system has adjusted in order to keep growth and and technological progress going.

Host: Yeah.

Oscar Krberg: Um and what you see in the manufacturing sector in China today is is basically that. Yeah. If you're an internet oper entrepreneur, your life is bad now compared to what it was seven or eight years ago. But if you're in technology oriented manufacturing, your problem is not that the government is squeezing you out. Your problem is that you have this just incredible competitive pressure from everyone else.

Host: Yeah.

Oscar Krberg: In your sector. So, it's a it's a it's a problem of sort of uh capitalism on steroids, if you will, as opposed to uh an an overly oppressive government.

Host: Yeah. I I think like the the rhetoric changed a lot. I think in recent years uh I believe like two or three years ago there's a lot of like um you know internet koss they came on to podcast and published articles saying oh now it's a state time you know like it's a in Chinese it called 国进民退 which it means like the state state company is going to own everything like private company they can just like exit the stage it's now it's our show now but I think like the right now nowadays they pull back that rhetoric a lot because a lot of like you know small business owners or they're scared and they just like flee the countries, right?

Oscar Krberg: Yeah. No, and it's absolutely true that if you talk to, you know, people in the business class in Shanghai or or Beijing and particularly people who did well in the 2000s and the 2010s, you know, they are very very disgruntled with the current state of affairs. They're very unhappy that the government is not um allowing more freedom and the government is not more progrowth in a general sense. Uh and and there's absolutely no question if you just read the economic data from month to month. China has a very significant confidence problem. Consumers, households, they don't want to buy stuff.

Host: Yeah.

Oscar Krberg: They're holding back and saving all their money, not spending it. And private companies are very very reluctant to invest. Um you know particularly if what they're producing is sort of consumerf facing products and consumerf facing services because they just see consumers like downgrading their conception all the time. So there's no question that you've got a a significant lack of confidence relative to what you had um several years ago. I just think that as as bad a problem as that is, China is a big country and there are, you know, big chunks of the economy that are globally significant, you know, essentially in the tech industrial sector which are doing extremely well and where the the problem for entrepreneurs is not a lack of confidence, right?

Oscar Krberg: Uh the the problem is just an extraordinary amount of of competition

Host: competition. Yeah.

Oscar Krberg: Yeah. they have to work very hard but it's that you know you look at the people who are leading companies like BYD or Xiaomi or CL or any of these companies uh they exude comp confidence that they have literally worldconquering products and they're probably right but their life dayto-day is kind of not so great because all their competitors are making it very very hard for them to you know keep the level of profitability they buy Yeah,

Host: I agree.

Host: Yeah. Now, uh let's move on to the next question. I think that this question is going to be interesting because I think everybody like all the economists was like kind of recommending China is like increase your consumption. Even the US government I think kind of pressure China to kind of transform the economy from export oriented towards consumption oriented. I think professor Shu argued that um you know because of the current uh Chinese um distribution policy like how you kind of distribute the wealths among all the uh citizens in the country. It's very difficult to actually convince all the Chinese that yeah, we're going to encourage a consumption lab model because of that. Like they just don't have the money or they don't have the confidence in the economy that when they spend that money, the state is going to hold them back if like the bottoms falls out, right? Like if you have another co hit or like there's a bubble burst and you lost your house, you lost your job, like what you do, right?

Host: There's not much welfare to kind of hold them up. That's a reason like a lot of consumer in China are very reluctant to spend and they actually pivot towards like you know they called call it uh transition to a lower priced goods like right yes downgrade downgrade of the consumption

Oscar Krberg: consumer downgrade that's right

Host: yeah consump downgrade so what do you think about the current situation and also all the you know conflict among that distribution system like if the state or the Beijing does refuse to empower all the worker like politically like give them the union rights increase their earnings or like boost their property rights like give them like a permanent property uh ownership.

Oscar Krberg: Yeah.

Host: Uh calling for this boosting domestic consumption is simply rhetoric instead of really anything that holds water. What do you think?

Oscar Krberg: Yeah, this is a very messy discussion I have to say. Um so the first observation is okay so people have been commenting on the so-called lack of consumption in the Chinese economy you know for decades

Host: for decades.

Oscar Krberg: Right. Um you know and what they point to is if you look if you divide the economy into you know investment and consumption those are the two main components of it. We'll see the Chinese investment the share of Chinese economy that's investment is very high the share of Chinese economy that is that is consumption is very low by international standards. So there's some technical problems the way the Chinese statistics are cons constructed. I think they underestimate the true consumption rate. It's it's probably five or six points higher um than than is reported in the in the in the data. Even if you make that adjustment, it's still on the low side. Um

Oscar Krberg: But it's also the case is what what economy had by far by far the fastest rate of household consumption growth from 2000 to 2020. It was China. And it was not even close. Right? So the um uh I think Chinese household consumption grew sixfold during that those two decades from 2000 to 2020. You look at another high growth you know emerging economy India it was I think the growth was you know a quarter of that. You look at any you know advanced economy is way lower. So it is it is false to say that China has had weak consumption growth. They've had actually extremely strong consumption growth and you know anyone who is aware of what the standard of living was in China urban China 20 years ago and what it is today there's just no comparison.

Host: Yeah.

Oscar Krberg: Um, so I think that's the first thing that we need to to stipulate is that when people say China's consumption is weak, that isn't actually true in absolute terms, right?

Oscar Krberg: It's true in terms of some uh uh picture that you draw of the structure of the whole economy and and the share of consumption. Mhm.

Oscar Krberg: And um you know I think what's more accurate to say is that it's not that China consumes too little that it invests too much. Right.

Host: Yeah.

Oscar Krberg: So um this is the fundamental issue that the way the state is constructed you know the state essentially controls the financial system. All the excess money in the economy essentially flows into state controlled institutions and it is allocated to investment needs first and the investments are strategic. So in other words, they're not saying what is what is the investment that's going to get us the highest financial return in the next two years, which is basically how it works in a country like the United States. They say what are the strategic industries that the state wants to support over the next 20 years? Let's put a bunch of capital into them and, you know, hope it eventually works, right?

Oscar Krberg: So, what you wind up doing there is um uh taking a lot of money out of the households and using it to finance very long-term investments in infrastructure, industry, and so forth. That may in fact produce a good economic return over a long period of time but actually don't um provide a very good financial return in the short short run and what that does is you know if you think about a US household American household or a European household they have some extra money what do they do you know they might invest it in the stock market um they might invest it in you know bonds that generate certain kind of return and so they wind up in aggregate having quite a bit of financial income in addition to their um uh their wage income.

Oscar Krberg: In China, basically households are not allowed to have any financial income because all financial income is essentially seized by the state and put into these long-term investments. Um and I think that is actually a bigger cause of this low consumption rate. Mhm. It's that basically people don't have as much income in China as you would expect given the uh rate of development and and part of that has to do with wage suppression but part of it also has to do with the sort of commonandeering financial income by the state rather than the private sector. Um and I think that's more important than often what people talk about the social safety net etc.

Oscar Krberg: Um now is that ever going to change? I would say no. This is not going to change. So where where I would agree with this critique is while I think that the underconumption problem is in a sense overstated, I think the balance between investment and consumption in in China is basically fixed in stone

Oscar Krberg: Because that's what the government wants it to be. And because they control the entire financial system, they can make it to be that way. And as long as enough of these investments produce some kind of an economic return over the long run, you know, the system can continue. So yeah, I I make I'm making a lot of sort of technical disagreements with the argument, but the conclusion I actually agree with,

Oscar Krberg: Which is that there is almost no possibility that within the next few years, we will see a significant shift in China's economic model away from this sort of investment and export-led growth to more consumption-driven model. I just don't see that happening because you know basically the Communist Party has decided how things should run and from their point of view um you know it's been very successful they've they've created gigantic economy where everyone you know has a much better life than they used to and Chinese companies are now increasingly you know globally competitive um across a wide range of technologies. So they say what is the problem here? People have a good life, we have addressed our needs for global competitiveness, for national security, etc. Um, it's fine, right? Uh, you know, and so an economist will say, well, but you've left a lot of consumer welfare on the table.

Oscar Krberg: Um, but the party will just say, well, we we beg to differ. No, we have a different concept of how things should work. And until that concept is proven not to function, they're going to keep doing it.

Host: Yeah. Also, the other thing kind of noticed is uh I remember watching a lecture you were giving like um two years ago, you basically said that the the Chinese government realized like after 2008 the US model is not something they want to inherit. They want to follow that like they do not want China to become a over consumption driven and then you have all this uh debt problems like happened in 2008 and they want to be like Germany right like uh like export oriented. Yeah.

Oscar Krberg: Right. Yeah. Now there's some you know there there's some nuances on that because they have their own huge debt problems. They're just in the you know the local government sector etc. But uh but yeah that's that's basically that's basically right. They've decided that they want to be more of what I call a Leninist Germany that is to say a technology export oriented economy with a huge manufacturing sector but you know not social democratic but lex that's their that's their model.

Oscar Krberg: It's actually an interesting point to pivot to the next question because you mentioned about like the Chinese government had this industrial policy want to invest in manufacturing sector high-tech sector to drive you know global competitive competitive companies. However, you see like uh US and China has a trade war 2.0 you know like happened last year right like when Trump uh returned to the office and now it seems like China's trade war like all like I would say like trade conflict with European Union and other countries are just getting more and more like uh headlines you see the news right and the Chinese overcapacity is definitely a problem you know like the some of the company like Xiaomi you said like super competitive it's like if you put it in North America probably all the other electric vehicle company will be killed but again it's in China and there's not only one Xiaomi, there's also BYD and other car EV manufacturers, right?

Host: So there definitely seem to be an overcapacity problem in China and professor Chinuay use a concept, they call it uh horncker's fable. So basically said like if a totalitarian regime like East Germany treat freely with all the western civilized companies uh countries and while suppressing its workers condition you're going to have like uh unc to say unfair advantage over like a democratic countries and then eventually those countries will start to decoupling with you because they think they cannot out compete you in a in a fair um arena. So how do you kind of see that like would that the trade war and all the other like you know tax policies kind of protectionism in different countries starting to hurt the Chinese model.

Oscar Krberg: Yeah, I'm I'm a little skeptical of this story. Um because, you know, you've had protectionist pressure building for the last, you know, seven or eight years, starting with the the trade war uh that Trump launched in 2018. Now, in fairness, you know, for the first few years really didn't add up to much. It's no more, you know, significant. Nonetheless, you know, all of this protectionist pressure, what has it done to China's exports? Nothing. Basically, they continue to grow. What has it done to China's share of global manufactured goods exports? Nothing. They still account for, you know, over 20% of global manufacturers. They run the the overall trade surplus, you know, has grown to over a trillion dollars. If you just look at the manufactured component of that, it's even larger. Um so um you know if the rest of the world is is thinking that they're going to you know solve their problem with China by being protectionist they're doing a really bad job of it.

Oscar Krberg: Um so that's I think the first observation is that that protectionist rhetoric and protectionist action has actually not had that much of an impact. Mhm.

Oscar Krberg: Um and I think the the other thing that you see is that um um these technological supply chains are very complicated, right? And what you continue to see despite all the protectionism is uh companies throughout the world realizing that they need to do things in China to be more competitive or have Chinese suppliers. Um so there's a lot of among all of this sort of rhetorical decoupling pressure what you see at the ground level is very very limited decoupling in a few sectors. Mhm.

Oscar Krberg: Um, you know, a a great example of this is auto autonomous driving in the United States, right? So, the leader industry leader there is Whimo. Um, they have, you know, a number of places that they source their vehicles from, but a big one is the Chinese company Gile Ziko brand. Mhm. Um and you know they haven't really advertised this and kind of the way that they get around um the tariffs I believe is that they essentially that the car is not a fully uh functioning unit until it is equipped with all of Whimo's um u self-driving equipment. So they they basically take the guts of the car from J and then they uh and then they put all of the equipment on top of it. Still kind of expensive. Uh and they're looking at other options, but um there's a lot of there's a lot of of continued uh you know back and forth between the US and the Chinese tech ecosystems because they they still kind of need each other.

Host: Yeah.

Oscar Krberg: Um so I I basically think that um first of all that China's competitive advantages are not just low labor cost right they now have the top companies there now legitimately have uh globally competitive or sometimes globally leading technology um this is clearly true in electricals and batteries I think it is increasingly true in things like industrial automation robots etc. Um it's clearly true in green energy equipment. Uh and you can go on and on. Um and so China is has very strong technology. They have an ecosystem that enables the technology to be scaled up very quickly. So the unit costs come down essentially through economies of scale where they can iterate much more quickly. So the, you know, the product cycle for a Chinese vehicle, electric vehicle typically is 12 to 18 months compared to three to five years for a western vehicle maker. And so if you can bring products to market much more quickly, you're going to be able to keep up with or anticipate consumer demand much better than your competitor. So this isn't true in every single Chinese sector. And I think we need to be careful about assuming that everything in China is like the EV industry because it's not.

Host: Yeah.

Oscar Krberg: But in in those leading industries, Chinese companies are just really really good at what they do and they have advantages uh which are very very large and multifaceted and and really cannot be offset by a you know a a tariff unless they could be offset by an export exclusion and just say we are going to ban the imports of your products period which is kind of what the US has done. Mhm.

Oscar Krberg: Uh most countries aren't interested in doing that because they want the stuff. Um you know, most countries do not have competitive industries that they need to protect. So if China has the best product at the lowest price, they're going to buy that.

Oscar Krberg: And what you've seen is that China has been very successful at shifting away from the US market to other markets, particularly in the emerging world. Um they get lower prices, so it hurts them. Um but they get the volume and they get the market exposure. So um I think that China is now so integrated in the global economy and the sources of its competitiveness are so diverse and so many of them are technologically determined. I I don't think that decoupling works. It it only works if you have basically a world war which forces everyone to decouple you know which has happened a couple of times before.

Oscar Krberg: Uh that would be very bad on many on many levels. But short of that it is very hard to see uh effective fully effective decoupling other than you know here and there you know individual specific supply chains that are really really important.

Host: Yeah maybe but on a macro scale um I don't I don't really see China being derailed by that.

Oscar Krberg: Got it.

Host: And also like I think um it also depends on like uh the other democratic countries um president and their policy you know like during better era he's like promoting a French shoring technology like fresh shoring uh strategy basically working with all the other kind of you know countries that have the similar government or democratic values compared to America and then kind of allocate those supply chain there. Uh I think uh when President Trump come into office, he immediately abandoned Biden's strategy and just I think that to certain extent actually helps China a little bit on that side because he started a trade war with everybody. So the competitive advantage of like doing the French roing is much less compared to the Biden era because you have less tariff like from other countries.

Oscar Krberg: Yeah. And I think even that, you know, I was much more sympathetic to the the French stoing strategy um than to what Trump is doing for sure, but it it's pretty severely limited, right? And a point that I've made in some of my publications is that China just has a very special ecosystem which is extremely powerful.

Oscar Krberg: Um, and if you want to compete with them across the board, you would have to recreate that ecosystem across the board. Mhm. It's basically impossible to do that under a French roing model because every country has its own interests. You can't coordinate. It's way more complicated.

Oscar Krberg: So the only way that French works is that you pick a few sectors where you think it's really really important not to rely on Chinese um inputs or not to rely on totally. And in these individual sectors, you say, "Okay, we're going to pick not everything but like three or four or five and and do that really robustly." And that and that could work if you give it enough time. Um but I think the problem now is that as you say that Trump has basically abandoned that strategy and if you look for example what are the incentives in Europe they're very mixed right now because on the one hand a lot of their industrial base is getting hollowed out by Chinese competition on the other hand the US is shutting off its markets.

Oscar Krberg: So what do you do if you're European industry? A lot of European industries say particularly the car makers would say well look we can't really rely on the US anymore. So we need to double down on our investments in China

Oscar Krberg: Uh stay close to the leading edge. We can take advantage of all of the ecosystem benefits there. And that's how we how we keep ahead uh you know um on innovation you know and that may or may not work but it's pretty understandable why they're thinking that way.

Host: Yeah definitely agree. Um

Host: Now let's move on to the next question. I think uh this is very interesting because uh recently Beijing is like finally doing some kind of fiscal packages to help the market. I would say like in in the Chinese term they call it 救市 is basically saving the market. And uh professor Shu is very skeptical. He viewed those measures strictly through the lens of a soft budget um constraint. He argued that this money is not a real stimulus for the girls or uh it's actually just a essential life support for uh all those uh local government debt as you mentioned before like there's a lot of local government uh shadow shadow banking kind of going on and they have those investment platform which have a lot of lowquality investment and huge debt problem. Do you agree with that um observation like the all the stimulus is basically try to life support the system instead of really try to encourage more consumptions or help the every every like you know citizens in China.

Oscar Krberg: Yeah, I basically agree with that. Uh you know I think that the soft budget constraint idea this is an idea that goes back to a Hungarian uh scholar Janos Cornai um who back in the I think 80s or 90s wrote a very good um explanation of how he was talking about eastern block countries and how they worked under the sort of socialist model.

Oscar Krberg: Uh it's a very powerful concept and I think it explains a a ton of what's going on in China. It's basically the idea is these local governments um or state actors can spend a lot of money uh and at the end of the day if they make bad decisions they don't have to bear the cost of those decisions they don't go bankrupt or or whatever. Um and I think that is a very very continues to be a very powerful concept um as relates to China and I think it accurately describes the so-called stimulus program. Um, so you can talk about either of these debt swaps narrowly or you can talk about the broader so-called stimulus measures that the government started putting in place about a year and a half ago.

Oscar Krberg: And I never called them stimulus measures. I said these are support measures.

Host: Yeah.

Oscar Krberg: They're there to, you know, make sure that economic activity doesn't fall below a certain level, but they're not aiming to um accelerate things. But I I think Professor Chu, you know, puts his finger on a very important point here, which is that not only are they not stimulative, they they kind of embed a big reason for why you have this problem of excess capacity in China, right? So why do you have, you know, 20 or 30 electric vehicle companies

Host: Yeah. producing at scale? I mean, they're more used to be a hundred.

Oscar Krberg: Yeah. I I'm I'm discounting the ones that that really, you know, exist more on paper, but you know, ones that really produce significant numbers of EVs. There's 20 or 30 of them, right? There probably should be four or five. Yeah. Right. Uh how come you and in industry after industry, you have this situation where there are many many more competitors.

Host: Yeah.

Oscar Krberg: Than it seems like the market should be able to bear. And this lasts for a really long time. And the basic reason for this is local government support. So if you are a local government, you need to have local sources of tax revenue and employment and so you will find everything in your power to keep your local EV maker or steel mail or whatever it is in business

Oscar Krberg: So that you can collect the tax revenue and and the people will be employed, right? And um and because local governments have a lot of tools at their disposal, not just cash, but they can you they can hand out free land, they can lean on the local power plant to say, "Okay, cut this guy's, you know, electricity bill by 50%."

Oscar Krberg: Or whatever. They have a lot of um non-budgetary mechanisms by which they can support industries and keep them in business even if the company is is intrinsically not very profitable. Mhm.

Oscar Krberg: So instead of a normal process where you have a flood of new entrance into a hot sector and then you know within a couple of years most of them go bankrupt and a few survive the people who should have gone bankrupt stay in business for an incredibly long period of time right

Oscar Krberg: And uh and so that's kind of the ultimate you know soft budget constraint if you will. What's interesting now is that the central government has said, "Oh, well, this is terrible. We don't like all this excess competition. It must not exist. We must have fewer companies. Local governments, you must stop sub subsidizing these companies."

Host: Yeah.

Oscar Krberg: But does the central government ever attack the central issue here, which is the way that the fiscal system has set up.

Host: Yeah.

Oscar Krberg: Which number one gives local governments immense authority to channel resources to these companies and then number two gives them immense incentives to do that because if they don't do that then they literally will have no budget revenues right.

Host: Yeah.

Oscar Krberg: And the central government is responsible for that because they've set up a fiscal system which makes it very very hard for local governments to generate any revenue except by essentially taxes on production.

Host: Yeah.

Oscar Krberg: Uh but the central government is not going to tamper with that. Um so yeah this whole soft budget constraint is is a problem for economic growth. It is a it is essentially what creates the excess capacity problem.

Oscar Krberg: And at the end of the day I think the central government's view on this is well this is not ideal. We would love it if you know if there were only BYD and Xiaomi and two other companies making EVs and being very profitable. On the other hand, how much effort are we going to put into re remaking the system so that happens? Not that much because okay, these guys have to cut their prices to the bone. That's great because then they are, you know, more competitive on global export markets. Yeah. And prices fall for for domestic consumers.

Oscar Krberg: So the central government, I think, is very much complicit in this in this setup. Um, and so far they do not have a they they appear not to have a strong interest in changing the system.

Host: What they can do is like shuffle more money into the system through things like these debt swaps in order to make make sure that the the local government stays solvent.

Host: Yeah. I think like the you know because of lo those local government policy you have so many competitor you have this like fierce competition kind of everybody has to lower their price if there's a new market kind of come out like the EV market 10 years ago everybody is jumping in like every city have their own EV manufacturer that definitely create a lot of competition for uh developing the advanced technology because you cannot survive in that kind of environment without any advanced technology but I think that also a huge waste of the taxpayers dollars, you know, like the Oh,

Oscar Krberg: for sure.

Host: Those money could be spent on other more productive um activity like investing in the education or try to help improve the um those farmers working environment, try to improve those those people's life. Um don't you think that part of the reason for the low consumption is also driven by this like the policy kind of heavily tilts towards local investment instead of like you know

Oscar Krberg: Absolutely that's absolutely the case. Uh I mean this gets back to the point that I made earlier about how basically the state commandeers all of the financial income country and directs it to these investments rather than allowing it to recirculate through the economy the way it would in a in a more market oriented system. So so that is I think absolutely uh at the heart of the question of the investment consumption balance and and also the growth rate.

Oscar Krberg: So the thing that I've been sort of trying to figure out for the last few years is it's it's become very clear that under Xiinping the Chinese government is much less concerned about maintaining a high economic growth rate than previous leaders. Right.

Oscar Krberg: Um and when they talk about development it used to be that development meant a high GDP growth rate.

Host: Yeah.

Oscar Krberg: Under shiinping it means no it means technology development um and the growth rate has to be you know a certain level but it doesn't have to be that high right um so we seem to be and they you know and this is essentially what they have achieved is an economy that is making really impressive technological progress in many fields but is growing a lot slower

Oscar Krberg: And if you read government documents on this what they will tend to say is well don't worry all this new technology will produce enormous new productivity gains and this will you know cause higher growth in the future that's what they say

Oscar Krberg: Um and the problem with that is that most people in China do not work in the technology industries right so what's the combined employment of EVs semiconductors industrial robotics you know green energy all of these things put together you know that might be 10% of the of the national workforce Mhm.

Oscar Krberg: Uh so in order for this to spill over into um you know the the rest of the economy where everyone else works, you need to have some mechanism by which you know the fact that you're really good at making electric cars creates some productivity benefit elsewhere in the economy. And that that's where I start scratching my head because I don't really see the ability um for technological uh improvement uh to feed through into sort of generally higher uh uh productivity and higher wages for most people, right?

Host: Yeah.

Oscar Krberg: Um and you did actually have a mechanism for that essentially in the internet sector, right? for for 10 or 15 years you had these great companies like Alibaba and Tencent and so forth that were technological innovators and also gigantic employers and they were essentially selling consumer services.

Host: Yeah.

Oscar Krberg: Um and so there you could see a lot of spillovers between the technology that they were developing and and broader gains income. Uh and that is is much less the case now. So, China is now kind of I think a bifurcated place where the technology uh economy is overperforming doing very very well. Um and the over the the total economy, the macro economy is underperforming.

Oscar Krberg: Uh and I don't really see a reason for that to change in the next seven years. I don't think China is suddenly going to get a much faster growth rate. I don't think consumption is going to accelerate, but nor do I think that the technology progress is going to slow down. It's just this kind of weird combination of extreme technological competence, a lot of success in individual sectors in an overall economy that that always feels a little bit sluggish.

Host: Yeah. So, uh that actually bring up to the next question which is very interesting because Professor Shu predicts that China is going to face a long-term stagnation because the Communist Party will not give up control. Um, and Professor Ching kind of argued that like there's no accountability for welfare and the Chinese people did not demand the government deliver like social socialist promise that will kind of lead to this long stagnation for the country. Do you think that prediction is holds any water? Like do you think that argument is u sound?

Oscar Krberg: Yeah, I think both of those critiques are, you know, we need to take them quite seriously because I think they they put their finger on, you know, some pretty real problems, right? So yeah, there's no question that I mean looking at Professor Shu's um uh stagnation thesis um the increase in state control um and the the efficiency cost of just like channeling huge amounts of money into these investments that on average are very low productivity. All of that, you know, creates, I think, a greater risk of stagnation. And and you could argue that there were sort of there already.

Oscar Krberg: So China, people talk about real growth rates. So this is growth rates accounting for, you know, inflation. So normally if you have like an economy is growing by three and inflation is two, that means that your real growth rate is only one because you have to subtract the inflation rate from the from the from the nominal growth rate, right? Um in chi China has the opposite now the the the nominal economy is growing by like three and a half or 4%. The prices are falling by 1%. So they claim oh we have real growth of 5%.

Oscar Krberg: But that 5% you know one percentage point of it is just coming from falling prices.

Host: Yeah.

Oscar Krberg: Not from increased activity. Um so in nominal terms China has been growing slower than the United States for the last four years. Mhm.

Host: Which is kind of staggering when you consider that they were growing, you know, way faster than the United States for many years.

Oscar Krberg: China's economy relative to the US peaked in 2020, I think, at about 75%. It's now down to about 65%. So China's economy in total compared to the US is smaller than it was five years ago. Um,

Oscar Krberg: So you could argue if you wanted to that China is already in a sense stagnating. Now that would be an exaggeration because it's still growing.

Host: Yeah.

Oscar Krberg: Um, you know, pretty fast um by any standard. Um, so that's not stagnation in my book would be it's not growing at all and it's it's clearly growing, right? Um but there's you know the the the dynamic that exists now is one where growth is a lot lower than it should be or could be. Uh and the longer that goes on I think the more risk that that creates you know perhaps.

Host: Yes.

Oscar Krberg: So I I you know as I said I'm I'm much more bullish than than Shu Changong you know on China visa v Japan or the Soviet Union or any of these other comparisons. I think they have a lot going for them. Track record is very good. Um, but the the risk of an economy that that over a long period of time and here I would say you need to be talking about 10 20 years. All of this inefficiency starts to catch up with it. Yeah, that that risk is there, right? But but again, this is not something that's going to happen in the next one, two, three, five years. This is going to be a much longer term dynamic. Um and then um the uh the other uh case was professor chain.

Host: Yeah. He argued that like the if the China want to get out of this current situation they have to increase the welfare share. Right.

Oscar Krberg: Right. So that's I think that's an interesting argument and the counter to that is that you know I have a one of my clients in the financial industry who recently put it to me this way. He said, "Look, you know, you look at the United States and this is an economy that is optimized for the top 20% of the income."

Oscar Krberg: So, if you're in the top 20%, America is great. You can do whatever you want, make lots of money, uh you're very secure, you can, you know, invest, make big returns, it's excellent, right? If you're lower down in the income scale, it's not so great, right? But for the top 20%, it's fantastic. Right? China, his point was, is the opposite, right? For the 20th or the 30th percentile of income, life is fine, right?

Host: Yeah.

Oscar Krberg: Um, you have a house. Uh, most things don't cost very much.

Host: Yeah.

Oscar Krberg: Uh, if you live in the cities, social welfare provision is not fantastic, but it's not horrible. There are, you know, the health care system is much better than it was. Decent education for your kids. Uh, your retirement is basically taken care of. They're universal pensions. They're not fantastic, but they're there. Don't really have to worry about much. And um and I think that's a very good point, right? That the system that has been created, yeah, in terms of a formal social welfare system, it's not like the United States or Europe by any means. Mh.

Oscar Krberg: Um, but in terms of creating a sense of security and and sort of provision for a large majority of of its people, it works pretty well. Mhm.

Oscar Krberg: Um, so I'm I'm not sure that Chinuay is quite right in saying that uh the the overall social welfare system in China is as bad as you know like to argue.

Oscar Krberg: I I do think though that if you if you optimize in that way, you are creating some perverse incentives, right? Um, and basically what you're telling the majority of your population right now is, okay, you've got an okay life. Uh, and there isn't going to be that much growth, but we order you to be fine with it.

Host: Yeah.

Oscar Krberg: And you know, I think for a lot of people it's like, okay, I'll take that deal because the reality is my life is okay

Oscar Krberg: And okay, I I can't expect the same sort of growth that I would have a year or two ago. But yeah, um but that's fine. I I can live with that deal. Mhm.

Oscar Krberg: Um but if you have if you if you make most of your population live with the deal where they just lose that aspiration for making things better, I think that gets you back into this this stagnation question. What is the incentive for people to work really hard and try to improve things if they're not going to get anything out of it? Mhm.

Oscar Krberg: Um and so I think there is a risk there that the that the way that they have chosen to organize the system um creates more incentives for more people over time to just kind of check out the system.

Host: They call it lay flat like

Oscar Krberg: Right. That's right. It's right. Exactly. It's the tongue ping um you know phenomenon. Exactly. Which I think is in in terms of the current meme I think it's a little bit overstated because there's plenty of people who are not mind flat but

Oscar Krberg: But the you know I think that the incentive structure is in the Chinese economy is now a little bit questionable.

Host: Yeah.

Oscar Krberg: And the incentive structure for entrepreneurship is clearly much weaker than it was say 10 years ago.

Host: Oh yeah. I I would definitely agree with that because like I know a lot of uh venture capitalists in China they shouldn't be called venture capitalists. They're actually venture debt because you have to sign agreement. If your company fails, you have to buy back all the share. Basically, you're put on a huge loans, right?

Oscar Krberg: Yeah. I mean, we could have a whole separate conversation about the VC system in China, which is like complete mess. But yeah, uh uh but yeah, so that's I I think there are there are definitely risks there. I would just say my my basic response to both uh Chinu and Shu Jang on this would be that um the the risks are are real uh and I think they are it's kind of at the margin rising but they are very very slow to I I think really have a material impact on Chinese momentum.

Host: Yeah, there's another U professor called his name is Dong Shan. So he recently did a podcast. He's arguing that the Chinese government should actually give out UBI like basically give all the young people like uh money to spend because I think like the system is really not fair to them like that's like a compensation and also encourage them to have babies and all this stuff. Do do you think that Chinese government can do that and will do that? I mean

Oscar Krberg: Well they they could if they wanted to because they control the financial system. I don't think that they will and personally I don't think that they should. Right. So to me, the way that these problems get addressed is basically more flexibility in the financial system.

Oscar Krberg: That allows hardens the budget constraints, right? So you have a financial system that really punishes the the companies that that can't, you know, survive and they go out of business. Um and conversely rewards the companies that do really well, right? Uh and rewards the investors who put that capital at risk, right? So this is the whole point about the way that the state commandeers all financial income and moves it where it wants. Where China was actually moving up until about 2017 was to decentralize the financial system and create a more um sort of consumer oriented uh financial and capital allocation system

Oscar Krberg: And that clearly had significant risks attached to it. But from a standpoint of improving household welfare and making you know people economically better off I think that was the way to go. The and the the point there is that that's a dynamic sort of market driven system not the government saying okay we the government will decide that you will now have a basic income of X right

Oscar Krberg: I don't think that that really changes anyone's incentives at all uh it it's basically that would just be a sort of a continuation of the existing sort of commandoriented system so even if they did it I don't think it would have that much impact because I don't think people it would really change people's incentives that much Yeah. Yeah.

Oscar Krberg: But I don't think they're going to do it.

Host: Okay.

Host: I I think um both Shu and Qing are very um pessimistic and also they have a deterministic view about China's future, right? Like they think China is like the train on a track that kind of heading toward that destiny uh no matter what you do, right? But I think you're more bullish on that. You think like Chinese economy is more resil resilience compared to what they perceived, right? Can you give us a like maybe u just like a forecast or your your view on like ne maybe in the next two to three years like how the China economy would be behave or even the cap uh the I would say like there people people often like uh want to ask like how the Chinese stock market perform right like that okay

Oscar Krberg: perspective so okay

Oscar Krberg: So the first thing I will say is I really hate being described as a China bull because I I don't partly Partly that's just the aesthetic. Partly it's because I don't view my role as being, you know, to take sides in for it or you against it, right? Which is

Oscar Krberg: Um I've always described myself as a skeptical optimist.

Host: Yeah.

Oscar Krberg: Meaning, so the optimism is that I have very high conviction in um in the the kind of underlying strengths and resilience and adaptability of the uh Chinese system.

Oscar Krberg: Mhm. Um uh so and this I I should also be clear that because I'm optimistic at core on the economy, this does not mean that I uh uh give approval to the political system. Those are two completely different questions, right? Yeah.

Oscar Krberg: Which often get mixed up. And I think it's perfectly possible to say on one hand these guys really know how to run an economy um and are very successful at mobilizing and deploying resources uh to achieve you know impressive economic ends. Um that is one question and what would be my value judgment on the the right political system that's a completely different question.

Host: I know so understood. Uh so I want to be careful about those two stipulations.

Oscar Krberg: And so um the skeptical part is that you know there are always huge problems in China and as we've discussed, you know, even though I disagree with some of the conclusions of the of the scholars that you've cited, you know, a lot of analysis is spoton right there are really really difficult um structural abiding problems um which reduce efficiency uh create bad incentives uh both at the government level and at at the company level. And if these are allowed to fester, yeah, they over time uh they could cause the economy to perform much much worse than it has in the past. Right. And when you when you put on top of that things like there's a big big demographic problem, you know, China benefited enormously from having a young population. It's now aging very quickly.

Host: Yeah. The the average age in China in in about 15 years will be higher than in Japan.

Oscar Krberg: Yeah.

Oscar Krberg: Which is staggering. Um so um so whenever you see problems of that magnitude, you can say okay in the past they've done a great job of dealing with their problems but um can they keep it up? Maybe yes, maybe no, right? Uh and what are they doing to address the institutional constraints that they're putting on themselves? Right? But if I had to um you know and as I've said before my my basic view right now is that China has a great tech economy and a kind of a mediocre macroeconomy.

Oscar Krberg: Um and so my I would do forecasts but my expectation would be you know China's been growing by in real terms around four four to 5% in nominal terms around 3 to 4%. I think that basically continues for the next few years. Mhm.

Oscar Krberg: Um which is an okay result but not terrific.

Host: Yeah.

Oscar Krberg: Um and on the other hand, if you look at the technology ecosystem, it is very impressive and I think is going to you know expand into new sectors and Chinese companies are beun become much more globally important. Uh so I'm quite bullish if you will on China's uh the ability of the top Chinese companies to you know attain leading positions in an increasing number of technology intensive industries right I think that's very very clear and the the the sort of counter forces to that whether it's protectionism or friend shoring or industrial policy elsewhere it's going to be a very very long time uh before those kinds of countermeasures have have impact. But China's got I think very strong um uh capacities there. So the the question I have in my mind is like, okay, you've got this great tech ecosystem, but it's an ecosystem that kind of exists in a bubble

Oscar Krberg: And most of the rest of the Chinese economy where people live doesn't benefit that much from this fantastic tech ecosystem. So to me the big question is how can you get these two things more integrated and how can you have wider benefits through the economy as a whole from this great tech progress that they're making and I don't really frankly see that the government is a great answer that way they they basically seem satisfied with the current the current situation and they have the ability to you know keep keep things on track and I don't I don't think that the rest of the world has really any ability to throw it off track. China is very self-sufficient. Um, so I'm not sure if that's a bull case, but that would be the case for um, uh, you know, not underestimating the adaptability of the Chinese corporate system. And and I guess the final thing I would say is that even if you look at the at the political system, there have been some some adaptations. And so I think

Oscar Krberg: One of she's Xi Jinping's characteristics as a leader is that he is more rigid than his predecessors. Uh once he decides a thing is correct he sticks with it. Yeah. For a very long time even after the evidence piles up that he needs he's much more resistant to course correction than any of the previous three uh major leaders that we had. Um and that's a problem. If you have a rigidity in the system, that means that inefficiency is built up rather than being dissipated. But but he has made some course corrections.

Host: Yeah.

Oscar Krberg: Um and he has recognized that there needed to be more support. They're doing some things that are a little bit more household friendly. You know, they're not gigantic, but you know, so I I think we can maybe over we can exaggerate how rigid the system is. It's still more rigid than it used to be.

Oscar Krberg: But again, what's your anchor here? Is your anchor what is China today versus the China of 10 or 15 years ago? Or what is China today versus any other country that's out there?

Host: Yeah.

Oscar Krberg: Right. If you take the first comparison, it's like uh yeah, there are a lot of things that today that are not as good in China as they were 10 years ago. There's some that are better, but there's some that are worse, right? But if you look at China compared to most other countries in the world, still stacks up pretty well. And their ability to adjust and to push resources where they're needed um is still remarkable. Uh and as long as that systemic adjustment capacity remains strong um then it's hard to see China sliding into the kind of extreme stagnation or sclerosis that you know some of the some of the critics would say in the short run short run meaning the next five years

Host: that's the reason the bull here I have a quote here it's not like a solid I I think like uh I don't know if you read the article I remember like two years ago maybe that's the bottom of the Chinese equity uh basically I think one analyst come out of I can't remember is that JP Morgan or Goldman Sachs he basically says the headline is that Chinese equity is not investable and I think that marked the low of the the market right

Oscar Krberg: Yes that's right and I'm not a I'm not like a markets guy or market strategist but um yeah I mean one of the things that you see in markets is that people sort of take these very extreme positions.

Host: Yeah, exactly. Right.

Oscar Krberg: Uh you know and it's just like the last two years that has not been the case. The stock Morgan has done very well and you know people have recognized that it's not Japan, it's not the Soviet Union. Um

Oscar Krberg: And and you have to take it in a somewhat more nuanced way.

Host: I I agree.

Oscar Krberg: So that's that's healthy.

Host: Yeah. I actually read an article uh actually um early last year I think end of the year before last year is um basically saying like Moody's came out and argue that all the Chinese credit situation and all the small business particular manufacturing sectors the worst part is behind us even though the recovery is super slow and uncertain but like uh it's no longer that in the sho you know like basically that kind of

Host: yeah correlated with the market reaction you know in the in the equity

Oscar Krberg: Right. I think there's actually there's a sort of I would broadly agree with that assessment. It's always a little bit par perilous to say ah we've hit the bottom. It's only up from here.

Oscar Krberg: Um but the other interesting thing is if you look at um uh just credit flows into manufacturing these expanded by a factor of six between 2019 and 2023. Mhm.

Oscar Krberg: So there was a six-fold increase in bank loans to manufacturing which was the counterpart of the fact that the banks were no longer lending to property. So they, you know, they stopped lending to property and they poured all of their lending into manufacturing. And so, you know, people sometimes ask, okay, why do you have so much excess capacity in China? And partly the answer is, duh.

Oscar Krberg: There was a six-fold increase in lending to manufacturers. So money was free for anyone who wanted to sit on the main franch. So So of course you got excess capacity, right?

Oscar Krberg: Now what's interesting though is that peaked in 2023.

Host: Mhm.

Oscar Krberg: Uh and it fell in half in 2024 and it's roughly at that level today. So there is there are tightening financial conditions in um uh in China that I think actually are going to have started to show an impact in winnowing out uh some of this excessive competition. And it takes a long time because the local governments also play a role. But if the banks are no longer willing to pour money into these sectors, eventually people will start to fall by the wayside with some consolidation. But it'll be it'll be slow.

Host: Yeah. So I also have some uh I actually did a advertisement of this podcast happening. So some of my viewers uh raised some questions and I'm going to go over some of those questions. Uh one of the question is uh I think from the the contest I can tell like he probably is a young professional in China like kind of working that tough uh job market.

Oscar Krberg: Yeah. Yeah.

Host: So he's just saying that you know um currently young people are just laying fat flat right just like doing nothing and be have a very low desire so you don't have a lot of consumption probably never get married or have kids and you know just like stay a very low profile life um that actually comes into a very dramatic contrast compared to the on the news you see like China's neck competition on the high-tech area right so right um his question is are we really looking at a permanent disconnect where the state become super high tech, you know, the superpower, but the average citizen just left behind with no way up.

Oscar Krberg: Yeah. No, it's it's a great question, you know, and I think on all of these things, you know, China is a big country and there are a lot of different things going on, right? Um, so depending which piece you choose to look at, you can come away with totally, you know, different things. So if you if you spend your time like in Shenzhen going around to all these companies and seeing all the people and how hard they're working say yeah no no one's lying flat here right

Host: yeah exactly

Oscar Krberg: Then get up but then you go elsewhere and yes there are this is clearly clearly an issue um you know I don't have a terrific answer to that other than to kind of repeat what I said earlier which is that there there is clearly there's this disconnect between the vibrant tech economy and large swaths of the rest of the economy.

Oscar Krberg: Um and uh there isn't a lot of benefit in most of the country in most of the job market particularly um from these you know these great tech industries. So for example the net number of jobs that has been created in Chinese manufacturing in the last 10 years is negative.

Host: Yeah.

Oscar Krberg: So even as China's taken over the world in all the sectors, there are fewer people working in manufacturing today than there were 10 years ago, right? Um all new job creation is in the service sector

Oscar Krberg: And you know a lot of those jobs are very uninspiring and you know you don't see a lot of you know progress. So no, I think I think that's that's a problem. And I think from a from a social, you know, from a social standpoint, uh I think it's really tough in China. I think particularly if you are under 30 in China, it is really tough. It is probably the toughest toughest it has ever been

Oscar Krberg: In all the years that I've been there because even like in the 90s when people forget it was pretty tough. Um there were people working for stateowned enterprises. They laid off tens of millions of them.

Host: Yeah.

Oscar Krberg: Um it was the the new economy hadn't really fully taken off. You know, they had to create 20 million new jobs a year just to keep everyone employed.

Host: Yeah.

Oscar Krberg: It was it was it was hard to be a young person back in the 90s. But then at least you had a sense that things were going someplace, getting better.

Host: Yeah,

Oscar Krberg: If you put in some effort, it would pay off. And now I think it's it's true that, you know, for an increasing number of people, they don't get the sense that there's a payoff to effort. So why bother, right?

Oscar Krberg: So I, you know, I I think I don't have a great answer to that. I I think, you know, if you look at the totality of China, I think there are more people not lying flat than than are lying flat.

Host: Yeah.

Oscar Krberg: Um but again this is I think one of the risks that's that's out there.

Host: I agree. I I was actually in uh Shenzhen last uh October and uh the company I visit they are having a meeting at about 12:00 at night. I was like you guys are crazy. I'm going back to hotel. And they were saying yeah the the owner said like yeah I'm going to send you uh with my uh driver but I'm going to stay here and have a board meeting with on my uh partner. I was like, "Okay, great." Like he he thinks he's doing really well, so he's apparently not laying flat. Yeah.

Oscar Krberg: Yeah. Yeah.

Host: The next question I think like it's very interesting because I know you observe um Chinese economies through your lens as a journalist and also as a consultant, right? You have your own firm kind of doing the uh analysis. Uh however, there's a lot of criticize about like the Chinese government data. They say, "Oh, like your your GDP growth doesn't align with the investment figures. Your export data is contradicting all the trading partners importing data. You're just like making the data up."

Host: Um, do you think that that's like a reasonable critic? And uh they compare that to uh Soviet Union because Soviet Union apparently made up some numbers like through their uh government agencies. Uh how do you navigate that that kind of situation?

Oscar Krberg: The short answer is no. I don't think this is a valid critique.

Host: Yeah.

Oscar Krberg: And I think this is a great example of what we were talking about at the at the top, which is a political argument masquerading as an economic one. When people say, "We don't trust the data," what they're really saying is, "Well, we we don't really like the Communist Party. We don't trust it. So therefore, anything anything that it says, including its statistics, we we disbelieve." Right.

Host: Yeah.

Oscar Krberg: So I think the one way to think about this is China is a globally integrated economy, right? They're the biggest exporter in the world. I think they're still number two in imports behind the United States. Um they have huge investments globally. Um the trade data actually there's a technical thing in the balance of payments now which is a big focus of controversy but in fact the discrepancies in the trade data are are pretty minor and uh and and basically pretty easy to explain um and you know so the the reality is that the trade data is one of the ways that you can validate what's going on in China right yeah you know if the economy really so small, how can they import so much oil?

Host: Yeah.

Oscar Krberg: For example, right?

Host: Yeah.

Oscar Krberg: Um and there are things that you can measure physically like output of electricity and so forth which just that that that is not fakeable, right?

Host: Yeah.

Oscar Krberg: So the Soviet Union basically had a madeup economy which was largely aluric, right? They didn't trade with the rest of the world. They were just within themselves.

Host: Yeah.

Oscar Krberg: And see in that kind of a situation you can make up all kinds of numbers.

Host: Yeah.

Oscar Krberg: Uh and they can seem to be true for a while.

Host: Yeah.

Oscar Krberg: And then once you are exposed to the rest of the world, they're revealed as lies. Basically, that's essentially uh and that would have been true, I think, of China in the 60s and 70s. I when they really were a closed off economy,

Oscar Krberg: It does, you know, if if China were really making things up. Um my rule of thumb is you know in a in an open system and this would apply to a country making up its stat statistics um most people running sort of corporate Ponzi scheme like Enron you you can probably do that for about five years.

Host: Yeah.

Oscar Krberg: At scale and you cannot do it longer for five years.

Host: Yeah.

Oscar Krberg: You can do it longer for than five years if you're burning me off and you're just like one guy with you know a handful of investors. Um but at scale you can run a a statistic scam of this type for a few years. So if it hasn't been revealed as you know if it hasn't collapsed in five years what that tells you is whatever the problems are these numbers are broadly you know telling you the the truth.

Host: Yeah.

Oscar Krberg: Um and you know and then you can get into all kinds of technical discussions about the GDP numbers and blah blah blah.

Oscar Krberg: Um but here's another way of thinking about it. You know, so for a long time there's been cottage industry people saying, well, China's economic growth rate for the last 30 years has not been 10%. It's really been 7%.

Host: Yeah.

Oscar Krberg: And here are all these adjustments that I do to prove that it's seven, not 10. But the reality is because it's an open economy, you can say with high accuracy, how big is the economy today?

Oscar Krberg: Mhm. Um and and you can look at the oil import numbers and stuff like that and and you know, calibrate that. And so if for 30 years you your economy is X and for the last 30 years your economy was growing not by 10 but by seven. What that means is that 30 years ago your economy was twice as big.

Host: Yeah.

Oscar Krberg: As you thought it was then. How likely is that? Or conversely if we think that number was correct and they were really growing by seven, not 10, then the economy is only half as big as it appears to be today. And how likely is that? Right?

Host: Yeah.

Oscar Krberg: There's like an a very easy smell test that you can do on these kinds of exercises which you know exposes them. So no I don't I just I refuse to take that seriously. These are mostly people who are discontented with the political system, which I understand.

Host: I agree.

Oscar Krberg: Or or who extrapolate actual real data problems which are significant.

Host: Mhm.

Oscar Krberg: And which require a lot of work to untangle

Oscar Krberg: And say, "Oh, well, because we can't believe this thing. Therefore, we can't believe anything. Therefore, we can make up our own numbers about what we think reality is." I just don't find that at all a a a credible form of argumentation.

Host: Yeah. I I think that's a very good explanation. I agree with you on most points. Um the next question is actually you know uh the since uh President Xi came into power he's definitely tightening the control on the whole society right you see more civilians you you see more big data control and like a lot of dollar a lot of money is budget uh spend on like really keep the society stable. They call it like the cost of um way like it's in Chinese right

Host: um how sustainable that would be because that cost is kind of increasing as you know the economy is not doing well people have u opinions and they are discontent with the current political system and you're going to spend more and more money on doing that and uh you know

Oscar Krberg: Yeah that's that that is I think there are a lot of interesting points that are raised by that question. Mhm.

Oscar Krberg: So um one answer is that over a long period of time the party and the government in China have done a very good job of basically making sure that living standards rose for most people with most uh and they did a very good job of pushing resources from rich areas to poor areas so that no area got too far left behind. And there's still a lot of inequality and so forth in China. It's not by any means a perfect system, but they did okay. And I think basically sold people on the idea that um if you stick with us, you will do okay.

Oscar Krberg: And uh we just ask you to like silence your political views.

Host: Exactly.

Oscar Krberg: But we we guarantee that you'll be okay. And that largely worked. Um what's interesting and if there's very good survey data from the like 2010 2012 showing that when there was a lot of discussion about social discontent in China that actually people were not that discontented. Uh people said well if I got if people get rich it's because they're smart and hardworking and if you're poor it's because you're lazy and uh system is not rigged. Um and the the survey data also very clearly showed that that um people have a lot of complaints about their local officials that they see

Oscar Krberg: And they tend to have a much higher opinion of the central leadership. So in other words, they're not um in general people are not saying the system is rotten and corrupt. They're saying my local officials are rotten and corrupt. Ah

Oscar Krberg: Um and that's the issue not some kind of more systemic thing. Now what's interesting is that some of the survey work has been redone recently and it came to a more a darker conclusion

Oscar Krberg: Which is that after 10 years of Xiinping's anti-corruption campaigns people are much more likely to say if you're successful it's because you were corrupt 10 years ago.

Host: Interesting.

Oscar Krberg: That is interesting. And I I I you can only speculate as to why this is so. Um yeah,

Oscar Krberg: I I two ideas come to mind. One is just like you know the economy is growing a lot slower than it was and people see less opportunity and if people see less opportunity then they're more look more willing to look for scapegoats.

Host: Yeah.

Oscar Krberg: Um so I think that's part of it. Uh the other possible part of it is because Xinping has spent so much time trumpeting corruption that people have been just internalized more of a sense about oh wow I didn't realize that the system was that

Host: so corrupt. Yeah.

Oscar Krberg: Um so it kind of the anti-corruption in that sense sort of backfired.

Host: Yeah.

Oscar Krberg: Um so yeah and and if you look at what they spend on domestic security and so forth it is it is massive. Mhm. And so that is a cost.

Oscar Krberg: I don't think it's crippling yet for a couple reasons. One is again for most people in most of urban China, life is pretty good and your material circumstances are reasonably well taken care of and there's a sense of security and stability that is, you know, broadly shared.

Oscar Krberg: Um, you know, and that could change, but right right now, I think that's most people's experience. So there's a a degree of tolerance that people give to the system because you know things are kind of okay. Um and um and you know then the other thing is like the I hate to blame things on sort of entertainment culture but um the reality is China has a very rich entertainment culture that is cost right. Yeah. And you know, and people talk about, oh, there's the great firewall and you can't get foreign websites and no one in China cares about that.

Host: Yeah.

Oscar Krberg: They have a tremendous domestic internet that they can, you know, play on all day.

Host: Oh, yeah.

Oscar Krberg: There's uh huge, you know, sort of gaming, short video, whole ecosystem, social media, very vibrant. So, people can live pretty active lives in that sense.

Host: Yeah.

Oscar Krberg: Where they're not super constrained unless they get into, you know, very targeted political.

Host: I agree. Yeah.

Oscar Krberg: Um so I I tend to think that all of these things mean that um look, this is not the system that I would choose to live under.

Host: Yeah.

Oscar Krberg: Um and I think it's too constraining and and and whatnot, but I I think it is a system that that continues to work well enough at acceptable cost for the regime.

Host: Yeah.

Oscar Krberg: And you can critique it in any number of ways, but I don't think that it's likely to fall apart or or create some kind of unbearable cost in the next several years.

Host: Yeah. The next uh next question is very interesting. I think um basically the listener is arguing like trying to push back against all the pessimism from uh professor Shu or uh Chinuay. Uh he basically said that you know uh China has such a low cost of living. You have we have like really cheap utilities uh great transportation really low cost. Education is really cheap. Like I I did my um high school like college education in China and the cost is not that great. It's not a heavy burden for my parents like to kind of support us through that. US is completely different story. I think in all the western developed countries those private schools are super expensive.

Host: But like they argue that that's kind of the hidden welfare the Chinese people are enjoying comparing to those wealthy nation like US which is not direct cash handle but it's like you know it's it's benefit you kind of get. So that's the reason that a lot of people in China are still happy with where they are, even though not as happy as they could be, but like they're still comfortable living there.

Oscar Krberg: Yeah.

Oscar Krberg: Yeah, I think that's true. Um I I kind of made that point earlier when I was talking about the, you know, the social welfare system. Um that in formal terms, if you measure what do they pay out in pensions and social insurance and so forth, it's it's not that great. But if you look at the kind of what you could call the implicit social welfare system, there are a lot of elements into it and and this sort of low cost of living is one and I think you know if you if you look at Xiinping's rhetoric over the last several years when people talk about you know deflation and so forth I think it's pretty clear that this is how he he views

Oscar Krberg: Uh that oh what's wrong with deflation? It means lower prices everyone is better off.

Host: Yeah.

Oscar Krberg: Um and and so forth. So I think there is there is some you know and it is it is true that you know you look at the United States what's the big political issue at the moment it's affordability.

Host: Yeah. Exactly.

Oscar Krberg: Right. Because housing costs too much and there are all these other costs that are too much and it's a real problem.

Host: Yeah.

Oscar Krberg: Uh and I think the the sort of the flip side of that is um yes that China has um uh one of the ways that they are able to engineer this sort of tolerance uh among citizenry is that life just you can live an okay life for that not that much money. Mhm.

Oscar Krberg: And so that kind of reduces your expectations of how much money you need to make now or how much you need to make in future in order to be okay.

Oscar Krberg: Mhm. So I think I think that is part of the if you will consent mechanism they've created.

Host: Yeah.

Host: So uh next question he asked about is uh kind of from the the global south strategy. So he say like oh yeah we China company has this overap capacity instead of fighting with all the hostile western markets can we just simply pivot to invest in the global south like working with um Africa working with like uh Asian other Asian countries and to create new demand.

Oscar Krberg: Yeah. Uh yes and no. Uh I mean I think the reality is um that you know the US and Europe the rich countries are still the best markets.

Host: Exactly.

Oscar Krberg: If you if you if you talk to any of these big Chinese tech companies like BYD or Cat Yeah. they are desperate to get it to the US market. They would love that so much because they're huge markets. You can you can charge higher prices. Um so yeah you can get by you know diversifying into lower income markets but that is clearly a suboptimal strategy.

Host: I agree

Oscar Krberg: For most of these countries companies. So um you know the the more ideal situation from Chinese corporate perspective is that they could work out some arrangement whereby um uh you know they could gain more access and and let's be real about this. This. I mean, if you divide the world into the OECD, the Organization of Economic Partition Development Countries, this is about 30 rich democracies basically.

Oscar Krberg: They still account for 60 plus% of the global economy. And that's down from what it was 30 years ago, but that's still twothirds of the global economy.

Oscar Krberg: Um, and that shares is falling, but it's falling very slowly.

Host: Yeah.

Oscar Krberg: So I I think it is much more rational for China to have a sort of all the world strategy on this and it it's a little bit uh wishful thinking to think that if you are completely shut out of the markets of of the US and Europe that you can totally make this upside now the reality is that you're not totally shut out of of US and European markets particularly in Europe.

Host: Yeah.

Oscar Krberg: But even in the US you know the Chinese companies can't sell cars but consumer electronics they're selling a ton. Oh yeah, I agree. Yeah.

Oscar Krberg: Uh so the reality is that China continues both directly and indirectly to be heavily heavily reliant on the US and the other developed markets and that's going to be the case for some time to time.

Host: Yeah.

Host: So the next question from the listener is uh he he he's asking about like a philosophical question about the strong nation, right? So I think we we can all agree like China as a state power is like number two or like I mean like President Trump is talking about G2, right? I think he's he's a very pragmatic and re realist u the geopolitics um area. So I I wouldn't argue against that. But like from the individual average citizen living standard, China is still uh pretty much behind of all the leading western countries, right? So um his question is like does US and China simply have fundamentally different definition of what constitute a strong nation? Like US is really focused on individual but China is like we we are just looking at the grand country we're strong that's it we don't really need to push for that uh individual improvement.

Oscar Krberg: Um yeah I think that's to some degree a fair point. You know it's maybe less true than it was a year ago. I mean with Trump now um it seems pretty clear the position of the US government is that we really don't care that much about individual welfare and about these kind of tokens of state state power.

Host: Yeah. I think like the funny there's a funny joke uh everybody expect China to behave more like US but now US is behaving more like China.

Oscar Krberg: Yes, that's right. They're kind of a bad copy of China taking all the worst aspects and none of the good stuff. Mhm.

Oscar Krberg: Um so yeah and I think what that reveals is that okay so the US has always had sort of this ideology of you know individualism and and so forth and and and the economy has been run you know at least since World War II uh with a pretty strong bias in favor of consumer welfare. Mhm.

Oscar Krberg: Um but you know the US has also been a a big global power for a long time.

Host: Yeah.

Oscar Krberg: Uh you know pretty imperialist. Um and the imperialism takes you know different guises. Right now it's basically naked. Um

Oscar Krberg: Uh but you know even when it wasn't naked it was still there right? So um I think the US leadership has has for a very long time taken quite seriously you know concepts of what you need to do to um promote what the Chinese would call comprehensive national power.

Oscar Krberg: Um and I think I guess if I had to analyze I would say look if you look in the cold war there was a clear sort of US versus Soviet Union rivalry. Um there were a lot of national projects in the United States in the 50s and 60s particularly which were driven by this sense of great power competition and there were things that we had to do as a nation that didn't have anything to do with consumer welfare but were important for for national you know power right

Oscar Krberg: You know and I think at the end of the cold war basically from the 90s onwards the US said well we don't really have to do that anymore because we're the sole remaining superpower and so we don't need these national projects. We can just, you know, do m individualized wealth maximization basically and that's fine. And then you add all that up and we're great.

Oscar Krberg: Um and in some sense they were I mean if you look at the US economic performance since the financial crisis of 2008 it is the best of any country in the world.

Host: Yeah.

Oscar Krberg: Basically better than any developed country. And you know for the last five years as I said it's actually been growing faster terms than China. So yeah,

Oscar Krberg: There is a way in which that works. Um um

Oscar Krberg: But it's also, you know, would you say that the US has been run totally with an idea to making the individual's life as good as it possibly can be? Well, a lot of people in the US would dispute that.

Host: Yeah.

Oscar Krberg: You know, all these questions about in affordability. Uh you know, there's huge social fractures that are showing up in the the political system. There are a lot of people in the in the country who feel that they've gotten a raw deal. Um so it's mixed, right? It's mixed in the US. Um and I I think the difference is that that China has a kind of a more unified political system. It is authoritarian. So there is kind of an authoritative view that comes out at the top.

Oscar Krberg: Uh it is, you know, basically a Leninist political structures are highly centralized.

Host: Yeah.

Oscar Krberg: Um and um and so you know yes there is this kind of vision of national power um that gets articulated which is divorced from most concepts of like consumer welfare

Oscar Krberg: But I I would say it's it's also balance right so I think the reason that China has been so successful for so long is like they've been pursuing national power in this overall way but they've recognized for in order for that to be sustainable most people in China have to get enough out of it for them to keep playing the game. So there has been this sense that there has to be broad shared prosperity and growth in China that that goes down to the to the household level. Um so the the kind of Leninist um comprehensive national power uh aspiration has always been I think tempered over the last few decades by this knowledge that if we do it the way the Soviet Union did, we will end up the way the Soviet Union did.

Oscar Krberg: And what the Soviet Union did is that it did not pay enough attention to the quality of life for the average citizen. Um and to sort of economic opportunity and I think that lesson is still very very uh deeply entrenched in the Chinese leadership however much they've become more focused on these great power competition issues.

Host: Yeah. Do you think China can transition into a model that Singapore has done? You know like Singapore is not really we we from our American terms it's not really a democratic country right like it has a very strong party kind of ruling and uh it has it has a decent social uh welfare program it also uh pretty cracking down on people have descent or criticize the government but even though like the government has a pretty good reputation of improving the welfare like but they have a very good judicial system I think like they call it far, right? Like they basically rule by law, right?

Oscar Krberg: Yeah.

Host: Uh I I would argue I think rule by law is more important than democracy like just like voting everybody has a one vote like typically you will have uh majority uh tyranny or like there's other terms talking about that like I don't think that's ideal system. You will have more uh populist government coming out of that. I think like do you think China has a potential to kind of transition to the Singapore model be more judicious like rule by law focus on that instead of like you know getting you into a populist uh democracy.

Oscar Krberg: Yeah. Well I have a I have a couple response to that. So first of all as a you know American I will disagree with you on that last point. I I think democracy is a very good thing. It doesn't guarantee good governance.

Oscar Krberg: Um, but it gives you, I think, a better shot at sustaining good governance over a long period of time. I agree, most other systems. And the other thing is that I think people get a little bit too hung up on the on the on the sort of rule rule by law, rule of law thing.

Oscar Krberg: Uh there's no question in my mind that the US as a dance is a little bit over lawyered. So we can do with a little less of that. Um

Oscar Krberg: Uh but also you know what what it really boils down to is can you can you sustain good governance right and um you know having a good legal system with various kinds of checks on on power I think it's really important to do that and it's very it's very difficult to achieve that in any kind of non-democratic system. So I would still, you know, personally I would just say um over the long run um uh in an advanced economy um you know you're you're better off with democracy than with some other system. I mean what happens when Xiinping dies, right?

Host: We we have no idea what is going to happen. Yeah.

Oscar Krberg: To the the Chinese political system after that. And you can imagine many many different outcomes, right? So clearly I mean clearly democracy allow the US has a lot of problems and we are seeing them full full on right now. So I don't want to sugarcoat it

Oscar Krberg: But just it's like on average over time which would you'd rather have I think that's that

Oscar Krberg: Um I I would still go for that in terms of but that said you know I think authoritarian systems also have a wide range. Some are very effective do provide good governance over a long period of time. China is a good example of that. Mhm.

Oscar Krberg: Um, and I think Singapore, you're right, is is sort of the ultimate example of a non-democratic authoritarian system that has provided very consistent constrained good governance for a very very long time. So they they have a successful model. Um, I will I will end with a apocryphal anecdote that gives gives you my view on on whether they China could become like Singapore. I don't know if remember who told me the story and I'm sure it's not true but it's yeah it's too good not to use.

Oscar Krberg: So the story is that Lee Guuan Yu the prime minister of Singapore back in the 80s came up to Beijing and had a meeting with Doug Jing. Uhhuh. And Lieuan Yu as was his want like talked endlessly about how great he was and how Singapore was now, how China should do this and China should do that. And Dung just sort of sat there very quietly every so often would spit into his spatoon. And then finally after Lee Kuanu had sat down and you know exhausted himself dung le forward and said Mr. Lee that was very interesting and should I ever become the mayor of the city I will be sure to follow your advice.

Oscar Krberg: So the point of it being what you can do in Singapore because it is a city state has basically nothing to do with what is achievable on a full-scale country let alone a full-scale country on the scale of China which is just gigantic both in terms of population geography social complexity etc. So no that I think a sort of a a clean Singapore option is not available for China. It is always going to be a way more complicated and fractious um uh you know governance challenge. And if you look at the reality of China today I think that's still true. He's still you know Xinping has a lot more authority than past leaders. It's very centralized, but there's still a lot going on at the local level that the center is not really able to control all that well.

Host: Yeah.

Oscar Krberg: So, whatever China's political evolution is going to be, it's going to be its own thing. It's not going to be, I think, all that close either to the Singapore model on the one hand or the US model on the other hand. Got to figure some other some other path.

Host: Yeah, I I think I really like your story and I I remember reading a article basically the scholar argued that democracy is a luxury like when you average GDP reach a certain level above that level it's easier for it's more likely you're going to keep that democracy otherwise you're going to see that democracy kind of turned into you know um authoritarian regime and it's very easy for people to hack hijack the system and change a bunch of the rules and uh change the constitution and now you're seeing that happens in a lot of democratic country or formerly viewed as democratic country right for example Venezuela is one example like it used to have a very um how to say broad like participated democratic system but when Chavis win the election and he just like changed the constitution and he he basically slowly but surely destroyed the the system. Uh I really appreciate your time and uh today's conversation is really good. I I really appreciate your time and participation and hope you uh doing well in your future endeavors.

Oscar Krberg: Yeah. Well, thank you very much. I thought it was a great conversation. Uh very well structured. I I enjoyed uh all the questions and I enjoyed being able to uh engage even vicariously with Chinhai and Shujang. You know, a lot of very interesting food there.

Host: Yeah, really. Thank you. Yeah.

Oscar Krberg: Okay. Thanks so much.

Host: Thank you. Bye.

Oscar Krberg: Okay. Right. Bye. Bye.