Seeking Truth From Facts: Alf & Steve Hsu — #68

This is a crossover episode in which Alf of the Seeking Truth from Facts podcast interviews Steve Hsu about the Chinese economy and political system, and US-China competition.

Seeking Truth From Facts podcast: https://substack.com/@seekingtruthfromfacts/p-148705853

Steve and Alf discuss:

• (00:00) - Introduction to the Podcast Collaboration
• (00:48) - Steve Hsu's Background and Expertise
• (02:22) - US-China Geopolitical Dynamics
• (28:44) - China's Political System: Meritocracy vs. Autocracy
• (32:23) - China's Path to Liberalization: Past, Present, and Future
• (45:57) - Geopolitical Dynamics: China, Russia, and the West

Music used with permission from Blade Runner Blues Livestream improvisation by State Azure.

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Steve Hsu is Professor of Theoretical Physics and of Computational Mathematics, Science, and Engineering at Michigan State University. Previously, he was Senior Vice President for Research and Innovation at MSU and Director of the Institute of Theoretical Science at the University of Oregon. Hsu is a startup founder (SuperFocus.ai, SafeWeb, Genomic Prediction, Othram) and advisor to venture capital and other investment firms. He was educated at Caltech and Berkeley, was a Harvard Junior Fellow, and has held faculty positions at Yale, the University of Oregon, and MSU. Please send any questions or suggestions to [e-mail] or Steve on X @hsu_steve.

Creators & Guests

Host

Stephen Hsu

Steve Hsu is Professor of Theoretical Physics and of Computational Mathematics, Science, and Engineering at Michigan State University.

What is Manifold?

Steve Hsu is Professor of Theoretical Physics and Computational Mathematics, Science, and Engineering at Michigan State University. Join him for wide-ranging conversations with leading writers, scientists, technologists, academics, entrepreneurs, investors, and more.

Steve Hsu: Welcome to Manifold. Today's episode is a co release with a new UK podcast called Seeking Truth from Facts. Seeking Truth from Facts will focus on geostrategy, international relations, the decline of the US empire, and related issues. We had a very interesting conversation, and I think you'll enjoy this episode.

Thanks for joining us.

Alf from Seek Truth From Facts podcast: Hello everyone, today we have a fantastic podcast lined up with Steve Hsu.We've got a lot of things to discuss, mainly focusing on geopolitics, including Russia, China, and a lot of issues relating to geopolitics. So if you could introduce yourself, Steve.

Steve Hsu: It's great to be on your podcast.

My name is Steve Hsu. People probably know me as a professor of theoretical physics and a guy who Also does research in things like AI and computational genomics and has founded a few, deep tech companies around these technologies.

Alf from Seek Truth From Facts podcast: Perfect. And you've also, especially in recent times, you've commented a fair amount, on geopolitical matters, particularly as it relates to China.

Steve Hsu: Yeah. So I have a fair bit of expertise about China because I have been traveling there for some time, for scientific and business collaborations. So I understand the science and technology ecosystem there. I have a long background in defense and intelligence related stuff, which is not entirely public, but some of it is, the CIA venture fund was an investor in my first startup, which is an encryption Startup and we develop tech technologies to defeat the firewall which was being built in the early 2000s in China.

So, I have a fair bit of expertise about this stuff, but it's not, I'm not broadly known for it.

Alf from Seek Truth From Facts podcast: Okay. Yeah. Yeah. I

guess, one of my first, one of the first things I wanted to discuss, concerns, something which I saw you comment on recently and, your, your comments on it got gained, gained some traction on, on Twitter X.

Cause,some prominent people were, retweeting it and reposting your clips of you talking about it, which is where you discussed the failure of US chip sanctions on China. And I also remember, KiOR Mai went on your podcast, Manifold. And he, and in both, in both these instances, you discussed the U. S. 's shift away from free trade and more towards a kind of geo strategically oriented protectionism. And obviously this came after more than a quarter century of the U. S. positioning itself as the global champion of free trade and globalization. With the overwhelming consensus among economic well being.

So what is it particularly about the U. S. and U. S. 's reaction to China's rise which prompted this dramatic shift?

Steve Hsu: Yeah, so I could give more than one theory of this case, for completeness. So, the cynical view is that, you know, when the U. S. was the completely dominant hegemon, you know, in the wake of World War II, it was the only advanced economy that hadn't been devastated by the war.

Under those circumstances, the U. S. wanted free trade. They wanted to set up a system for world trade and finance, which they could dominate. Once a challenger arose that could really compete well with them, they sort of switched gears and have moved to, you know, a system where they're willing to violate free trade agreements.

So, for example, they've totally mobilized the WTO. I don't think most people realize that, but the U. S. has more or less, deliberately, frozen the WTO from action on trade matters.

Alf from Seek Truth From Facts podcast: Yeah.

Steve Hsu: so, that's the cynical view, which is that great powers do what is in their best interest, and now it's in the best interest of the U. S. or at least the hawkish people in Washington would say that it's. To, you know, limit China's rise as much as possible, and they even say this, they even, I think most of the U. S. government would say this explicitly, that they're actually trying to contain China. So, that's the realist view,

Alf from Seek Truth From Facts podcast: I guess.

Steve Hsu: Yeah, that's the realist view, I think the U. S. apologist, Statement would be, Oh, these Chinese don't play fair because they, you know, they, there's a lot of, you know, it's a, it's a sort of mixed state led slash free market economy in China. And so there's a lot of government investment in capacity and in developing companies.

And so it's not fair for Western companies to have to compete against that system. And plus their military technology is getting better and better. So we just, we, we, we're just, we're just behaving as enlightened people, but as enlightened people that have to protect us.

Alf from Seek Truth From Facts podcast: Which of those perspectives do you think more aligns with, with reality?

I

Steve Hsu: I think it's well, I lean more toward the former than the latter.

Alf from Seek Truth From Facts podcast: Yeah.

Steve Hsu: But you know, I think there, no system is completely monolithic. You know, Stalin's government wasn't monolithic. Mao's government wasn't monolithic. And the U. S. system is. So there are plenty of them. There are two lean more reckoning who, you know, really, and I guess maybe I put myself in that, in that group.

I would say that probably we're not going to be able to contain China short of a World War Three, which would be, you know, just devastating for both countries or the whole world. And given that, the best outcome is to be realistic and say they are going to have more influence.geopolitically and they are going to capture more market shares more market share globally But that doesn't mean the u. s. Can't remain extremely prosperous and exactly Trade so so but but of course like there's this thing called the Thucydides Trap where the rising power the the existing hegemon always reacts sort of overreacts yeah versus the rising power and you end up in a hot war or something like that and we do seem to be trending in that direction.

Alf from Seek Truth From Facts podcast: I guess this is sort of zero sum fallacy that arises that oh if China's doing well it must be at the expense of America.

Steve Hsu: Yeah a lot of this comes from you know it sounds very trite to say it this way but. But a lot of it really does result from, well, we could say even actually racism or even, or maybe more mildly just sort of ignorance about the other.

And so it's very easy for American politicians, whether you're on the left or the right, to conjure up the worst case scenario, in a world where China surpasses the U S in economic or military power. And, and so we would just naturally assume as Americans who don't know that much about China. Oh, it's going to be the worst possible thing.

Right. So they're going to try to enslave, enslave us and you know, whatever. and you know, I think in defense of hawkish war planners, that's their job. Like some of them, their job is to imagine the worst case scenario and then sound the alarm that, Hey, there's now some significant tail risk of this worst case scenario arising. And I need to make you aware of that. And I think there's nothing wrong with that. That's very. Reasonable, but when the system tilts a little bit too much

Alf from Seek Truth From Facts podcast: Yeah in

Steve Hsu: That way then you can have a real problem.

Alf from Seek Truth From Facts podcast: And I guess the difference is a lot a bit a big difference comes when the media starts really beating the drum of they're coming they're coming, you know Um, yeah

Steve Hsu: Well, I think if you if you watch carefully western media, because of concentration of of power mark, you know market power And yeah control over the media the the sort of corporate mainstream media You and also state controlled media like, you know, BBC or PBS or Deutsche, Deutsche Welle in Germany.

They're all singing from the same playbook. And it's, it's very easy to get them stamped on, you know, what later turns out to be nonsense. Like if you actually look at what they, if you look at what they wrote about the 2016 election and things like Russian interference and, you know, like whether Trump was actually spied upon by the U.

S. intelligence services, everything, the main, the corporate media wrote about that. If you look carefully, looking backwards in time, you can see they were just totally wrong about everything they said, but almost all the, all the elites more or less accepted.

Alf from Seek Truth From Facts podcast: Yeah, it was, we had a similar thing here in Britain, I'm sure you know, to do with Brexit and, in 2016 as well.

And to do so, I know Dominic Cummings was a big target of that with Carol Cadwallader, I think. Yeah, if you,

Steve Hsu: If you, if your listeners are predominantly in the UK, I'll, I'll give them a treat and say that, you know, Dom and I have been close friends for, I don't know, 15 years, something like that.

And, and so I, I know very well about how Dom, Dom literally broke Carolyn Codwaller's brain. Yeah. And she's never been the same since. Yeah. And everything she wrote and that the Guardian wrote and other papers wrote about the vote leave campaign and the role of Cambridge Analytica. And stuff like that is all wrong.

It's completely wrong. It's actually, it's just made up. Yeah,

Alf from Seek Truth From Facts podcast: yeah,

Steve Hsu: yeah. It's made up. And I actually, I actually know the guys who did the data science work for Dom and I know what they did. And it's, it's, it wasn't Cambridge Analytica and it wasn't anything like what Waller imagines, but, but that stands in the minds of most Britains.

Alf from Seek Truth From Facts podcast: Yeah, and then she brought in, like, all this theory about Steve Bannon being involved and Russia being involved.

Steve Hsu: Yeah, believe me, Dom, Dom doesn't really know Steve Bannon at all, and certainly never was influenced by Steve Bannon. Yeah.

Alf from Seek Truth From Facts podcast: I suppose another, like, returning to China, another thing we've been hearing a lot about recently is that China is apparently in the midst of a really deep economic crisis.

That's something that we're hearing being shouted from the rooftops from corporate media.

Steve Hsu: I, to, to go deeper into that subject, I recommend a podcast that I just released within the last couple of weeks called, China myths and realities. Oh, perfect. I think maybe, yeah, it's maybe episode 65 of Manifold. And I'm talking to a guy who was a tech founder and ran his company in Beijing for seven years, and we're talking about these issues, these topics, and in fact, the chip war thing that you were discussing as an excerpt from that episode. So, so, so listeners might be interested to go. I'll be, I'll

Alf from Seek Truth From Facts podcast: definitely, I definitely

Steve Hsu: go

Alf from Seek Truth From Facts podcast: check that out.

The

Steve Hsu: The way I would characterize the current economic situation in China is that. They had a monstrous property bubble, probably the biggest property bubble of all time. And so people for the last more than a decade have been commenting that the Chinese government is going to have to act to pop this property bubble.

Basically what happened there is that, you know, they went from a very poor country to You know, a very developed country in about 30 years, but you know, the stock market there is not as developed as the United States and the number of ways that people can invest their money is relatively limited there at this moment in time, it's no longer limited, but over time, you know, say 10 years ago, 15, 20 years ago, basically everybody who had excess money to invest was investing it in real estate and in property.

And so you had this crazy bubble, where apartments were just completely unaffordable in China and especially in the tier one cities. And so what happened is that the government basically just said, we don't want our economic growth to be built on real estate speculation and developing, building more buildings and stuff.

And, of course some of that infrastructure was necessary because as I said it was a very poor country and it needed to build all that infrastructure so a lot of it was necessary and some people would even argue that over time you'll see that the stuff built during this bubble will get used. Yeah.

but it's a little, it's a little uncertain exactly how much inefficiency. There was waste in the bubble But in any case the government acted to pop that bubble In the last few years and so what's happened is, you know, if you remember 2008 Yeah, your listeners are old enough. If you remember what happened when the U. S. real estate bubble popped, it crippled the U. S. economy for, you know, really years. And took the world.

Alf from Seek Truth From Facts podcast: Took most of the world with it, yeah.

Steve Hsu: Yeah, and if it weren't for huge amounts of quantitative easing, which China isn't actually doing, we would have been in an even worse situation. So, so you have to, anybody who wants to analyze something as complicated as, like, the rise of China, has to be able to maintain multiple factors in their head.

So one factor is, yes, indeed, they have, they have this headwind against economic growth because of their having popped this property bubble. And the economy is sort of adapting to this. And Xi Jinping's, you know, very explicitly stated planning in the, you know, in the government is they are going to de-emphasize that kind of infrastructure investment because they've already gotten enough of it.

And they're going to focus on what they call high quality growth, which means, you know, R and D, advanced manufacturing, you know, moving up the value chain and manufacturing AI, stuff like that. So, they have very explicit plans to do that. But of course, in the interim, which could easily last a few years or five years, you're going to be able to easily find examples of young people who are discouraged, they can't find a job that they want.

People that are out of work, construction workers, you know, there are all kinds of negative consequences.you know, it's really a structural

Alf from Seek Truth From Facts podcast: shift is what we're seeing in China.

Steve Hsu: Yeah, yeah. So one factor is, yes, one factor is they're in the middle of a structural shift. Another factor, though, is that they've more or less closed almost all technological gaps with the rest of the world.

So you can almost not find a vertical where, you know, in that particular technology or manufacturing capability, China, like, say , advanced machine tools for a while, like the Germans were still ahead of the Chinese, but I think that gap has gone now, right? Or electric vehicles or, or cars, they're not the number one exporter of cars, you know, surpassing Japan.

So for people that are carefully studying all the factors of economic development, you It seems like actually they're in pretty strong position, like you, in other words, you would ignore them at your peril, like their ship building industry dwarfs the Korean shipbuilding industry, then dwarfs like the rest of the world's shipbuilding industry, right?

And so if you're going to fight a naval war with them, you better think about that ahead of time.

Alf from Seek Truth From Facts podcast: And I, I guess, another thing people people should, really focus on is, as you said, the comparison between the way that China has handled its speculative real estate bubble and the way that both America handled its in the 2000s and how the Japanese government, for instance, handled theirs in the 80s.

exactly. It's a much more proactive approach where they don't let the bubble get too big to fail. They,

Steve Hsu: In fact, if you look at research by academic economists, there's kind of a lively debate. I mean, I mean, you know, the people that are kind of far right, pro market people wouldn't agree with this, but among many economists, there's this question of, should central banks pop bubbles? And this was asked during the real estate bubble.

It was asked during the tech bubble. And so the question is like, if you're the central bank and you suspect there is a bubble brewing in the stock market, should you like to raise interest rates to pop the bubble and, you know, like it's actually something even quite free. It's like the United States or England, you know, academics debate whether the government should do stuff like this now in China, where the state is stronger, it's a more autocratic system for sure.

yeah, the government's going to occasionally just move, just say like, okay, this industry whole plants, we're done with that. Everything is going to be solar now.

Alf from Seek Truth From Facts podcast: So,

Steve Hsu: and, and, and that, you know, they could make huge mistakes, huge blenders, but they could also like move, you know, they can also traverse, valleys where, you know, the market system is going to have trouble, like making this like big shift.

because incentives maybe are wrong locally, although, like, in a global sense, we definitely know we have to switch these renewable energies, but the local incentives are kind of wrong, but the government, if it's powerful enough, can just basically force the whole system to pivot.

Alf from Seek Truth From Facts podcast: Yeah, I guess the Chinese

Steve Hsu: are willing, willing to do stuff like that.

Yeah,

Alf from Seek Truth From Facts podcast: yeah. And I guess some, some of the more free market types might say that that's central planning, but I would argue maybe not because they're doing it based on market signals, right? That's their source of information. Yeah.

Steve Hsu: I think if you, if you, again, if you carefully study how the Chinese system works, number one, it is still predominantly a free market system.

So in other words, like whatever it is, the government's trying to do solar panels or semiconductors, the actual people executing on the plan are people who are incentivized by things like stock options. Okay. And so, so at the grassroots level where stuff is really being done, the businesses are being built.

So you're there. There's a market. Yeah. Yeah, it's a market system. I was just in Frankfurt for a meeting of oligarchs and, you know, one of the oligarchs said to me, Hey, who is German? and, and a former physicist, he said, you know, in Germany for the first time now we've surpassed, we have more government workers than free markets.

In other words, more than 50 percent of all people employed in Germany. Are employed by the government,

Alf from Seek Truth From Facts podcast: right? Okay.

Steve Hsu: And, and he was, he was decrying this as really terrible and that Germany is finished because of stuff like this. And it's like, he might be right, but I don't think China is at that point.

I think China is more free market by that measure than Germany, for example. So yeah.

Alf from Seek Truth From Facts podcast: One thing I wanted to ask you about is there's this chart that I've been seeing floating around, and I've seen people like Noah Smith post it, it's basically China's nominal GDP as a percentage of America's. And it appears to show that since around 2021, China has been shrinking for the first time since the economic miracle began in the 80s. I mean, does this chart show, as has been claimed, that China is now on track to remain stuck behind the US? That China's model is failing? Or that the Trump and Biden administration's protectionist policies have been effective? And if not, what's the truth behind it?

Steve Hsu: Right. So, the root question here is how do you compare two economies, which could be qualitatively different? How do you compare them in terms of size and quality? Right. And in this case, maybe they're more focused on size and. The question of like, well, how do I monitor activity in country one and compare it to activity in country two?

And then what's the unit of measurement that I use? And if you use nominal exchange rates, I mean, on the same day, Noah, who might know pretty well, he might say, yeah, look at this graph, China's finished. And then, like, later in the day, he might say something like, Yeah, they're definitely managing their exchange rate and underpricing the RMB, just because they want to keep their exports strong, right?

Yeah. So he could utter the same two, but what do those two sentences mean? It means that maybe the nominal exchange rate is off by 20%.

Alf from Seek Truth From Facts podcast: Exactly. If you're measuring by normal, the

Steve Hsu: statistic of normal

Alf from Seek Truth From Facts podcast: GDP is very vulnerable to changing exchange rates.

Steve Hsu: Yeah. So I think a more reasonable, like, so, so, you know, kind of ill defined question, like whose economy is bigger, right?

Yeah. Because in no way were you ever going to like, Literally sell everything in one economy to the other economy, right? So, the marginal exchange rate is not necessarily the right conversion factor. And, I guess let me make two points that this is getting a little bit in the weeds of econometrics, but number one, the way that both governments report GDP.

Their currencies are radically different. So the way U. S. accounts for services, there's something called owner imputed rent. Something like, there's, there's stuff like, oh, the property of my house in the United States, if I chose to rent it out, you know, what that would be a contribution to GDP.

There's all kinds of things which the Americans do that the Chinese don't do in their actual GDP statistics. So first of all, you have to be careful about that. And then the second point is that if you just look at like actual non, you know, things that cannot be distorted, like actual physical quantities that, you know, characterize the two economies like, oh, how much electricity is being produced and how many tons of steel.

You know, when you look at stuff like that, the Chinese economy is qualitatively larger than it's almost like two X definitely. Yeah. So, it's like, which one do you like better? Like a kid after services, McKinsey, you know, consultants and realtors who get 5 percent of every transaction in the U S or 6 percent of every transaction.

So, so is that actually making that quote economy of the U S bigger and stronger than that of China or. You know, literally, like, are we going to be more worried about who can produce more ammunition and planes and tanks or, or even like more advanced manufactured goods that the rest of the world wants, right?

So I think you just have to be very careful in comparing what's going on here.

Alf from Seek Truth From Facts podcast: and another thing I wanted to mention was that, just to stay on the topic of China's economy is that China, as you mentioned earlier, has in recent years emerged. As potentially the world leader in high tech manufacturing, what specific government industrial policies have been implemented to affect this, and have they been successful, and if they have been successful, what way in which, in what way were they done which made them successful and made China the world leader.

Steve Hsu: Yep. So, there was a thing which really, you know, set the alarm bells ringing in Washington and it was, it was a policy document from China called, I think, China 2025.

Alf from Seek Truth From Facts podcast: Right. Made in China 2025, was it?

Steve Hsu: Yeah, and that was a set of basically directives the way the government works. There is the central government. It is actually even the government aspect.

I'm not talking about the free market aspect. The government aspect in China is very decentralized So it's not, it's not that every dollar flows through like the treasury or something like that. What actually happens is that the central government sets policy and direction. The individuals who are the mayor of a city of 20 million people, or the governor of a province with 100 million people, i. e. larger than Germany, you know, those people are, are vying to advance in the political system. So they are trying to follow the directives that are issued by the central government. But they have a lot of latitude in how they do it. So if in the city of Shenzhen they say hey, we understand what China made in China 2025 is really focused on, you know, we need to improve the quality of our jet engines. We're gonna lure some r& d centers to shenzhen By giving them free land and building them a building and apartments for the researchers.

And we're basically going to subsidize that particular goal. In the central government's plan, but we're going to do it based on our own local strategy. The, the mayor or the governor of that region will then like point to that years later and say, yes, and we're the ones, it's our company, Shenyang Aeronautical Industries that built the first competitive, you know, high bypass jet engine now that brings us to parity with the West.

Right. And that, that guy will get promoted based on that, but it's a decentralized system. It's almost like a venture capital system where individual regional political bosses are making bets and they're subsidizing industries locally to make those bets. And if they win, if DJI, which is located in Shenzhen becomes by far the dominant drone manufacturer in the world.

The guy who subsidized DJI was actually promoted, right? Yeah. DJI was actually a spin out of Hong Kong university of science and technology. Okay. You know, a different region than Shenzhen, but Shenzhen makes it really, really attractive for companies like that to relocate there. So I'm sure whoever was in charge of luring DJI there and helping them grow is whenever he's in Beijing pimping. DJI is like a huge success in Shenzhen. This is how their political system works. It's totally different from the caricature people have of like, no, it's like, it's like guys in Mao suits and Joseph Stalin. And they're nervous that if they say the wrong thing,

Alf from Seek Truth From Facts podcast: yeah,

Steve Hsu: they think it's like, oh, if they say the wrong thing, then she hits a red button.

And then some guys, his chair falls into the piranha, piranha pool or something. It's not like that at all. It's, it's like, Local guys have their budgets. Yeah. They're trying to generally conform with what they think the bosses above want, but they have a lot of latitude in how they, which particular things they invest in.

Now, the downside of this is that they have, they're, they're more EV companies because many different, regional governments decided to basically try to subsidize or, or, you know, produce EV car makers. in their regions. And so there's, oh, there is over capacity. There's going to be a dog eat dog, you know, consolidation where maybe half the different EV companies in China are going to go out of business.

And the winners are going to take over their manufacturing capabilities. So, it does lead to that kind of thing. You could call it waste, but it is a kind of Darwinian, Darwinian competition also.

Alf from Seek Truth From Facts podcast: Yeah. And I guess, and it's true. I think I've read that the subsidies that are given to strategic industries in China are different from.

In some of the Western countries where it's almost, it's pretty much corporate welfare. whereas in China, I know they're very much conditional based on certain targets. Is that correct?

Steve Hsu: Yes. Yeah. Yeah. So, you know, you, you, you still could have a situation where the governor of some Northeastern province where, you know, coal mining is still a big deal for them doesn't want his unemployment numbers to go through the roof.

And so he might be subsidizing some money losing, you know, old economy industries or coal mining companies, you know, there is a decline approach,

Alf from Seek Truth From Facts podcast: I guess.

Steve Hsu: Yeah, but which, which, you know, a lot of people who are a little bit left of center, you know, in the US or Scandinavia would say like, well, this is totally reasonable, right?

Yeah, stuff. But, but, but, but. The, the, I think the most productive stuff, the most kind of really impactful stuff is what you said is, is like, they basically will, they, if they're told quantum computing, you know, the government says, Hey, quantum computing is one of our priority semiconductor manufacturing.

The local guy is going to be like, Oh shit, let me talk to all the venture capitalists in my city and all the professors and all this, and let's see if we can put together something in Chongqing. That can be competitive in the semiconductor space and they'll run their own local, they'll have the equivalent of like McKinsey type people running their own local study of, okay, which part should we bet on?

Should we bet on the wafer production part? Should we bet on the lithography part? Should we bet on the, you know, quality control technologies or, you know, design software that they'll try to figure out where they have strengths. From their universities and their existing companies and such, and then they'll invest, right?

So, that's actually how it works.

Alf from Seek Truth From Facts podcast: Okay.

And I know, just to move, moving on to a discussion of China's political system, I know you've been a critic of the. And we've, we've, we've discussed, we've discussed it, just earlier, just now and criticism of the common Western characterization of China is just like a dictatorship.

yes. and obviously it's probably more accurate to describe it as a political meritocracy. I mean, so,

Steve Hsu: So I would say it, it is, it has. Very merit, so this is, and this is a deep cultural thing in China, so the idea that state officials are supposed to be meritorious people, so they're supposed to be people who succeeded on the imperial exams, and not only that, in Confucianism, public officials are supposed to model behavior for the rest of the people.

So there's a very, like, tight, like, kind of straitjacket on the way leaders are, in traditional Chinese culture, the way leaders are supposed to behave. You're not supposed to be a flamboyant playboy like JFK. That doesn't, isn't the way Confucian culture actually teaches you, you know, that leaders in your society should behave, right?

So, there's this old cultural component, which is thousands of years old, of Confucianism, Which values meritocracy and it has very prescribed even rituals for how leaders are supposed to behave vis a vis the common people. So that's one piece of it. Now, it is true that it is more autocratic because it still has many aspects which are really communist, you know, left over from, you know, Leninist communist, you know, systems.

And yeah, Xi does have much more power. You know, more personally than any one Western leader, right in their country, so it has lots of differences from the Western system, some of which, you know, I, I think are good and some of which I think are bad. Yeah, I don't particularly like the autocratic nature of the system, but it is what it is.

And I, you know, does let them do things sometimes that if she has the right idea, he can, he can move things very far in the right direction. If he has the wrong idea, he can move things very far in the wrong direction.

Alf from Seek Truth From Facts podcast: But I obviously, I guess what I'm trying to say is it's not autocratic in the way somewhere like Turkmenistan is.

Steve Hsu: No, I think it's very different from any of those countries. And it, it may actually be compared, this is again, things that most Westerners don't understand is that all of the successful Asian tigers, like Korea or Taiwan, even Japan, Singapore, went through an autocratic strongman stage of development before they became democracies.

Most of these countries, like Korea and Taiwan, for example, have only been democracies for a very short amount of time, within my living memory. So before that, before that, they had a kind of autocratic system.

Alf from Seek Truth From Facts podcast: In South Korea, it was Park Chung hee and Chun Duk hwan, wasn't it?

Steve Hsu: Yeah, exactly. And if you look into it, if you look into the stuff they did, it was pretty nasty, right?

They had to shut down labor unions and do all kinds of stuff, right? And, in Taiwan, when the KMT took over the country, they killed a lot of the local Taiwanese intellectuals. Yeah. So, so, so it's, it's, it's a more complicated history. And the question, the economic development question is, is it possible that a country that's playing catch up with modernity needs to go through a period of more autocratic rules so they can just get stuff done?

And then once they reach a certain level of general education, health, nutrition, wealth in the country, they can transition to a more liberal system, right? That's actually the pattern in Northeast Asia. Okay. And I

Alf from Seek Truth From Facts podcast: guess, following on from that, because I've heard, I've heard you talk about this before to do with China potentially shifting to a more liberal democratic system.

Yeah. In the future, I mean, so if you went

Steve Hsu: to, if you went to China 15 years ago and you talked to highly placed people. They were all anticipating more liberalization to come. So it was actually a shock to people when she took over.

Alf from Seek Truth From Facts podcast: So

Steve Hsu: people were shocked, like very senior people in the government and in business that I knew, just openly predicted that, you know, that things would continue liberalizing and there's no way they would ever get rid of it.

They actually put in a kind of term limit. Yeah, but then she kind of got rid of it, blew it away, right. But, 15 years ago, people would have bet like their house that, Oh, that rule is for good. Because they learned, they learned from Mao's excesses and people still remember that. So this rule is going to stick for at least another generation.

They turned out to be wrong, but. It doesn't mean intrinsically that, okay, after she dies, you couldn't have like a liberalizing period where, like with Hu Jintao and these other guys, there was kind of like multiple people who were kind of in at the top and they were kind of sharing power and everything was very laissez faire in that period.

for, for the Chinese and the communist mentality, that period, you know, had, there were a lot of negative things about that period, which like people who like Occupy Wall Street would agree with because some people got very rich in China. Yeah. You know, there was crazy like prostitution and, and all kinds of bribery.

Yeah. And there was a lot of corruption. There were all kinds. Tons of corruption. And so she actually came in saying, I'm gonna, I gotta, this is all got a tone. This all has to be put under control. Otherwise the Communist Party is going to lose authority. It's going to lose respect, among the people. And so he came in to do that, right?

So, but it doesn't mean that 20 years from now, they couldn't be going through another big liberalizing phase after she is gone.

Alf from Seek Truth From Facts podcast: Okay. And I, I suppose my, my question is, what, what, what do we mean when we talk about liberalization? Are we talking about like what South Korea did, where it went essentially to a fully liberal democratic system, or are we looking at maybe something more like Singapore, where it's kind of a combination of liberal democracy and with meritocratic elements?

Yeah.

Steve Hsu: So if you remember, there were widespread experiments with local voting 15 years ago in China. So where they are, they would actually let the local villages and maybe crop, like Not province level, but county level.officials be elected by the people. So you, you could, you could start with stuff like that where, where there's really direct democracy at some

Alf from Seek Truth From Facts podcast: Yeah.

Steve Hsu: Grassroots, local level, smaller scale level. But then like the people then who then staff, like, say the top few thousand people in the communist party, they then are representatives, they elect the next she or something. Right. So, so, you know, it could look something like that. In fact, if you talk to a lot of Chinese people, they'll actually , you know, when you, when you do these surveys like Harvard will go and do these surveys in different countries and they'll say like, okay What how democratic do you think your country is? A lot of people already think China is democratic because the average people think that their communist party representatives are more or less doing what they want And those representatives are then electing the more senior, like central committee members and so, so, so the, there is a sense in which it's a very much more representative democracy than not direct democracy, but it is democracy and a lot of, I'm not saying I agree with this view, but, but a lot of Chinese people actually think of themselves as a democratic country because they actually don't take the worst view of the internal workings of the Communist Party. They take a more positive view of it. And if you take the positive interpretation, it is a system of aggregating preferences of the ordinary people. Okay. So, it does, it does faithfully represent the wishes of, you know, 80 percent of the time or whatever it faithfully represents the wishes of the average person.

Very interesting where, whereas one could argue in the US that, that, that isn't even true. Mm. Like the, the average people here don't like their preferences are not actually reflected in the final policy.

Alf from Seek Truth From Facts podcast: I guess one of the things I was asking is, do you think that China will retain many of the meritocratic elements that have helped it succeed? Succeed? And I think that, a way in which, another country that's done something similar to that is Singapore, right? Singapore has a kind of. hybrid system of meritocracy with liberal democratic elements. Could you see something similar to that emerging in China? Or are you thinking something more like South Korea where it's a more fully liberal system?

Steve Hsu: So I think people who are trying to understand countries in the greater Sinosphere, I think, like Singapore and Taiwan, even, even you could say Korea and such, there's a deep layer of civilization and cultural heritage, which is really Confucian. And that is where the meritocratic tendencies come from.

And I don't think they'll soon jettison that. So I think that's going to be more stable. The communist or not communist aspect of things is more shallow and it can go away eventually. Right. So, so, you know, which is why you could have a system like, you know, it's literally the same people kind of like in running the Singapore government or running the Taiwan government or writing the Beijing government.

Right. So, so the, the communist versus not communist aspect by now is a little bit baked in because the communists can claim credit for modernizing China, bringing China back into the forefront among nations. So, so they, they have some social Capital to spend and they won't just go away. Like, I don't think it's brittle.

Like tomorrow we'd have a color revolution and the system is, I don't think that's at all likely to happen, but over longer periods of time. Yes, absolutely. You, you, I think you could end up with a much more Singapore like system in China than, and let me just add one more thing. If you read the writings of Deng Xiaoping and the writings of Lee Kuan Yew, those people were in contact with each other.

And it was actually Deng Xiaoping's visits to Singapore and Japan that caused the opening up of China. And so even today, I was just in Singapore earlier this summer, meeting with a bunch of government officials. Mostly about AI and such, but of course, we talked about other things like geopolitics and they regularly still to this day receive high level delegations of Chinese communist leaders who come to Singapore

Alf from Seek Truth From Facts podcast: and

Steve Hsu: meet with them to discuss things like, what can we learn from Singapore?

What can Singaporeans learn from the Chinese? That still happens to this day. And lots of interesting insights that I received from those Singaporean officials came from, you know, extended contacts they've had with their counterparts. Not just like a one year visit, but they've known the same official now for 10, 15 years. Maybe they've even visited, you know, visited them, their families, maybe even know each other. So, these are very deep levels. Yeah.

So like for, for the American guy, like, Josh Hawley of Alabama or whatever, like. It's like, oh, these communists in their weird looking mouse suits, they don't really understand the West.

Well, like Josh Hawley, maybe has never been to Singapore, but the communist guy may have spent like 10 weeks or like learning from the Singaporean government. Right. So, so it's, it's, there's just such a disconnect with reality amongst the Washington elites. Yeah.

Alf from Seek Truth From Facts podcast: Cause I'd read about the Dung's visits to Singapore, and I'd read about the ties between the CPC and the PAP in Singapore, but I didn't, I didn't realize it ran that deep.

Yeah, and

Steve Hsu: Continues to this day.

Alf from Seek Truth From Facts podcast: Yeah, and I guess,another, another thing I wanted to talk about on the economy point to do with China is I've seen a lot of the more free market types and a lot of who often overlap with the U. S. hawks basically say that the China's prosperity has very little to do with government policy.

It's just to do with global market forces and the Chinese government letting them do their thing. It's all because they joined the World Trade Organization. Obviously that's an element of the fact that China's move from an essentially planned economy to a market economy played a massive role in the miracle.

But what, what role did government policy actually play?

Steve Hsu: Yeah. So government policy played a role in improving the education system and the university system so that they're now world class. Building high speed rail, building lots of infrastructure. And also, deepening the core technology prowess of the Chinese economy that, that isn't necessarily going to be done by companies, companies have a, you know, at one extreme, a short range focus, which is like one quarter, or maybe like in an exceptional case, you could have a company that has a five year time horizon or a three year time horizon that would be. But the government did things like invest in new technologies being developed over 10 years, right? So, 20 years.

So that that and I think like people who really understand science and technological innovation even in the U. S. would say like that is a huge huge part of the American success and they're very focused I used to be the vice president for research at my university people like me were very very focused on the fact that basic research in the United States used to be above 1 percent of GDP and it's been declining. It's well below 1 percent of GDP. And that, that is the kind of stuff that delivers the most long term ROI of anything. And so just having a country that's like, just more optimistic about doing that rather than like letting it erode is a huge Delta over 10, 20 year timescales.

Alf from Seek Truth From Facts podcast: Yeah. And it's definitely because, and I know another thing.

That China, the Chinese government has played a critical, critical role in is basically making sure that because obviously companies, especially in an emerging market have the incentive, the incentive is for short term, often speculative investment. Right. whereas China, obviously through targeted and conditional subsidies to manufacturing and to research and development really steered-- didn't plan in place of the market, but steered the market towards a more long term, success, more successful and conducive for development in the long term.

Steve Hsu: Gotcha. Now, I would say, to get to where it is now, trying to need both a huge amount of market liberalization, you know, foreign capital, at least in the past, they needed foreign capital.

Now they don't need the foreign capital. They run a trillion dollar trade surplus. So, but, but, they also needed this infrastructure buildup, human capital investment, all that other stuff, which really only the government can do. You know, I think the most positive thing I can say about the sort of far right free market people and the way they analyze the Chinese economy is that they could still benefit from shrinking the state owned enterprises.

So, the state owned enterprise is for them just like in Scandinavia or other places, is a way to park stuff like, oh, we, we don't want the employment rate to go up, but we don't want a bunch of people thrown out of work. Well, we'll just make sure the state owned enterprises are still a big chunk of the economy and they don't make people off and they don't have to make profits.

And so, it's like you have two parts of the economy, one, which is growing at a free market rate. And the other one, which is. Sclerotic and not growing as fast because it's a state owned enterprise sector And I would say like if one could wave a magic wand and decrease somewhat the size of a state owned enterprise sector in china That might be very beneficial to them. But it's not it's not it's not something that as a single factor is going to be catastrophic for them.

Alf from Seek Truth From Facts podcast: Yeah yeah, that's, that's very interesting. And I guess even with the private sector, you look at the private sector, that's obviously through particularly at the moment, support for research and development and technology, a massive amount of government involvement. And yeah, I guess, I mean, you said earlier though, one area where the government has been very influential is through investment in technology is the way they've done that investment through the, I guess, performance conditional subsidies, is that the way it's been done?

Steve Hsu: Yeah, it's, it's so funny because the best analog of what the governments do in these local regions, provinces, and cities is, is venture capital. They basically like, you know, they're giving money to companies, but they might stop giving you money if you're not performing and, and they're very numbers driven, KPI driven, you know, type things. If it works, it's, it's a, it's actually a very good model. You know, if it doesn't work, it's corrupt stuff and betting on the wrong things and et cetera.

I actually kind of feel like because the US system has become so kind of hollowed out and it's just dominated by grifters, most of what, when, like, I'm for, if you say, like, just directionally, are you for rebuilding American manufacturing and infrastructure and all these things? Of course, I'm for that. I'm very enthusiastic about that, but when you ask me, like, what are the odds the Americans can actually execute on this once the money is allocated, I would say low. I would say low. It's going to just be grifting and special interests and, and a lot of Americans don't want to work that hard. So, so. I just, I'm not optimistic that we can execute on things like this.

Alf from Seek Truth From Facts podcast: I guess, broadening to the wider geopolitical situation, do you think that China's rise in high tech manufacturing has been aided by essentially the U. S. instigating a decline in Germany's high tech manufacturing sector with the Russia sanctions?

Steve Hsu: Yeah. Well, I think that particular aspect of, okay, Russia's sanctions. And blowing up their pipeline.

Alf from Seek Truth From Facts podcast: You know.

Steve Hsu: You have sky high energy prices in Germany, you crippled large portions of their manufacturing industry. Again, elite consensus in the United States doesn't understand this point, but I think the Germans, at least the Germans I was with in Frankfurt understand this point, right?

So the German companies are all deciding, "Oh, am I going to relocate to America or to China?" Because they need to go somewhere, right? And you know, the U. S. will actually benefit. It's a little bit like as the empire declines we start sucking the resources back into the core. So America will actually benefit from some of these German companies moving their manufacturing, you know Or the chemical companies moving their production to the U. S. But some of it's also already moved to China like basf, for example.

So yeah, I mean it wasn't it was not a smart move. I mean, we're basically crippling Europe. Europeans are more or less politically enslaved by us so they don't can't really fight it. Yeah, but it is beneficial both to America and the Chinese.

Alf from Seek Truth From Facts podcast: Yeah, I can, I can attest to the fact that Europe's being economically crippled as I live here.

Even though I'm not in the EU.

Steve Hsu: I'll tell you a funny story. I was talking to one of my friends. This guy was a PhD student of mine and then we co founded a tech company 20 years ago and we keep in touch and he speaks German.

Alf from Seek Truth From Facts podcast: Okay.

Steve Hsu: He's German on his mother's side and he's traveled extensively in Germany over the years. In fact, he happened to be there when the wall fell. Right. Wow.

Alf from Seek Truth From Facts podcast: Okay.

Steve Hsu: But so anyway, we were talking about Germany and We were talking about the cost of living and how much money people in Germany actually make. And if you actually look like in The Economist or something, you'll see Germans are about as rich, they're slightly less rich than people in Mississippi in the United States.

Yeah. If Germany was a state in the United States, it would be below Mississippi in terms of its, you know, income per capita, et cetera. And if you say this to a proud German, they get really mad and they'll say, yeah, but I don't have to pay for college here, you know, and it is my healthcare, blah, blah, blah.

But most people in, even in rich cities like Munich or Frankfurt, they're living on 2000 euros net, maybe 3000 euros net per month. That's, that's actually a reasonable, like, income for them. And if you think about that in American terms, it's not very much money. And these are like professional educated people, not, not like working class people.

Right. So, Europe, in some ways compared to America, you're starting to realize like it's, it is poor. And, like, I have friends in London who joke that the UK is going to become the best outsourcing destination for English language work because the English is very good.

Alf from Seek Truth From Facts podcast: Yeah,

Steve Hsu: OG English and, but the costs are pretty low compared to what you have to pay an American worker.

So, it's unfortunate.

Alf from Seek Truth From Facts podcast: I've heard the UK described. Because obviously that's where I am. I've heard it described, perhaps hyperbolically, as London with a Bulgaria staple to it. Yeah,

Steve Hsu: basically

Alf from Seek Truth From Facts podcast: that. That captures it, yeah.And I guess, yeah, staying on the topic of, of, because we touched on Russia and Ukraine, and returning to China, I mean, do you observe, a Sino Russian alliance to be building, or do you think that would be an oversimplification of the relations between the two countries?

Steve Hsu: I think there's definitely an alliance building and, again, like, like people I would consider pretty midwit geo strategists would say, oh, it's going to fall apart because, and then they say things like, oh, they're going to fight about Central Asia, these Central Asian republics that used to be part of the Soviet Union.

And China wants to take them over or something. And, or they'll say like, oh no, they have this huge border and China's going to try to take a lot of Siberia. Yeah. When in fact, like China has these terrible demographic problems where they can't even get Chinese people to live in the Northeast of China because how many of them, how many Chinese people are you going to be able to get to move to Vladivostok?

Right. So I just don't see in the short run now in the long run, there could be. a situation where Russia weakens a lot and China does actually take back some of that territory. But I would say that's probably generations away or at least one generation. But in the, in the 10 year timescale, 20 year timescale, I see them as tight allies because if you're Russian and you know, you're watching Russian TV and you like, Oh, yeah, a bunch of people in Kursk were just killed by, NATO weapon systems and, and, you know, like we're fighting for a lot, like, Oh, a battleship, you know, a, a frigate was just sunk in the black sea, by a missile that was shipped to, you know, the Ukrainians from Germany or from the UK.

Right. Yeah. Really? Are, are, are you going to forget that? Like maybe your cousin, maybe your cousin was on that ship. Exactly. Yeah. Yeah. And when, and I don't believe the casualty figures that NATO midwits, you know, bandy about in this conflict for Russia, like, but still probably a lot of Russians have been killed.

Like as many, certainly as many as Americans were killed in the Vietnam war. Okay. And like 50, 000 maybe could easily. And so, and so they're not going to forget, like it's a crazy anti-Russian kind of racism to say like, oh, they're just going to forget that we imposed that many casualties on their young men.

Alf from Seek Truth From Facts podcast: Because they think that they'll just Russians think about like their people in terms of a hoard or whatever. That's like, they generally think that's how Russians think.

Steve Hsu: Definitely not. And they're not going to pivot. And they're not going to suddenly pivot and say, Oh, now we want to be part of NATO and Western Europe and the system, you know, after you cause so many of our people.

And they actually, I think, feel bad about the Ukrainians that died, even though we don't feel bad about the Ukrainians that died. The Russians actually probably do to some extent feel bad. And so, because they view them as their kind of brothers. Yeah. So, there's just a total misunderstanding of the geopolitical situation here.

So I, I, so anyway, you're basically integrating Russia into the Sinosphere right now, the Chinese economy, like all the, you know, advanced manufactured goods that they have in Russia are now coming to them from China. So.

Alf from Seek Truth From Facts podcast: The sanctions are working well. Yeah. Yeah. Yeah. I think, I think, yeah, it's just, it's just ridiculous to see these, as you say, like NATO, like midwit, commentators, just always predicting the worst possible outcome for Russia and China, and always predicting the best possible outcome for the U S and its block.

Steve Hsu: What's bizarre is that, even when these guys are actually military guys, like actual, you know, they, they. I don't think they've ever, like, counted, like, how many actual operable tanks and jet fighters does NATO have? Exactly. Yeah. Or could, could, like, Britain field one division on the continent?

The answers to all those things are like, no, no. Yeah. Like me, they're like a little Chihuahua barking like crazy. The only thing they have really going for them is nuclear weapons. Yeah. So if it weren't for nuclear weapons, they would be, you know, they would be as helpless as, you know, you know, Argentina or something.

Right. So.

Alf from Seek Truth From Facts podcast: And, so I know another thing that's going on in America at the moment, is that they're essentially forgetting how to build certain things, certain defense technologies.

Steve Hsu: Yes, absolutely.

Alf from Seek Truth From Facts podcast: And that's going to be a big problem for them going forward. So I think, I think on that note, we'll wrap up this podcast.

It's been brilliant talking to you, Steve. some fantastic insights about China, about geopolitics generally, and thank you so much for coming on the show.

Steve Hsu: It was my pleasure. And you know, I, I thank you for really asking the right questions. I think we went into more depth into a lot of these topics than I normally can go, because normally I'm assuming my interlocutor or the audience isn't really that sophisticated.

But in your case, I think you're, you're, you pretty are, you are pretty sophisticated. We could have a much better conversation.

Alf from Seek Truth From Facts podcast: Perfect. And yeah, so, I hope to have you on the podcast again, relatively soon.

Steve Hsu: Fantastic. I'd love to come back.