Letter from Beijing, with Han Feizi — #72

Han Feizi is the pseudonym of a columnist for Asia Times, who covers the Chinese economy, technology, and US-China competition. The author lives in Beijing, and has an extensive background in finance and investment banking.

Han Feizi's articles for Asia Times: https://asiatimes.com/author/han-feizi/

 

Chapters:

00:00 Introduction to the guest: Han Feizi
01:39 What it's like in Beijing right now

06:38 Modern Conveniences in Beijing

12:11 What the economy feels like for ordinary people

19:09 China's economic structure: consumption, infrastructure investment, Michael Pettis

30:32 Currency Valuation and PPP: real PRC is significantly larger than US economy

31:45 US high living standards and manufacturing competitiveness

34:13 Globalization and its discontents

40:15 Reversing globalization and the myth of American exceptionalism

45:58 China's increasingly high quality standards and quality of life

58:09 Whither China? Xi Jinping

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, 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 my guest is Han Feizi, who writes for Asia Times and is one of the most insightful analysts of China, China-U. S. relations, and the global economy.Han, welcome to the show.

Han Feizi: Thanks. Thanks for having me on. It's a pleasure.

Steve Hsu: In case you haven't figured it out for the audience, Han Feizi is actually a famous sort of historical figure, Chinese historical figure, and it's a pseudonym.

And, so we're not giving you the real name of our guest, but we are giving you his byline at Asia times. And I encourage you to read his columns there. Han's background is in engineering, in terms of his undergraduate education. He's had a storied career. Most of his recent work has been in finance.

And at one time he was a China equity analyst for a well known investment bank.Is that accurate?

Han Feizi: Yeah, that's perfect.

Steve Hsu: Okay, great. So, now we're actually having this interview in Beijing. And you live in Beijing.In China in the early 2000s you lived in Beijing and then for some period of time you were in Hong Kong and New York and a couple of years ago you came back to Beijing.

Is that right?

Han Feizi: Yeah, that's absolutely correct.

Steve Hsu: Okay. And so I thought we'd start by trying to give the listeners a little bit of a feel for what it's like to be in China or Beijing today in 2024. I think unless you've traveled to China recently, you can't really understand what the situation is today.

And if you haven't been traveling here consistently for the last 10 or 20 years, it's tough to get a sense of how drastically things have improved here in China over the last, say, 20 or 30 years. So, maybe we could start by discussing that.

Han Feizi: Yeah, so, so I moved back to Beijing in 2022, the end of 2022, right at the end of COVID, where I came out of, quarantine, did my five days in quarantine, came out, and a week later they opened everything up.

So, it was a very rough time to be moving back to Beijing and it was just very stressful. And then in the back of my head, because I had lived in Beijing, '99, 2001, it was just a very stressful city. It was, you know, shoving and pushing it in line, people spat everywhere, the pollution, you know, just rudeness in public.

And then when I came to Beijing, I was all prepared for that, steeled myself for that. And then suddenly it's like walking around the twilight zone, where everybody is super nice. Everybody stands in line. Everybody in the subway is quiet, looking at their phone. The service is superb.When I went to the bank, when we had to set up all our accounts, everybody was super helpful. When we had to register for the public security, where I just expected, you know, dismissive officials. No, they bent over backwards to help us out.

So it was just a very strange situation to be suddenly back in China and everything kind of changed.And it's one of these things that I've been here for the past two years to try to figure out, you know, why this has happened and whether it's replicable elsewhere.

Steve Hsu: So, I, just to drill down on that a little bit. So, okay. If you go back 20 years, like early two thousands or even 10 years. Things were much rougher here. People were relatively poor. I mean, one of the aspects of having an 8 or 10 percent per year GDP growth is if you go back 10 or 20 years, people could be three, four or five times poorer in the early period than they are now on average. And, concomitant with that, is that the situation, the life situation is rougher, right?

As you said, people didn't really know how to form neat lines. You know, if you go far enough back, there was much, they're much more likely to be spitting on the sidewalk. There's no such thing as customer service. All of those things are things which evolved quite a bit into the present. Now, I was at last in Beijing in 2019, right before COVID.

And I sort of already felt things were, you know, improving a lot in Beijing. And if you went to kind of the nicer parts of Beijing, I already felt it was kind of approaching Tokyo in terms of the aesthetics of the architecture, how nice the space was. You could get a nice coffee and sit there and read some books at the bookstore.

So I already felt it was already kind of coming along and it's just coming even further now by 2024. Does that, does that seem fair to you?

Han Feizi: Yes. That seems, yeah, totally fair. And all this time I'm racking my head on what exactly has, you know, Congo happened, what happened. and all I can come up with is it was just kind of a quotidian, very boring process. It's just, as people get more affluent, the mindset of abundance replaces a mindset of scarcity.

Steve Hsu: Yes.

Han Feizi: And the young people, especially, who, you know, grew up in this environment and all of them pretty much, you know, 20 years ago, 5 percent of Chinese high school students went to college. Now it's approaching 70%. So it's, it is much more highly educated. They don't have this feeling of scarcity where, whereas before, you know, everybody rushes to the front of the line, afraid things will run out. that just, just, just doesn't happen anymore.

Steve Hsu: Right. I think, so I, I tweeted an interview with, now I can't remember the author, but he's a pretty well known American who lived in China and taught here, originally in the nineties and then came back again.

And he remarked on a lot of differences between the students that he taught then and the students that he taught now. I mean, they're literally six inches taller on average. And, you know, have more than one set of clothes to wear every day. And so just a completely different situation in terms of the level of affluence, in the society.

Now, in terms of living in Beijing. So this is a monster city, right? What's the actual official population of Beijing? Is it like 20 million people or something?

Han Feizi: I think it's like 26

Steve Hsu: So it's a mega city but it has a really extensive metro system. But to ride from end to end, like if you start at one part of the city, you want to get to the other side on the metro, it could take you like an hour and a half or something to get across the city. It's so big.

When you're getting from point A to point B here, I think many people would take the metro. On the other hand, you see a lot of locals riding city bikes, which they just scan with their phone and pay a couple of yuan and they're, they're on this little bike and they can pedal it around and then just leave it where they go.

You see a lot of crazy looking e bikes, which are totally silent and dangerous. Yes, those are a menace. Yeah. So you've got all that going on. You've got a mix of totally silent electric vehicles, very modern looking, crazy futuristic looking ones. Then you've got more legacy internal combustion engine vehicles. You've got a mix of that going on. Traffic here tends to be pretty bad. But, a typical, another way of getting around is to call DiDi, which is like Uber. You just call it through your phone app. It comes and picks you up. The drivers here are kind of super efficient. You seem to get a DiDi, like, right away when you call it.

And, then, but you're, you're often in for a half, you, you know, to get from any two points, it's like always like at least a half an hour because of all the traffic, in the DiDi. So

Han Feizi: Similar to DiDi is the way we eat now and we prepare food at home, it's delivered on the day. We never stock the fridge and the amount that you can spend for free delivery could be as little as, you know, 50 RMB. That's, let's say, seven bucks of food. so basically our fridge is just entirely empty and whatever comes that day we cook. So that's a kind of convenience that the city offers and most big cities in China now offer that kind of delivery service.

Steve Hsu: Right. So I think that's something Westerners can't imagine, like, you know, and that say, for example, my wife would complain about that, like the level of convenience of life here in Beijing, if you're, you don't have to be super wealthy, but if you're just, you know, somewhat affluent here, you basically can have all your food delivered very quickly, you're surrounded by huge numbers of restaurants, everything is super, super convenient. Now, in a way, that's built on the backs of lots of delivery drivers.

You see a lot of people who are not making a lot of money and who are actually delivery people, Meituan, or whatever it is. And they wear these sort of, certain color uniforms. And you see them on their bikes, or whatever, electric bikes, or whatever, delivering stuff. Um, In the hotel where I'm staying, there's a robot. And so when a delivery comes, like, often, it might be a food delivery, it might be something else. But when a delivery comes in, the hotel staff get it. They put it in the robot, the robot actually navigates up the elevator and brings it to your room, and when it gets near your room it's like signaling I think the intercom system or maybe your telephone, and then like you know the robot's there, you open the door and your stuff is delivered.

Han Feizi: If you, if you've been in Beijing for a time, then you will run into the electric, robot Meituan little vehicle. There, there, there, there's nobody inside. it's that stuff. it delivers things around to, I guess, checkpoints for then the delivery person to take the last mile.

Steve Hsu: Right. So, so just in terms of everyday use of robotics and you, you might say like, oh, this is not super high tech robotics. But in a way it is because it actually works. Right. This city probably, or big cities in China probably have reached a level of automation that you just don't find anywhere else. I don't know if you'd find it in Seoul or Tokyo. So that's pretty striking. I think, for, for, I think for people who are bilingual and can just fully function in Chinese.

Many of them would say the quality of life is actually, again, if you're somewhat on the affluent side, the quality of life here is just higher than what you could get in the West. Is that fair? Or am I exaggerating?

Han Feizi: That's, that's absolutely fair. There are things you miss. There are things you miss.

For example, there's more natural space.

Steve Hsu: Yes.

Han Feizi: in the West. But, that, that is, that is absolutely fair in terms of, um, You don't spend so much time, uh, going to Costco, stocking up for the week.

Steve Hsu: Yeah, you don't do that here. Yeah,

Han Feizi: It's, a lot of the things are just provided for you. A lot of the services are very cheap.

Steve Hsu: Yeah, but although we emphasize that automation is supporting that, there is still a kind of low income group that are doing the delivery stuff. And so it is built on the backs of that. And it's like, some of the most like, kind of hard trending stories that you read about in China, especially because the economy is not so good right now. It's like somebody went to college and maybe their family even maybe went into debt slightly for them to go to college, but now they're working as a Meituan delivery person so that like you have to be fair and say like that exists like part of the convenience that Han here is experiencing is built on some lower wage people that are, yeah.

Han Feizi: To be fair, the Meituan people are not very, very low wage. They're, it's a grueling job. But if done efficiently, it's somewhat on the higher end of a blue collar wage.

Steve Hsu: Okay.

Han Feizi: But still, you don't want to be a college grad in doing that. That was not your original intent.

Steve Hsu: Right. Right now in it for me talking to people here and so the people the set of people I've talked to here, so far on my trip, you know a lot of university professors scientists graduate students, you know the occasional driver or maid everybody laughs at me when I say I talked to those people when I travel in China because it's become kind of a Tom Friedman cliché to do that, but I do find it actually useful. Um, I think almost everybody here says the economy is not good.

Now I've, my model, mental model for this has been that it's mainly driven by the property bubble, the bust of the property bubble. Now in China, the financial markets, the equity markets are not that well developed, so most people who have money are investing it in like a second apartment or a third apartment, basically in real estate.

And so you had a kind of bubble going where, especially in the tier one cities, people were, you know, over-investing in a sense in real estate. And the government sort of saw this as a problem and realized it was a bubble. And, and again, historically, I've said this before, many, some people realized this back in the US in 2008 and there was some discussion that, oh, should the Fed try to pop this real estate bubble that's building up?

Or should we just let it go and let nature take its course? In the US we let nature take its course in China, the government basically decided they were gonna tighten credit and change some rules about investment in second and third apartments and that has caused a collapse or significant decrease in property prices. I kind of think that's the main driver of the general malaise that people feel here. Because, for example, if you look at Trade surpluses.

China has record 1 trillion a year trade surpluses with the rest of the world. So I don't think it's the manufacturing and export part of the economy that's underperforming. I think it's more this domestic internal property and also infrastructure investment side. But I'm curious what you think about this, Han.

Han Feizi: Yes. so if you just look at the numbers, then it's, that's definitely what's driving the lower GDP as in the property sector, which depending if we ask is around 20 percent of the GDP and that has been falling, you know, one of the first sectors that ever had a decline anywhere in China for decades.

And the property sector, you know, the largest one was going down about, you know, 4 percent a year. So because of that, the overall GDP was not running at 7, 8%. Now it's running at 5, 6%. But what it says is that there are other parts of the GDP. That is running at seven, 8%. And, you know, we see it like in the, you know, the EV space, the solar power space, the batteries, those things are in places, you know, booming cities like Hefei, or, you know, Dongguan, places that you don't really hear about.

So, there's a lot of malaise of urban Chinese people talking about how slow and how difficult things are. And yes, it's definitely happening, especially in the places where everybody goes, Beijing, Shanghai. These places are, you know, kind of plateauing in the economy, while the real growth is in the second, third, or not, not even the second, the third, fourth tier cities.

So, a lot of the income growth is coming from there and not in, not in Beijing. So people here will not be happy if you talk about, you know, how the economy is going.

Steve Hsu: Right. I think here you have multiple things going on. So, for example, if you're on the affluent side, and you own an apartment, or more than one apartment, you realize, oh, the market value right now that property is way lower than it was a couple years ago. So that makes you worried. that makes you spend less money. Consequently, there's less consumption going on in these cities and the people whose livelihoods depend on that consumption, like people who run shops and things like this. they feel threatened economically. And so there's a sort of potentially spiraling effect where overall the consumption level in the country is dropping and it's just causing the economy to contract that part of the economy, which is distinct from, you know, some factory investing in huge numbers of robots to make super cheap solar panels or batteries or whatever it is, and then exporting them all over the world.

So, you have one sector of the economy that I think is doing extremely well and the government's. Specifically focused on growing sort of high quality growth in advanced manufacturing and high tech goods versus internal consumption of the economy, which, you know, is definitely in the doldrums and maybe will require significant government stimulus to actually get people confident enough to.

Is that a fair description, or am I, what am I leaving out?

Han Feizi: I think I would kind of disagree that domestic consumption is all that bad.

Steve Hsu: Okay.

Han Feizi: Domestic consumption, in a lot of, you know, foreign analysts, they think domestic consumption should take over as something that drives the economy. I think people have done their analysis wrong, and that China's economy was never all that unbalanced.

So I'm not all that, worried if domestic consumption does not outgrow the overall economy. And last year, well, last year didn't quite count, but domestic consumption grew 7. 8 percent, mostly recovering from COVID. This year, consumption in, in, this is taking not just retail sales, that's retail sales, a bit of a misleading number, but with the services involved, domestic consumption this year is growing in line with GDP, about 5%.

Steve Hsu: Okay.

Han Feizi: Uh, so I'm not too worried if it's just growing in line with GDP, because I never thought the economy was unbalanced where there's too much investment and not enough consumption. That's never been my, um, starting point.

Steve Hsu: Okay. So here we're, we're, we're, I think we're, we're slightly talking about two different things, because one is this issue of there's a characterization of the Chinese economy in which, Western economists who are used to, a very consumption dominated service economy think that China isn't like that.

Like the part of the total economy, which is made up by consumption, at least as it's measured, seems too low to these Western economists. And so there's a sort of macro. discussion about this, quote, distortion in the Chinese economy, I, I, which I just meant as a secular thing because of the property bubble or whatever is causing the economy to kind of not be great right now.

When I talk to average people, I think they're more conservative about spending money and there's a sort of knock on effect in the restaurants and stuff like that. I think that seems like it's true. At least a lot of people think it's true. But I think it's different from like this question of like, oh, what is the actual overall overall level of consumption in the Chinese economy versus say a Western economy and what is a desirable level for that to be at?

So I, I think we're, we're, we were slightly discussing different things. Okay.

So, let's get into this question of the nature of the Chinese economy at a macro level. Like, one of your earliest or maybe the first column that you wrote in Asia Times was about an economist named Michael Pettis. Who am I right?

Michael Pettis?

Han Feizi: Yeah, since he's not here to defend himself, I don't want to mention Michael Pettis name. Oh, but I did.

Steve Hsu: Okay. That's fine. But I've read, so I've read a lot about Pettis, and people often bring Pettis up to me. Like, so, when people want to, like, argue with me on X or somewhere else, they'll sometimes bring up Peter Zahan, Oh, I love

Han Feizi: That guy.

Steve Hsu: So I don't want to talk about that at all. And then, like, sometimes people bring up, like, Michael Pettis analysis of the Chinese economy. Now, Michael Pettis is a guy with a background in finance. I don't know if he has a PhD. I think he doesn't have a PhD. Okay. So he's a guy with a background in finance who is a professor at Tsinghua.

So

Han Feizi: it's a

Steve Hsu: beta. Oh beta. Okay. So he does live in China. He's a longtime China resident. He is a professor at a major university in China. So one should give him, you know, one should listen carefully to what he has to say now. I don't actually agree with his take on this but I did spend time looking into it, you've spent even more time.

Yeah. So, okay. I realize you don't want to make this about Michael Pettis,

Han Feizi: But no, let's make it about him. But, but since I brought

Steve Hsu: it, whatever blame there is for bringing him into the conversation, it's me, but I know you have an opinion about this. So maybe you could just talk about how, what he says about the Chinese economy and then why you disagree with it.

Han Feizi: Okay. So, Michael Pettis has been in China writing about China for almost two decades now. And, um, guess what? He has been writing the exact same thing in China for almost two decades now. And, I have been following him for all this time, and we have even crossed paths professionally. I guess the biggest point is, as the years and decades went on, and he hasn't changed his and China kept growing, far above his estimates, it's disturbing that he does not and had never have done a post mortem on why things haven't worked out the way he has imagined and he still sticks to the exact same story that it was 15 years ago which is trying to invest too much and consume too little. Now, I believe I have done a post mortem.

Steve Hsu: Let me just pause there because before we evaluate the quality of his predictions, I want to talk about his thesis. So, and this is a, this is not just Pettis. Okay. So like you could read this kind of take in The Economist, for example, or even listen to quotes, real academic economists discussing this stuff.

So there's a claim that China consumes too little and invests too much. Correct. Now related or maybe not related, the service sector here is too small, too much concrete going into the ground, too much rebar, maybe building lots of capital intensive real estate. Or infrastructure projects that actually don't have a good ROI attached to them.

Okay, so those are all sort of parts of the story. and Pettis has been one of the major proponents of this view. That actually, oh, they got 8 percent growth but they had to really struggle and the amount of money they had to expend to get people to build high speed rail lines or skyscrapers or concrete roads in order to get that 8 percent growth.

The number in GDP is unsustainable because it's super inefficient. So that's that, and if Pettis were right, it would be very dangerous because it would mean that China has to pour money into the ground basically to get its growth numbers. It's not high quality growth. And it'll eventually have to collapse. It's not sustainable. And I took that seriously and investigated it myself. I didn't find his arguments convincing. Why don't you make your comment about it, Han?

Han Feizi: Yeah. So, all those, his framework is, I have nothing wrong with his framework. His framework is, you know, it makes sense. Now the fact that nothing ever happens, nothing ever happened. China didn't have any kind of financial crisis. If you call this 5 percent growth a, you know, a crisis, which people are trying to say it is, then well, I would love, many countries would love to have this kind of a 5 percent growth crisis.

So, I did do some digging, and then it comes out that, well, China supposedly is, you know, about 25 percent of the world's GDP, but only 13 percent of the world's consumption, if you go by the numbers, and supposedly China only consumes its GDP, consumption is only 38 percent of China's GDP compared to the U. S., which is almost 70, and Japan and Korea are in, you know, 50 to 55 range. So China looks like it's way out of whack. And then, however, you know, luxury goods, China consumes 26 percent of the world's luxury goods. And then everybody kind of laughs and says Chinese people are, you know, suckered for luxury goods and, you know, have poor taste and the, you know, the wealth gap creates that.

But when you look at every other consumption sector from cars to furniture to phones to electronics, China consumes well over 20%, some into 50%. So what's the total for the world? Total world. Right? Total world. And then you kind of scratch your head and you look at China's retail sales, it's 6.9 billion, I think it was for last year.

China's retail sales is 6.9 billion, and that's a little bit higher than US retail sales. However, the US household consumption is something around, I think I'm, going off my head here, around 15 to 17 billion trillion. So, compared to their 6. 5 trillion in retail sales. So most of the U. S. 's household consumption is in rent, medical care, education, things that are not retail sales and services.

China's household consumption turned out to be 6. 8 trillion U.S. dollars. Less than what it reported in retail sales. Now that gets me scratching my head. What is going on here? Are Chinese people going shopping sprees? And neglect to pay rent, and don't have medical care, and don't send their kids to university.

Steve Hsu: Let me recapitulate what you're saying. So, there is a household consumption number from the U. S. But a big chunk of that number, like half ish of that number.

Han Feizi: 150 percent more than retail. So, yeah.

Steve Hsu: Yeah. Yeah. More than half. Yeah. Is, is not retail sales. Correct. Okay. But for the Chinese number, and this is more kind of a criticism of just the way the numbers are reported for China, it looks like, household consumption is more or less 100 percent or, you know, even there's a slight inequality there alongside, but kind of like 100 percent retail sales.

So all that other consumption is somehow not reported as household consumption for China, whereas it is reported as household consumption for the U. S. Exactly. Am I getting that right? Yeah,

Han Feizi: you're getting it exactly right.

Steve Hsu: So, so the, the guy whose job it is to report household consumption in China is missing the rent payments, insurance payments, all the non retail sales components that are reported in U. S. household consumption, but are not reported for Chinese household consumption.

Han Feizi: Yes, actually, we don't know exactly what they're reporting. I just know that when you add up, all of their actual consumption of goods, China is, you know, it buys twice as many cars as the U. S.you know, three times as many phones, the food, you know, calorie wise and protein wise is, has exceeded the U. S. The, the, you know, appliances and, and furniture is multiple times the U. S. and yet China has a much smaller uh, retail much smaller, like about a quarter, not a quarter, a third of the U. S. 's retail sales. Not retail sales, U. S. 's household consumption. Yes.

So something is missing here. So this something that's missing tells me that it's a, it's a, it's a reporting issue. And if you look into the history of it, it's China from the very beginning. From the very beginning, they fought tooth and nail, with the World Bank when they got onto the World Bank system, the United Nations system of national accounts, fought tooth and nail to report as little services as possible.

That probably, was part of their strategy of getting concessions for, WTO access, WTO, ascension.but that has carried on through, through all these years that it is messing up and it has messed up the analysis of, you know, hundreds of Western economists.

If you look at China's, you know, electricity production is twice the U.S.If you look at the production of cars, it's three times the US. If you look at all these actual things you can lay a finger on, China's economy is multiple times the US. But when it comes down to the actual reporting of the economy, a lot of it is just missing.

Steve Hsu: Okay. So the specific thing we're talking about right now is household consumption. Yes. And so just to boil it down to something really simple, your argument is that the way that household consumption is reported for China is undercounting by quite a bit.

Han Feizi: By quite a bit. So if I had to put a, you know, ballpark number on it, you know, the U. S. consumes like 70 percent of its GDP is, is household consumption.

China, I would say about 60. There's nothing unbalanced about China's economy.

Steve Hsu: Okay. And, and is, is that the main part of Pettis' thesis that you disagree with or are there other things as well?

Han Feizi: There's two parts. That is half of it. The other half is his thesis that China's export driven policies are causing the U.S. to consume too much and de-industrializing the U. S. And, it's the U. S. which has opened up its economy that it has, you know, is forcing others, that other countries are forcing the U. S. to do certain things. When I think about the causality, well, nobody knows the causality. Okay. This is a market.

There are sellers and there are buyers. Okay. Anyways, well.

Steve Hsu: This particular thing I don't disagree so much with Pettis about. So my view of this is that, remember that the exchange rate is a managed exchange rate. It's not, the market doesn't determine the dollar yuan exchange rate and the Chinese government really kind of sets it.

And I believe they have said it in a mercantilist way. So the, the, the, the RMB is undervalued against the dollar. And. That's so that Chinese companies will be successful in exporting. And so if you're an American company and you're competing, you might say, Hey, these guys are flooding us with artificially cheap goods because the exchange rate is depressed.

And just to finish my thoughts. So, I think there's some merit in that because If you do actual PPP or buying power comparisons, I actually, it looks to me like, well, so the World Bank does this and they conclude that the RMB is in a sense undervalued by about 2x. And I also get that number when I just walk around here and I say like, well, how much food can I get?

Or, you know, how much did that cost here? And the exchange rate does make things artificially cheap if you're buying with dollars. And so that part of it I don't completely disagree with Pettis. Like if you're a rising economy and you want to make sure your export industries are able to grow and by growing they absorb technology and know how from, you know, other companies, other countries who have to come here and manufacture. It does make sense to have a somewhat undervalued currency. And then in a way that then sort of causes Americans to buy more stuff, since it's so cheap, like the stuff they can get from China. They have so much buying power. They buy more than they otherwise would. So to me, like that part of Pettis' argument is not completely crazy.

Thoughts on that?

Han Feizi: I don't think it's completely crazy. I just don't think you can 100 percent assign blame to one side. Okay. I think it's a, it's a, it's sort of a market as the U.S. has kind of almost backed himself itself into a corner, which is, this is how the U.S. has been running its economy so that people can have high living standards is by, having high, highly paid service worker economy, people like bankers and lawyers and consultants and marketing managers,as opposed to factory workers and, welders and machinists. And the way you have those high paying, highly compensated professions is you have this trade, trade of U. S. assets for Chinese goods.

Steve Hsu: So I, I, I put it this way. So, since China does have a managed exchange rate. It's not FX traders, you know, around the world who are setting the dollar yuan exchange rate the way it works with yen, for example, or, or euro dollar. in a way there is a government which is setting that exchange rate and it's the Chinese government.

Now, on the other hand, Americans have been pretty happy with this bargain. So what is the bargain? The bargain is that the dollar has a huge amount of buying power. U. S. corporations set up shop in China to manufacture stuff, bringing it back to the U. S. U. S. consumers get tons and tons of, you know, originally cheap price and maybe cheap quality goods, but now increasingly cheap high quality goods.

There's just a huge consumer surplus. I'm just always amazed at how much stuff I can buy now compared to back in 1980 when I was a kid. We couldn't buy nearly as much stuff. Like, you might get a new pair of shoes for your birthday or for Christmas and that was it. That was supposed to last you for a while.

Whereas now you can just buy a pair of shoes off of Timu. It's like, it'll cost you almost zero. so, there is something like that going on, but the U. S. was kind of happy with it. And, you know, the idea was Americans could go into these really, like, high value add service things, and we would let those Chinese guys manufacture all this stuff in these horrible factories.

And it didn't seem like that's such a bad bargain, but now that China's caught up technologically, the U. S. feels threatened by the overall size of the Chinese economy, the fact that they can't, tell the Chinese what to do in terms of geopolitics, now we're sort of alarmed by this setup and we want to, we want to like reverse some of what, has been in place.

Does that, does that seem reasonable to you?

Han Feizi: Yeah. That's perfectly reasonable. It's exactly what's happening. It's just that, it's hard to, when, okay, I'll, I'll tell a little story. I'll tell you a little story. When I was in grad school, in the early 2000s, there's one professor, he taught the China class.

And then we're talking about globalization and he said, there'll be winners, there'll be losers in globalization. So what are we going to do with the losers? And he said something absolutely brilliant at that time. He said, pay them off. And then, what do you mean pay them off? Well, the gains from globalization will be so great that the Ohio factory worker who loses the job, you know, we'll just pay him or, and then they'll be paid off from all the gains and everybody will be better off.

And then we all clapped our hands and then we're like, yeah, of course. That's, that's, that's so elegant. Except now 20, 25 years or 20 years later, we're scratching our heads and like, Oh, there was never a mechanism to pay them off. What exactly were, what were you expecting to do? You know, give them welfare checks and, and, and food stamps?

Or were you going to retrain them to be computer programmers? So that never quite happened. And what actually happened was all the gains from globalization were all hoarded by, by, well, the shock troops of globalization, the bankers and the consultants and, so that class. So now we're trying to reverse that trade. We're trying to reverse that trade. And I just hope that people will have a better, more well thought out plan than pay them off.

Steve Hsu: Yeah, well, I think your memory is correct that, you know, if you read the Economist, You know, around the time when China was getting, accession to the WTO and things like this, that was the story that there would be all these gains from trade and, the U S manufacturing workers who lost their jobs, they, they would get some transfer payment, some chunk of the gains in trade and that they, that would make them better off.

And I remember thinking at the time, like, but I don't think this is going to happen because the, the, the wealthy people, these financiers, the highly paid service workers. They're not going to give up their gains from trade. They're going to say, I worked hard. I'm super smart. That's why I'm such a highly paid lawyer.

That's why I'm such a highly paid trader, equity analyst. Why should I give it back to these guys in Ohio? And, and what mechanism, how would that actually work? Right? Like what politician who's getting most of their donations disproportionately from the super wealthy is going to take money from the super wealthy and give it to the guy in Ohio.

Like how is this actually going to work? And lo and behold, it didn't work. So, so there weren't actually, now there were gains from trade in the sense that the buying power of the guy in Ohio, Ohio, like me as a kid in Iowa, I could buy more shoes now. That's

Han Feizi: The only thing that kept the Ohio factory worker afloat is just cheaper goods.

Steve Hsu: Right.

Han Feizi: And debt.

Steve Hsu: And debt. And the other problem, and the other problem that I've sort of anticipated was, in terms of human capital. A lot of these people who were factory workers were not going to become, even if we had set up training programs, re-skilling programs, scholarships to turn factory workers into computer programmers.

I wasn't really confident that I was ever going to work. And in fact, we never really went down that route at all. So now we have, kind of a delayed effect where you do have these, former blue collar workers, people who do want, you know, hey, where are my gains from the trade? Why didn't you give them to me?

I guess I'm going to vote for Donald Trump because he's the only one who even admits that my situation needs rectifying. The other people just want to call me names when I complain about the consequences of, you know, this rise of China and, you know, we didn't get the gains from trade.

So, so, so to me, it's like, you don't get your goodies in our US political system until you marshal political power and take it. And the system is set up right now, much more so than when I was young, so that money has the power. And so if you're, you know, blue collar working class people in the Midwest, you don't have a lot of power to demand your share of the pie.

Okay. But we are at that point where there is a fight now where those people sort of maybe without fully grasping this complicated picture that we've been describing, kind of sense that they, they should be getting, and this would be true in Europe too, right? Lots of working class people in Europe. So they kind of like gilets, juanes and stuff like this.

They kind of sense like they, they haven't gotten theirs. the rich have gotten richer, we haven't gotten ours, and they're trying to basically work through the political system to get this to work, but I don't think, I think they're going to be denied. And, yeah.

Han Feizi: I mean, if you just have to think through it, let's, let's think through it much better than paying them off, you know, 20 years ago, and it becomes a bit tragic because if you think through it, that means you've got to reverse this trade.

You have to reverse this trade where everything's manufactured in Asia and then you're selling U. S. assets to pay for the stuff. and that means at some point, you know, you can't have your cake and eat it too. So what's got to give? I don't know, but one is asset prices will be in trouble. That's one way to do it.

If you suddenly say no more, you know, foreign buyers can't buy U. S. assets. That's one of the fittest ideas. or to tax foreign capital inflows. Another thing that could suffer is, if you really needed people, if you really needed to switch the economy from finance to manufacturing, well, your, you know, $400,000 investment banking job now has to be a $150,000 engineering job.

And your, you know, your lawyers and your consultants and your marketing manager, your real estate agents. who were quite comfortable in this trade, you know, well now have to be factory foreman and machinists and welders, which is a great, decent living, but it's not what it was.

Steve Hsu: I just want to, I do want to talk about the challenges that America faces if it wants to re industrialize. I do want to make a slight clarification here, which is that there are two separate things. One is reversing globalization. The other one is continuing with globalization, but taking the gains from globalization and making sure they're redistributed in a somewhat more fair manner.

And, yes, those are different. Yeah, they're different things. And we didn't, we talked about doing the latter, but we didn't do it. And to me, the rise of MAGA and Trump, you know, aside from immigration, which is another issue, is at least in part due to the fact that we didn't actually execute on redistributing the gains from trade.

And I, I was always skeptical that there was any realistic within the political economy that there was any reasonable way that plausible way that this was actually going to happen.

Han Feizi: So if it did happen, would those people have been happy just to receive a payoff check?

Steve Hsu: Absolutely. So it's right. So your, this is another neglected aspect of this, which is that your sense of well being and pride, in the meaning of life, you know, a lot of that's tied into your work.

And so being a machinist who's happy with their skills and machining and likes to make things, you can't fully compensate for that just with a check. So now the guy's unemployed or the guy works behind a counter selling stuff at Kmart, or, at, at the convenience store. but he gets a check that raises income back to what he made as a welder. It doesn't fully restore the sense of well being for that person. So, that also was neglected, I think, in this discussion.

But getting back to actually reversing globalization. So that would mean reshoring manufacturing to the U. S. somehow preventing these inexpensive goods from, you know, being imported from China.

I'm not saying that it's impossible to do that, but it requires a huge amount of national will and coordination and competence to do it. And so for me, I would bet against the U. S. being able to do this, even though I would like to see the U. S. capable of doing this. I just don't think it's going to happen.

Han Feizi: There is one kind of a, a kind of a fantasy free lunch. The fantasy free lunch is what a lot of people are hoping for, like especially Silicon Valley people, where the U. S. technologically advances to some great degree where there is manufacturing and it's all wonderful products that can't be made anywhere else.

For example, you know, every company becomes, Elon Musk founded 500 companies and they're all as successful as Tesla and SpaceX. Then you got your free lunch. But beyond that, you have a problem of having your cake and eating it too.

Steve Hsu: Yeah, I think that fantasy world is very implausible and, however, a lot of wordcels, so too, I always use the word wordcel, it means someone who's not very quantitative.

Maybe verbally extremely strong, but not very quantitative and those people can fool themselves with lots of sort of sloppy reasoning and such and so there was a period of time where we just kept telling ourselves, actually, there are plenty of people who still believe this, America is exceptional. The American entrepreneur is so clever. American technologists are so creative that we'll always just stay ahead of these Chinese. These Chinese are just copying us, so by definition they have to stay behind because they're just going to be copying what we do. And we'll always just stay ahead of them, and there'll always be these great jobs for Americans to do. inventing the new, really good, innovative stuff. And that's how we'll stay ahead of these Chinese.

And, and I think a lot of people still believe this. That certainly was a reassuring story that people could tell themselves. But I think the more you look at key sectors, whether it's robotics or AI or drones or EVs or solar panels or batteries. I could go on and on, you, you see the gap is closing. There isn't a constant gap where the U. S. just stays ahead.

Han Feizi: I don't think there's a gap at all, but it's just every country, both U. S. and China, has its own things that it's ahead on. There are absolutely things the U. S. is ahead on, but

Steve Hsu: Well, but I would say, if you look at the last 20 years, the, the set of things we're trying for the U S where the U S has a big advantage, like the U S has some special know how and can create a big value add that the Chinese can't do. I think that's almost gone now. So, so it used to be across many sectors, the Chinese government would say, hey, let's do this joint venture because we don't know how to make internal combustion engines. Let's give GM and Volkswagen really sweet hard deals. They're going to have access to the markets here. We're going to give them free land or tax breaks to build the factory here, but we'll gain because we'll learn from that. And eventually the Chinese will master this technology and we'll have our own national champions that can compete in the auto industry. Right. I think that was the playbook.The thing is that, It actually worked for the Chinese.

So they did close the gap. So like in almost everything, like I was just noticing at breakfast at the hotel, there's this really nice, automatic espresso making machine, coffee machine. It works great. It makes excellent coffee. And I looked at it, you know, my wife said something like, Oh, I wonder if it's made, is this an Italian machine or something?

And I'm like, probably not. So then I just looked at it, I photographed it, and then I just did a search and I realized like, yes, this is made in China. So. I think there is a big difference, which is that in almost every vertical, you find the Chinese have closed the gap. And so then, now it becomes untenable for the Americans, because the Americans really have to react to this.

By the way, one thing I should say to give people, you know, we're having a kind of dry, like, wonky conversation, the kind of conversation like, you know, bankers or economists would have to give a little bit of local color, which I think would be surprising to most Americans is if you come to China and you like, just look at the aesthetic quality of things, like the, the, the printing on the restaurant menu or the logo in front of the boba tea shop, or the, you know, the bedding on my, hotel room bed, the aesthetic quality is now very high.

And these things are designed here. It's not like, Oh, we have to bring someone from New York or Paris to design this in China so it'll be cool and hip and nice looking. No, there's some person who went to a fashion design school or a design school in China who designed it now. And I think that's totally underappreciated. Because if you came here 20 years ago or you're used to like only looking at Timu and seeing kind of shitty knockoff stuff, you don't realize that that the high level stuff in China is like the high level stuff in Tokyo or Seoul now at a very high level to the point where someone who grew up here who lives in say Shanghai and travels to Paris might not be that impressed by that.

Yeah, go ahead.

Han Feizi: It's even where the high level stuff, because it's a thing in China called dread, which is to overcomplete the high level stuff is now available to, you know, medium income people. So you can go to these boutique hotels, that, you know, you would pay an arm and a leg for overseas and you're just middle, just middle class stuff here.

So, I was just talking to a friend yesterday saying how China has quote unquote ruined a lot of fun in a lot of things, as in caviar used to be this luxury item, but Chinese caviar you can almost spread it on your toast every day, audiophile equipment, China has slashed the price of that stuff, where It used to be, you know, you, you, you saved up, all your money to buy a set of headphones and now Chinese audiophile headphones are, you know, totally affordable.

Cars, for instance, I mean, if you look at the, the, the Xiaomi SU7 Ultra that they're just coming out with, why would anybody buy a Porsche or a Ferrari?

Steve Hsu: So I believe that car that you're describing is the one that the CEO of Ford, had. Has been driving around, right? This is a big story. Yeah, go ahead.

Han Feizi: CEO of Ford drove the normal Xiaomi, the Xiaomi I thought it was the

Steve Hsu: SU7,

Han Feizi: yeah.

Steve Hsu: SU7.

Han Feizi: Just came out, they're gonna launch it next month, the SU7 Ultra. Oh, Ultra. Okay, got it. The Ultra has 1, 500 horsepower. Yeah. It's gonna cost about 60, 000 to 70, 000 US dollars. Yeah. So it's pretty much Xiaomi telling all of the, you know, the supercar manufacturers of the world that, you know, you're irrelevant now.

Steve Hsu: Yeah. but let me, let me expand on this a little bit. So, so, what is his name? Jim Farley, the CEO of Ford, who's a car guy. Okay. I mean, he's, he loves cars. He races cars. He's really into cars. I mean, you know, not surprising for the CEO Ford, but not all CEOs, right? Even if an automaker is really a quote car guy, he is a car guy.

And there was this big story in the Wall Street Journal a few weeks ago where he and some 14 members came to China to look at the new EVs and tested them and they were shocked. And they actually took several of the cars, shipped them back to the U S. And put them in the headquarters building at Ford in Detroit. So if you go in there, the first thing you see is a Chinese car.

Now, why did they do that? So every Ford employee would realize this is an existential threat to Ford in Farley's own words and the the story that broke just recently isFarley was doing an interview with some podcasts and he just mentioned that he has been driving an SU7, a Xiaomi SU7 that they brought back, and he doesn't want to give it up because he thinks it's such a great car.

And so again, like a lot of people in America still want to say, oh, there are these cheap cars from China. And even Bloomberg or some European news agency talking about tariffs or trade wars would say that cheap cars from China are a threat to Volkswagen. Well, if you ask the CEO Ford, he's not talking about a cheap car.

He's It as a car that outperforms any sports car that he can get. Okay. And it's electric vehicle and maybe equally shocking is Xiaomi is best known as a company that makes cell phones and electronic gadgets. So the fact that they're able to build a car that's so awesome, it competes with, you know, the most expensive supercars in the world, you know, you should take note of that. Like, how were they able to do this?

Han Feizi: Right. I'll, I'll tell, I'll tell a story. And this is a 20, 30-year-old story, which may tell you why things are happening the way they happened. I went to undergrad as a car nut, a total car nut. I read Ia Coco when I was in junior high school. I could identify every car on the road just by looking at the taillights. I can talk about the engine displacement, with horsepower where it's manufactured. That's all I ever wanted to do, was to be an auto engineer. And then when we signed up for all our internship interviews, I just signed up for the car companies.

And then I got, I got, offers from all of them cause they were just so impressed. I was so enthusiastic. And when all the interns were posted, I saw one name on there next to the name was Goldman Sachs. And I just asked around what the heck is Goldman Sachs? And then somebody must've said investment bank.

But in my head, I was like, what an engineer? What kind of bank? Who is this guy? Is this guy dense or something? Well, during graduation, this guy carried the flag, which meant he had the highest GPA in all of engineering. And so little wheels started turning my head. And I kind of found out, and this is how wrongly America has been set up in the past 30 years.

When I did work at GM during my internships, I suddenly realized that, Oh, these are state school kids. You know, I'll be.

Steve Hsu: I have to rib you because yeah, Cornell state school, keep talking.

But anyways, that's apologies. Go big red,

Han Feizi: But that's kind of what has happened in U.S. talent, where the talent has gone to finance. The talent has gone to Silicon Valley. But these old line manufacturing companies like General Motors and Ford, well, they get the pickings after Goldman Sachs, Google, Meta, you know go through the 500, 000 people. Whereas in China, they're graduating how many engineers? I don't know, a couple million? Three and a half million.

So about,

Steve Hsu: About 10 million students in China graduate from college right now every year. It's plausible a third of them are effectively kind of engineering grads, right? So yeah.

Han Feizi: And the government has been rightly or wrongly slapping around the finance industry in China, trying to lower their social status.And there's a lot of people in the finance industry who are quite upset about that. But I think this is a, a, you know, a purposeful calculation that we only have so much human resources available. Let's make sure they go to the correct places.

Steve Hsu: Well, when I was young and America had values, core values, you had to be a little bit apologetic about going into finance. Because, because most people would say, why are you going to finance? Like, do you think that helps people? Is it noble? Like, it, like, if you build a really great car, you can take some satisfaction in that. If you, you know, solve some problem in chemistry that makes people's lives better, you can take some pride in that.

People in the past, when I was young, when I graduated from college, if you said you were going to finance, people would say, well, why, are you just some greedy guy? Is that, like money, the most important thing to you? So you, you would have to overcome some kind of social derision over being a money guy.

You just gave away your age, but, well, no, I'm talking about, yeah, so this is, this is, this has changed a lot in America, but I think an empire or a civilization that's on the rise, values real achievement. But when you get into the looting and grifting stage, everyone is like, oh, let me just get mine. What's the fastest way to get mine? Oh, I want to make a partner at Goldman. See that kid who carried the flag? Maybe his dad or somebody told him this is the way if you want to make $5, $10 million bucks in net worth by the time you're 40. Oh, you can't do that as an engineer But you can do it at Goldman. Oh, he was a New York City kid.

Yeah, exactly. So, but I don't think it's healthy. And I think the Chinese Communist Party now understands this. It's not that healthy to have that become the predominant view in your society. Because then you don't have people who are willing to sacrifice for the common good. Like the idea that it is noble to be an engineer that makes real products.

Or to be a scientist that discovers new things or to be a soldier that risks death for the people at home. The reason those are attractive is because of good core values that valorize sacrifice in the name of something higher, something better, something for the collective good. And finance is not that.

So, so, of course, if you go to HBS or you go to these places, they'll tell you stories like, oh, but you're organizing capital. You're allocating capital more efficiently, and everyone benefits from that. And there is a kernel of truth in that statement. But I don't think it's good for a society to basically buy that line too much and have all of its best people trying to go into finance. I think that society is going to get out competed by another healthier society, which is at an earlier stage of empire, and still wanting to do real constructive things in the world.

Han Feizi: Yeah. I think China nipped it in the bud. I, my career, was made in China during the go go time. The go go time is pretty much Jiang Zemin through Hu Jintao. And that was, you know, everything went, finance was huge, and it really needed a correction and the Xi Jinping correction came through and, you know, am I a fan of Xi Jinping? Well, I am a, um, he better know what he's doing and I'm willing to hang on to see whether it all works out.

Steve Hsu: Yeah. I mean, he, he, he, he's moving things in a certain direction. High quality growth, advanced manufacturing, high technology. That's where he wants the economy to go. Less, I think the infrastructure thing, they've kind of figured out we did enough. We have the roads and the trains and the electrical systems that we need.

So obviously we don't want to a la Michael Pettis, invest, over invest in that now, maybe diminishing returns. But property for property's sake is just a speculative thing. Clearly that shouldn't be the way that the economy continues to grow. So he has a definite view. He's not just letting quote, the market decides what happens.

They have a definite view for how they want their economy to develop. Time will tell whether it works out for them.

Han Feizi: I still give him an incomplete grade, but you know, certainly not a failure. Yeah. Which a lot of people have already given him, or just assume it's a failure from the get go.

Steve Hsu: Now, you mentioned Xi Jinping.

We're just about at an hour mark, so maybe we can start wrapping up a little bit. you mentioned Xi Jinping and, you know, I think a lot of people in the West would say like, pre, or, or analysts of China would say pre Xi Jinping, it was a bunch of liberalizing folks, maybe from the Shanghai clique, that were running the country prior to Xi ascending to power. And that the liberalizing trend stopped and went into reverse. And the view from outside is that individual Chinese have less freedom to express themselves online. There's more sort of political indoctrination in the school curriculum. You know, there's a bunch of things that have moved in a kind of anti liberal or illiberal direction under Xi.

Do you have any sense of how that went and how realistic that assessment is?

Han Feizi: There's a kernel of truth to all of that. Yeah, and that has definitely happened. Yeah Now there is an understanding that it needed to have all of that as part of the backdrop to everything that has been going on from the anti corruption investigation to understanding that the US is now pushing back against China Yeah.

That is just one piece of the policy that, you know, needs to be in place as China moves forward. So, you know, the, the cliche is, you know, the, you know, the West swings from left to right, left to right. whereas China swings from opening and closing and opening and closing. So we are now at a closing phase.

I suspect that if China comes through to the other side, where it feels more secure in its region, its economy has passed through this change where it goes from a property,an infrastructure investment driven to a, you know, high tech manufacturing driven economy, then it will start listening again.

That's the swing that China goes through.

Steve Hsu: Yeah, I agree. I think that, for people who over extrapolate Xi, now I could be wrong, so Xi could turn into another bad emperor, you know, with Maoist tendencies or something, you know, some really disastrous thing could happen, but I think people tend to over extrapolate because if there is this pendulum that swings back and forth, it could be that ten or twenty years from now we have another liberalizing go go phase for China, where, as you said, it's feeling somewhat geopolitically secure, like it's built up its military, it's caught up technologically, there are no real existential threats to the country, there's no way for the Americans to try to, like, destroy the whole economy here by cutting off all the microchips or something like this.

Yeah, then we could suddenly go through a phase which was kind of like what we went through, say, in the 2010s or early 2000s in China. And people then would just be wondering, like, what were they talking about? What were people writing about in 2024 when they were saying, oh, she's going to turn this into some kind of Stalinist state.

Right. So I think it's, it's too early to judge, you know, what things will be like in say 10 years in China.

Han Feizi: Yep.

Steve Hsu: Exactly. Great. so maybe you want to end it there?

Han Feizi: Yeah.

Steve Hsu: Okay. All right.

Han Feizi: All right.

Steve Hsu: It was great having you on the show. Thank you for having

Han Feizi: me on.

Steve Hsu: Everyone read Han Feizi's column in Asia Times and I generally recommend Asia Times because as you know, I've had David Goldman as a guest on the show and, you know, he's got a very unique and insightful take on China, and I think Asia Times is somewhat unique in, you know, it's coverage, it's quite different from the usual mainstream sources, for coverage of, Asia and China.

Alright, thanks a lot.

Han Feizi: You're welcome. Thank you, everyone.