Transcription
Um, given that there were sort of some unhappiness with how BRI has been implemented, uh, previously, um, in terms of how it's being accused of being a debt trap, um, diplomacy, as well as, um, not utilizing as much, uh, local company and local labor for that. U, really interested to hear of you. Thank you.
>> Um, ladies and gentlemen, the rise of China means the modernization and sophistication of 1.4 billion people. This is more than the combined population of all the G7 nations. A transformative process of this scale will give rise to a myriad of multi-decade mega trends impacting not just China but globally. Not unexpectedly, China's rise has also led to geopolitical tensions, particularly with the US. As the world transitions from a globalized and unipolar world led by the US to a multipolar world order where China has a rising influence, we now operate in an environment that is radically different from what we have experienced over the past decades when the US was the clear leader. China achieved a period of unprecedented growth since its economic reform in 1978. Whilst we continue to see its resilience and new economic growth opportunities, packing all these growth in a short span of 40 years has also resulted in various unintended structural challenges that China needs to resolve.
Now, in this regard, we are honored to have with us today Dr. Eric Lee to share his thoughts on the US-China rivalry, China's economic situation, as well as what he sees as the sequel to the China economic growth model and globalization. Good morning.
Uh, thank you, Kenneth, for the generous introduction. It's a pleasure to be here. It's my first time at KMF, so I'm a little nervous because I want to do a good job. I get invited back. Um, so I have my anxieties and, of course, I think it seems that we're living in a moment of acute anxieties everywhere. I'm from Shanghai and I could speak to that. Um, so as Dr. Freud said, that this, the cause for anxiety is repression, and the way to deal with it is to talk about it. So let's talk about it.
Um, here are the headlines to our anxieties. The Chinese economy is in trouble because real estate is collapsing. Big techs are being reigned in. The state is taking over the market. Okay? And private capital is being choked. And we talk about Japanification of China. So the coming last decade or decades, okay, and China is in trouble because politics is turning left. Power is totally centralized. And of course, we have this rivalry between China and the US and the West. It's intensifying by the day. Uh, and, and it's decoupling of technology and supply chain. And of course, we hear talks of war. The world is in trouble because of deglobalization. So we had this amazing period of 20, 30 years, what we call globalization, which turned out, or supposedly turn out, turning out to be an anomaly. Uh, and we're deglobalizing, we're going backwards, and there's a new Cold War looming. Uh, and, and of course, that people talk about the collapse of the post-war international order. This famous American, uh, uh, thinker Robert Kagan wrote this book called "The Jungle Grows Back." The jungle grows back. If the US is not running the world, the jungle must grow back.
So these are the, the headlines. But I like to, uh, take a step back and put it all. If we observe the surface, all these could be true. Okay. Uh, these are obvious. But let's take a need. If we dig a little deeper and see the undercurrents, then we can predict the future. So let's, let's take a step back and put it in a larger and longer context of globalization.
Um, so at the onset of globalization, there was this theory about core, the center, and peripheral of globalization. These are the theories. I won't bore you with the theories, but it suffices to say that we know who are in the core and who are in the peripherals. Okay. So the core of globalization, if you look back 20, 30 years, when, when, when China joined the WTO, there was great debate in America whether they should let China into the WTO. And, and there are a lot of congressional testimonies, and there are a lot of scholars writing papers. And this, this idea that there was a grand plan for global, there's a grand design for globalization. It goes as follows: there's the core of globalization, which is the center, okay, and that's the US-led West. They possess the most advanced technology and the greatest economic resources. Okay, so they design the rules, set the rules. Um, and then there are the peripherals, and those are the developing countries. They provide cheap labor, raw materials, and market for the high-end products the core countries make. Okay. And this is the, this is the grand design for globalization. Okay. And the two largest beneficiaries of this grand design, of course, have been in the last 20 years, the United States and China. We all know that. It's a fact. Okay. And some even put, of course, US is the core and China is the peripheral. And some theorists put China as the semi-peripheral. Okay. Sort of a, a big swathe of territory that's in between the core and the peripheral, that we support the core and we exploit the peripherals. Okay. This cannot go on. It cannot go on because it's no longer sustainable. It cannot go further. That's why we're in this juncture. We're in this trouble and all these anxieties because primarily because the largest peripheral or semi-peripheral, China, is saying no to remaining in the peripheral. Okay. They don't want to do that. They, they're, if to use the professor's term, China wants a new bargain. And in fact, it's probably not fair to say that China wants a new bargain because China never agreed to the old bargain. It was a temporary bargain at best. Okay.
Um, so if you look at, so when, when did this happen? If you, if you want to put a finger on the time and a date, I would put it around 2015, when China was drafting the 13th Five-Year Plan. We're now in the 14th Five-Year Plan. Okay. So, but if you could even push it back further, if you read the 11th Five-Year Plan, 12th Five-Year Plan, it was clear in black and white that China's goal was not to stay in the peripheral. Okay? So, so, so the US convinced itself that they could keep this design forever, for at least a couple of generations, but they failed to read the documents. It's, it's amazing to me that so many people, policymakers, decision-makers, they don't bother to read the documents. Okay, these were documented. Okay. And in the 13th Five-Year Plan, now we're in the 14th Five-Year Plan. Okay. So China is saying we're not staying in the peripheral.
So let's take a look at the first phase of globalization. China globalization 1.0. Okay, that's from 2000 to 2020. 20 years. 2000 is that was when we joined the WTO. Okay. And this biggest push of globalization happened in my generation. Um, there are three pillars to the Chinese economy, to the market economy. The fourth one was driven by the state, infrastructure building, right? But the three pillars to the market economy: number one, real estate, which accounts for a huge portion of China's GDP, about almost 30%. Second, we all know the rise of the consumer internet platforms, the Alibabas, the Tencents of the world, okay, huge, huge economy. Third is the building of industrial capacity and the global value chain based on low-end manufacturing to begin with, and it's gradually, slowly moving to medium-end. Okay. These are the three pillars of the Chinese market economy. And of course, like I said, the two biggest winners, US and China. In those 20 years, we 10xed our GDP using those models. Okay. But by the time around 2015, plus or minus, these three pillars had run out of steam. They could not go on. Here's why. Okay. There are great problems. One, these internet platforms, for instance, on the second pillar, the, the internet, uh, consumer internet platforms. Internet platforms are winner-take-all businesses. Okay, those were business model innovations that created great big monopolistic companies, and they're financial capital driven. Okay. What happens is because they're monopoly, or designed to be monopolies, right? So, so I'm, I'm a venture capitalist. I've lived through this, made plenty of money out of this. Okay. Uh, entrepreneurs come to you with a plan, and, and because it's winner-take-all, eventually it will become, you will have to burn so much capital because user acquisition costs are so high. But if you end up being the winner, you own it all. You become monopoly, and then you can start collecting rents. And if you, so, so if you go from a future monopoly and you discount that value back into today, net present value is huge because it will be a monopoly. So based on that net present value, they raise capital from suckers like us and they use that capital to pursue and build the monopoly. So it's a closed-loop, financial capital-driven model. Okay. And in fact, in the last 20 years, the level of technological true technological innovations was pretty low. Okay. The, the, the QR code that's ubiquitous in China and everywhere else, that was invented like in the 1990s or 80s. Old stuff, nothing new. Okay. But business model transformation that changed everybody's lives. Okay. And very low value-add industrial capacity that's attached to to the platforms. Okay. So, so that's the, that's the old model. So, what another issue is that these companies are both monopolies and monopsonies. Okay? Monopoly is downward monopoly. I'm the only seller. Monopsony is upward monopoly. I'm the only buyer. Okay? You're the only buyer for labor, for instance. That's why you've got these drivers and you got these delivery men. They have no health insurance because they have nowhere else to go. Okay. Who is taking those burden when they get sick? The state is, the government is. So it's called negative externalities. Okay. So then we have technological stagnation. We screwed up. China made huge blunders. Okay, great success story. But several big blunders. Semiconductor being one of them, as we all know today. Okay. Another is the auto industry. We made a big blunder in auto, in combustion engine, 20, 30 years ago. We opened the gate to the largest auto industry, auto market in the world, and foreign capital owned it all. We got nothing. Okay. Just tiny little money. But we got lucky. EV came about. So we changed lane and surpassed them. We didn't repeat the mistake, but we didn't get quite lucky on semiconductor. So we're in a tough fight right now. All right. Then of course, we have concentration of wealth and great inequality because it's monopolies and monopsonies, and environmental degradation. So those 20 years, these are great successes, great problems. Real estate, I don't need to tell you about it. Okay. I, I was, I'm not a real estate investor. I don't know much about real estate. Uh, but then, you know, in the last two, three months, all these big real estate behemoths are getting in trouble, and I took out their balance sheets and I looked at their balance sheets. I'm surprised that they hadn't gotten in trouble much earlier. Some of these people do belong, you'll know where. So if you're an economist, this is what you should be looking at. Okay? Total factor productivity. It's a simple number. So if you look at China's economic growth, our total, total factor productivity is basically simple. How much, how much input does it take to produce an output? Okay, the greater the output, the less the input, more productive you are. So our economy, we reached the ceiling on on the contribution of increases in total factor productivity around 2010, and since then it's been declining, which means that our economy is getting, is not improving on productivity. It's just growing in size. Okay.
So, what's coming next? What's the sequel? We have these old growth drivers that I talked about: real estate, consumer internet platforms, and low-end manufacturing. What are the new growth drivers? Um, I like to use this smile curve a couple of e-commerce put out. Okay. And if you look at the smile curve, we've grown really big. Okay, but we stay at the, at the relatively bottom position, that position of the smile curve. We, the size grew, but the position has not changed much. What we need to do for the economy is this. We got to move upper left. And I would like to argue that this is the primary driver of this looming, this existential struggle between the US and China, because the United States cannot tolerate this movement. If we, if China succeeded, what are they going to eat? Okay. So this is, this is what's happening. All right. So the new growth drivers, what are they? I call it technology-enabled industrial capacity and supply chain. And then there are new industries, two areas. And second areas, they're new industries that are driven by technological innovation to begin with. Okay. In this great competition, China's greatest asset is its industrial capacity. Okay? We have the largest industrial capacity in the world, 33 some percent of the world's industrial output. It's bigger than US, Japan, Germany put together. Okay? Biggest industrial capacity in the world. We make everything. Okay? In fact, I would argue we're hitting the ceiling. Can't get bigger than that. Some things have to be made locally. Okay. And how much is it? It's about 5 to 10 trillion US dollars a year in value. Huge. Bigger than all countries. Okay. Um, so by my calculation, the value add on that industrial capacity is about 12%. Okay. So if you look at, so, so if you take the, uh, the 5 to 10 trillion dollars a year and compare it to a company's revenue, then the value add is its gross margin. Okay, so our gross margin is about 12%. And if you look at America in the 1970s, when its economy was the high, most industrialized economy in the world, when its industrial capacity was highest in the world, their gross margin was about 35, 40%. Okay. So I like to put it to you that these 20, 30 percentage point gap is the money that China needs to make for our next generation. Okay. And that is what I call technology-enabled industrial capacity. Of the 20, 30%, maybe eight or nine percentage points is semiconductors. Okay. We think about this semiconductor industry is the biggest, one of the biggest industries in the world. Okay. And China is about 45% of the world semiconductor industry. Huge. But we import all of our chips, nearly. Okay. The money China spends on importing chips from America and Taiwan, other parts, is bigger than crude oil and iron ore combined. And China is the largest crude oil importer in human history. Think about it. No country in the history of man had imported more oil than China is today. Yet we spend more on our chips. Not potato chips, computer chips. Okay. I like to talk about the iPhone story. You know, when Apple started making the iPhone in China 10 years ago, it's a thousand product. We kept 3.5% of the value. Now the number is up to 26%. Huge. Okay. We need to repeat the iPhone story in every sector. If we made the chips, the number will be 65%. Okay. So what are these new sectors? What are these new opportunities? Manufacturing technologies. Okay. How do we inject more technology into our manufacturing capacity to raise the gross margin? Supply chain technology. I mean, so many industries, hundreds of billions of dollars worth a year. The entire supply chain is in China, but efficiency is still low. Semiconductors, I talked about. Healthcare and life sciences. Synthetic biology, where China is at the forefront. Okay. Alternative energy, China is already at the forefront. So we are changing our economic model, and there's no turning back. And this is why we are experiencing anxieties because this is a wholesale structural change to the largest economy in the world. A bit of a shock therapy. So we're all in shock. There's a lot of pain. There's a lot of pain. There's a lot of winners, and there are even more losers in the short term, guaranteed. Okay. And more importantly, the government, our political leadership had decided, had concluded, which I concur, that market forces could not be relied upon to engineer this much-needed transition. So they initiated a top-down, through political initiative, a supply-side restructuring of the economy, and that by necessity is extremely painful to redirect capital away from the old pillars to the new pillars. That leads to losers, a lot of losers. Okay? Okay. And the winners are not here yet. That's, so we're in this vacuum, and I expect it to continue for a couple of years at least. So sit tight, put on your seat belt. Okay. Um, so the government is doing a lot. These guidance funds. So, so you have top-down political initiatives, and then you have market forces, capital going through those market forces, and then you have these new industries being built. So two things: one is to inject technology into old industries to raise the gross margin, and two is to build new industries. EVs, alternative energy, synthetic biology, life sciences, all these things. Okay. So this is the kind of new economy, the sequel that's upon us. If you read the 14th Five-Year Plan, this is President Xi Jinping's first real Five-Year Plan that he was at the helm when it was drafted. It's written all in there. Okay? You don't have to go beyond that document to know why these policies are taking place.
So this is, um, um, the, um, fiscal in the morning said that when Adam Smith talked about economics, it was political economy, right? And at some point along the way, the political got dropped. This is only economics. Why? I'm guessing because the winners already did their politics, and the economics under those politics that they did was working for them. It put them at an advantage and put everyone else at a disadvantage. So they're saying, don't do politics, just do economics. So you stay in the peripheral. Okay. You cannot pursue a different political game. The political game is settled. I mean, I, I don't know if the great professor is still here. Uh, you know, I, I thought it was an amazing thing that he said, you cannot change your history. You know, it cannot be perfect. There's so many imperfections. Uh, and, and, and Britain, you know, England was, you know, I'm telling you, one of the greatest imperfections that China faces today is that we cannot go out and get ourselves a bunch of colonies. [applause] You know, that, that played a big role in making it so perfect for England. So we had to, we had to overcome and compensate for that imperfection, and this is what we need to be doing. Okay. So, and, and, and this is a, a political process that directs the economy in a particular way, and that's why the powers that be hate it in the world. They want to stop it. So they want to cut off our access to semiconductor at the top. Cut off our access to semiconductor manufacturing at the bottom. Semiconductor industry was an old industry. Now it faces amazing opportunities. Here's why it's being transformed and reconfigured around the globe because of this great ride, because one party's attempt to stop another party from from achieving the value add. Okay. In, in that global supply chain, um, you know, I talked about we, we didn't, we're an active investor in semiconductor. We never, we didn't do that for many years because it was a settled industry. Okay. There's no, everyone was happy buying American chips. And if we were looking at a semiconductor investment, we'd be examining both the supply side and the demand side, right? Supply, can you make the chip? Demand side, will somebody buy it even if you can make the make the chip? And the demand side was always the problem because you go to visit customers, customers say, "Well, I'm happy with Intel. Why should I switch?" Now, every Chinese company is worried about getting on some list and have their access cut. So now semiconductor industry in China is basically, if you can, if you can make it, you can sell it. And it's 45% of the world's largest industry. Think about the opportunities. Okay.
So I want to end by talking about, is there a globalization sequel? Is there a sequel to globalization? Uh, and I want to borrow the concept, an American concept, political concept called "small yard and high fence." Okay? I'm sure you heard about it. And they referred to technology, to my industry. The idea was to keep, keep a small yard of really, really high-end technologies and build high walls so that China cannot access it. Okay. So I borrow that concept. I look at it. I say, who are exactly in that small yard? Who are in that small yard? So of course, it's two groups. One is the British Empire and its four grandsons. You know who they are. And then of course, there's these countries in Western Europe. I marked them black here. Okay. If you look at it, they account for the world about 40, 50% of the world's GDP. The rest in green, there are some middle territories, okay, middle zone, but the rest in green is what we call the Global South. And we account for about 40, also 40 to 45% of the world's economy, but almost two-thirds of the growth. Okay. So the Global South is highly diverse. It includes the poorest countries in Africa like Niger. It also includes countries that build on gold like Saudi Arabia and UAE, and military superpowers like Russia. This is the big world. So the question I think that we need to answer, and the answer is probably awaiting us in the next 10, 20 years, is can China, the biggest Global South country, the biggest economy in the world, can China lead the way and drive a new round of globalization outside the fence, in the real world? So, small yard, big world. Thank you very much. [applause]
Thank you, Eric, for another very interesting and thought-provoking presentation. Um, we'll now open the floor for questions. Um, if you have a question, please raise your hand. Um, and then the staff will bring, um, we'll come to you with a mic. Um, we'll go number four.
>> Um, hi Dr. Eric. I'm Tak again. But I do have a question and it's more along the lines of contextual clarity. I think when you're talking about top-down directives, who really has, who really has the say here in terms of research, design, implementation, and alteration? I think the question is, how diffused are these policy mechanisms and what actors and agents are involved? And I then a follow-up question to that is, do you think top-down directives are sustainable in the long run when it, when it comes to like very sensitive economics?
>> It's the only thing that's sustainable.
>> Cool. Thank you. [laughter] So just like in any company, without top-down design, nothing is sustainable in that company. If you want a company that lasts 100 years, you don't do top-down design, you're doomed to fail. That's probably why America is failing today because they lost their ability to do top-down design like they were during post-World War II. Okay. So, China has a highly complex political system and in many ways a bit more opaque than other countries. But, but in other ways, it's not so opaque. Like I said, if you just read the documents, it's all written there. Every five years, they have this detailed plan. I mean, down to which industry, which sector, in what location, it was all written there. And, and if you, if you look at the five-year plan history or five-year plan in the last several decades, 80%, 85%, 90% of the five-year plan get carried out as planned. That's a lot better than almost all the companies I invested in. Okay. So, so, so if you study how the five-year plans are developed, the moment they put out the next five-year plan, they start doing the following five years. So, it's a long process. Takes two, three years collecting data, collecting industry data, collecting public opinion posts, go to different regions, collect information, sending things down, trials. So, so the five-year plan is a highly complex process. Um, and, and it's all written there. So, so I think we should take that seriously. Thanks. Number three.
>> Yeah. Thank you. Hi, Dr. Eric. Um, what's, what's your advice to our youngsters? Traditionally, we've sent our, our children to, um, to the former empire and the grandchildren of the empire. So, uh, given the picture that you've, uh, painted, uh, what's your advice to them? Where should, where should we seek knowledge? Thank you.
>> Um, like I said, I think the big world, the real big world today is the Global South. That's my view. Okay. And, and Malaysia, of course, is a, a very important country in the Global South. Um, and you, I was, I, I recently spent a lot of time in in the Middle East, in Gulf States, Saudi Arabia and UAE, uh, working on investments, semiconductor industries, and we're talking about pan, um, going there, uh, to to study this. So if you have children, um, I think the, the, I think you should probably get them to learn more and more about the Global South, the diversity, the potential, the different political systems, different religions. You know, one of the biggest, uh, characteristic about the Global South is, is, uh, pluralism. So there's so many different political systems, different religions, different cultures, different economic models. Um, it's, it's great to go to the West, go to Oxford, go to Harvard to study. Uh, but they give you a singular vision. And if you're, if you're steeped like I was steeped in those singular visions at a young age, uh, that could handicap you. Uh, I'm lucky because when I got steeped in it, we went into a 20, 30 year process that was very much linked to that singular vision. But that singular vision is no longer going to be the driving force for the world. Thanks. Number one.
>> Hi Eric, it's great to see you again. Um, Brian here. I was just wondering, picking up on what you said about the Global South. Um, the elephant in the room strikes me as, uh, the Sino-Indian relationship, which I think is an incredibly important relationship, hopefully a partnership going forward into the future. Now, we see territorial conflicts, disputes, the Quad, and India is being co-opted into parts of these alliances, but it's clear that India has its own strategic autonomy and wants to act as an independent state that's free from influence from both the West and also China. So, just taking the Sino-Indian relationship as an example, how should China address the pluralism and pluralities that constitute the Global South today, and how can it forge a sustainable leadership going forward? Thank you very much.
>> Um, I think one of the most common characteristics, you know, all the, like I said, Global South countries are highly diverse, but they share one thing in common, which is the need for development. Okay. So, so in the past 20, 30 years, like, you know, the professor put out these charts, China did great, a few countries did great, but a lot of Global South countries had has stagnated. So it's critical for the Global South that some form of globalization continues. Okay. Now, it's the Western core, Western countries, maybe it's in their interest to reverse globalization given their own issues. Uh, so, so I think China should probably play a, if they want to win this, win the day, is to continue to encourage globalization, openness, interconnectedness among these developing countries. Okay, that's, that's one. And two is to, to allow for diversity, to encourage diversity. Um, so, so there's, uh, the, the West wanted in the first wave of glo, in globalization 1.0, is driven by so-called universal values. They wanted something universal. Of course, the word universal means one, uni, right, singular. Okay. And China wants a pluralistic world. They want the opposite of universality. They want differences. Um, and, and that's, I think that plays to the characteristic of the Global South.
>> Okay, I think we have time for just two more questions. We'll go with number six first and then number two.
>> Hi, Dr. Derek. Um, thanks for your talk so far. The dry jokes about colonialism have been excellent. I've got a very down-to-earth question. So Khazanah is an investment house. Uh, I'm from Khazanah. I'm Raman. Uh, my question to you is this, right? You occupy a unique viewpoint of being a political scientist. So you understand politics, and you're also an investor. So how do you think about deploying capital in a world where there is active, uh, top-down change, because as you mentioned, market forces cannot be relied upon to do the job to drive structural change. Thank you.
>> Well, I mean, I could speak to China, uh, where I am and where I have my business. Um, which is, we, you know, I got a lot of colleagues who are just complaining, who are just whining, okay? Because the old days are over. The good old days are over. There are new things. They're not used to it. My point is, let's stop whining. Let's engage the present and embrace the future. And the future is in these industries that I talked about. That's where the future value will be created. If you don't have a stake, I, I put it to you without extraordinary circumstances like a war or anything, 10 years from now, we will reach these goals. Our gross margin of our industrial capacity will get to 25%, 30%, 35% off of a denominator of 10 trillion US dollars a year. If you don't have a stake in that, you're out to lunch.
>> Last question.
>> Hi, good afternoon. My name is Mayi and I'm from Sals Energy. Thank you so much for painting the picture for us of the old pillars and the new pillars, uh, coming forward. Uh, I'm curious about how that relates to, in terms of, um, the Belt and Road Initiative, BRI. Um, especially how that relates to, uh, countries in ASEAN. Um, given that there were sort of some unhappiness with how BRI has been implemented, uh, previously, um, in terms of how it's being accused of being a debt trap, um, diplomacy, as well as, um, not utilizing as much, uh, local company and local labor for that. U, really interested to hear of you. Thank you.
>> Um, debt trap. Um, I mean, Belt and Road, it's an amazing thing that I guess just, just because they control the media. Okay. Belt and Road is the only project where I could see, I could remember that when a loan goes bad, it's the borrower that complains, not the lender. Okay. So, actually, there haven't been many bad loans on Belt and Road. Um, and when, when BRI started 10 years ago, exactly 10 years ago, actually, we never, none of us understood the far-reaching impact it would have. We thought it was just China exporting its capacities and, and finances. Uh, but looking back, with all these global deglobalizing forces around us, BRI is probably today the strongest globalizing force in a deglobalizing world. Um, and, and I think that means a lot.
>> Okay, thank you. I think that's all we have time for today. Uh, please join me for a round of applause for Dr. Eric. [clears throat] For, forch. Fore! Foreign! Foreign! Foreign! Fore! Foreign! Foreign! Yeah, [laughter] Fore fatal.