Speaker 1: Hello, and welcome to another episode of the All Thoughts Podcast.
Speaker 1: I'm Tracy Alloway and I'm Joe. Wi isn't thal so Joe.
Speaker 1: It's been a pretty eventful summer here in Hong Kong. Yeah,
Speaker 1: I mean that's my impression. I guess sort of like
Speaker 1: here too. But every everywhere that Chinese money has touched
Speaker 1: this summer, whether it's China itself, whether it's Hong Kong,
Speaker 1: or whether it's US markets, has been quite a wild ride,
Speaker 1: to say the least. Yeah, so obviously, um, being in
Speaker 1: the Bloomberg news room, it's been kind of NonStop this summer.
Speaker 1: So we're talking about the crackdowns of course that um,
Speaker 1: the Chinese Party has announced on various sectors of its economy. Uh.
Speaker 1: It started with targeting at financial back in October. There
Speaker 1: was a lot of theorizing about why ant lots of
Speaker 1: people focusing on the data that AT controls. But then
Speaker 1: the summer it kind of just spun into a new
Speaker 1: level of intensity and we saw China cracking down on
Speaker 1: for profit education companies. We saw it coming after d D,
Speaker 1: the ride hailing app, saying that they had to you know,
Speaker 1: improve their labor laws and also that Beijing, the City
Speaker 1: of Beijing might actually take them over and kind of
Speaker 1: make them a state owned enterprise or something like that.
Speaker 1: It's it's basically been NonStop and everyone is trying to
Speaker 1: figure out why now and what exactly is China trying
Speaker 1: to do. Yeah, that is sort of like the I
Speaker 1: mean you just sort of listed all of these things,
Speaker 1: and each one of them on their own have been extraordinary.
Speaker 1: Like the d D thing was crazy. It's of course
Speaker 1: that's like they're there like uber type company, And wasn't
Speaker 1: that like that was like it like three days of
Speaker 1: their U S I p O. Wasn't it like it
Speaker 1: was literally the I p O like out of Tuesday
Speaker 1: or something, and then the following one day there was like, oh,
Speaker 1: we're cracking down. And then some of the companies like
Speaker 1: these online are these uh private education companies, some of
Speaker 1: which are listening to us, like their business models are
Speaker 1: like basically going to zero right there, like your band,
Speaker 1: there's you can't do what you do. I don't know
Speaker 1: if it's total zeros, but it has been extraordinary. But
Speaker 1: I still don't feel like I understand, like what is
Speaker 1: the the end goal here? Yeah, so I guess two
Speaker 1: things on that topic. So you know you mentioned, Um,
Speaker 1: the d D crackdown happens soon after the I p O.
Speaker 1: A lot of people are pointing out that the seems
Speaker 1: like China is sort of shooting itself in the foot.
Speaker 1: It's going after some of its most successful companies. But
Speaker 1: on the other hand, you know, a lot of what
Speaker 1: China says it's doing is about improving quality of life.
Speaker 1: So it doesn't want people to spend loads of money
Speaker 1: on their education and have to be you know, really competitive. Um,
Speaker 1: it doesn't want well, it wants to protect workers rights,
Speaker 1: um for for d D drivers and things like that.
Speaker 1: It wants to protect user data, you know, similar comments
Speaker 1: that we've heard in the West when it comes to
Speaker 1: Facebook and Google. Right. So, but of course people are
Speaker 1: very distrustful of those messages. Um. There's lots and lots
Speaker 1: of theories going around about what exactly is going on.
Speaker 1: And today I am very happy to say that we
Speaker 1: are going to be bringing back a long time odd
Speaker 1: lots guests. We're going to be speaking with Dan Wong.
Speaker 1: He's a technology analyst over at Gavicale drab Eck Economics,
Speaker 1: and of course he's been on the show a couple
Speaker 1: of times, one of the best commentators in my opinion
Speaker 1: when it comes to China's tech sector. So really the
Speaker 1: perfect person can't wait? Okay, uh Dan, welcome back. Well
Speaker 1: it's not for nothing, Tracy that Odd Lots is my
Speaker 1: favorite podcast and Tracy my Joe my favorite podcast host.
Speaker 1: Too kind. And so I'm trying to think, Um, where
Speaker 1: to begin? Um, why don't we start? Well, why don't
Speaker 1: we begin at the beginning? Um, you know the crackdown
Speaker 1: on Aunt Financial in October. What was your initial thought
Speaker 1: about that one? Because I remember when when it happened,
Speaker 1: people kind of thought this was an idiosyncratic event. Um,
Speaker 1: you know, there was something specific about and Financial, an
Speaker 1: offshoot of Ali Baba and which is of course founded
Speaker 1: by Jack Ma and so people thought this was all
Speaker 1: about that one company and maybe that one person. But
Speaker 1: you know, almost a year later, it seems that there's
Speaker 1: a wider message here. I think the narrative has evolved
Speaker 1: since the early days of h and Financial, when about
Speaker 1: just before the US election, the financials I p O
Speaker 1: was halted by the Chinese authorities. And so if we
Speaker 1: draw the line from late October through to June and
Speaker 1: now presently we're speaking in September. The first big shock
Speaker 1: was the financial I p O and then the second
Speaker 1: big shock was the d D I p O. Has
Speaker 1: Joe mentioned, UM, you know, facing a fairly severe regulatory
Speaker 1: crackdown in terms of having its app pulled from app
Speaker 1: stores about a couple of days after its I p O.
Speaker 1: And so I think when we thought about those two
Speaker 1: events in isolation, um it was a really big shock
Speaker 1: and we wondered, you know, what exactly was going on.
Speaker 1: But as this regulatory campaign escalated, as we saw more
Speaker 1: industries get taken on, I think paradoxically, I think I
Speaker 1: am at least a little bit more aware that there
Speaker 1: is um more of a regulatory theme around governing these
Speaker 1: internet giants. And so if I wanted to, um, you know,
Speaker 1: put things into different buckets, I would put the first bucket.
Speaker 1: The first bucket would be made up of UH and
Speaker 1: financial and the D D I p O s in
Speaker 1: which the Chinese authorities were highly reactive, in which they
Speaker 1: couldn't really control the timelines because these timelines were controlled
Speaker 1: by the companies in terms of the I p O s,
Speaker 1: and so they had to crack down pretty quickly and
Speaker 1: pretty hard. And then I would cite something like, um,
Speaker 1: you know, a second bucket made up of items, um,
Speaker 1: that are much better studied. Uh, and so in terms
Speaker 1: of something like the online education crackdown. But we've read
Speaker 1: from the Chinese Ministry of Education is that the Ministry
Speaker 1: of Education surveyed around nineteen education firms, around seven hundred
Speaker 1: thousand children and then over hundred and fifty thou parents
Speaker 1: before they issued these pretty traconian regulations that more or
Speaker 1: less decapitated the online education sect. Or we can also
Speaker 1: think of other antitrust issues here that have affected companies
Speaker 1: like Ali Baba. We might also be able to think
Speaker 1: of some things like video games, in which President season
Speaker 1: Paying has been talking about video games for over the
Speaker 1: last four to five years. So I think there is
Speaker 1: a little bit of, you know, maybe two or three
Speaker 1: different buckets here. The first bucket are the purely reactive stuff.
Speaker 1: There's a second bucket of antitrust issues prominently faced by
Speaker 1: Ali Baba and mayelon camping. And then there's a longer
Speaker 1: term issue with video games and online education, in which
Speaker 1: the party state has decided, well, maybe we don't like
Speaker 1: these things very much. So already this was really helpful,
Speaker 1: and you know, obviously coming at this, looking at this
Speaker 1: from an American American perspective, it's always tempting to try
Speaker 1: to draw analogies. And when you look at sort of
Speaker 1: big tech in the US, you see a lot of
Speaker 1: politicians on both sides of the aisle with their plants
Speaker 1: about Facebook and Amazon, they're kind of the complaints are different,
Speaker 1: some overlap, but there's, you know, complaints about the power
Speaker 1: that they have. And then you have a lot of
Speaker 1: regulatory actions that take place in the US and Europe,
Speaker 1: and these lawsuits that never seek to that never really
Speaker 1: seemed to amount to anything, like maybe there'll be a
Speaker 1: big fine or a bunch of state's attorneys general like
Speaker 1: to one of the companies, and then four years later
Speaker 1: they have to make some change whatever, but it doesn't
Speaker 1: really seem to do anything. Is the angst about the
Speaker 1: power of tech slash big tech in China comparable, with
Speaker 1: the difference being that, well, they could do something about it,
Speaker 1: whereas politicians and regulators here can't get their act together.
Speaker 1: Or is the angst something different? I think it is
Speaker 1: more a question of degrees. So first I agree with you,
Speaker 1: that's the ferocity that the Chinese Party state um brought
Speaker 1: to bear on against these companies is you know, nothing
Speaker 1: like but the West, do you know? As best as
Speaker 1: I can tell, there are some irritating lawsuits that big
Speaker 1: tech is facing in the US, and then some minor finds,
Speaker 1: you know, somewhat big finds that they are challenging in
Speaker 1: the European Union. But there hasn't been a really really
Speaker 1: substantial actions here, whereas the Chinese have acted much more severely. Now,
Speaker 1: I think I would cite, you know, um, you know,
Speaker 1: in terms of the type of ankst that the Chinese have.
Speaker 1: I would want to put a framework of maybe four
Speaker 1: big slogans of the moment as well as one theme
Speaker 1: of the moment. And here I'm really drawing on the
Speaker 1: work of my Dragonomics colleagues, and I think the four
Speaker 1: big slogans that we've identified our first building the rule
Speaker 1: of law, that this is something President se Jingping has
Speaker 1: talked about over the last three or four years, requires
Speaker 1: a pretty comprehensive regulatory framework for dealing with a different
Speaker 1: company needs. Second, I would cite dual circulation, which is
Speaker 1: includes a theme to improve the functioning of domestic markets. Third,
Speaker 1: I would say, um, there's something of family values here.
Speaker 1: In which the country just really want UM families to
Speaker 1: have many more children. And then the big theme that
Speaker 1: we have been thinking about, the fourth slogan that we've
Speaker 1: been thinking about right now is something called common Prosperity,
Speaker 1: which has really exploded in the pages of state media,
Speaker 1: which is, in our view, something reduce inequality as well
Speaker 1: as social division. And so, you know, if you think
Speaker 1: about these broad interlocking programs trying to make it easier
Speaker 1: for families to have children, trying to make the marketplace
Speaker 1: that are regulated arguably more fair, to reduce these antitrust issues, UM,
Speaker 1: to have a common prosperity, which is uh means to
Speaker 1: you know, stop the wealthy from getting more wealthy, UM,
Speaker 1: and then to improve I think what they call it
Speaker 1: is an olive shaped distribution and economic distribution that's shaped
Speaker 1: like an olive UM. You know. I think the tech
Speaker 1: companies are all implicated by each of these slogans, but
Speaker 1: it doesn't mean that tech companies are the will be
Speaker 1: the only companies that will be implicated by each of
Speaker 1: these slogans. I think right now the focus is on
Speaker 1: tech because tech companies are implicated by all four of
Speaker 1: these slogans. Now, one more big theme is the idea
Speaker 1: that I think Beijing has decided that, well, we are
Speaker 1: going to prioritize certain technologies over others. Now, I previously
Speaker 1: worked in California, and I haven't always bought into the
Speaker 1: idea that consumer internet companies like Facebook or Snap really
Speaker 1: represent the peak of our technological civilization, that they are
Speaker 1: the shortest signs that we live in some sort of
Speaker 1: technologically accelerating civilization. Sort of lamented that among my smartest
Speaker 1: peers who have graduated from very good schools are much
Speaker 1: more keen work in hedge funds or asset allocation or
Speaker 1: the consumer internet companies instead of much harder technologies. And
Speaker 1: I think this is something that has upset Beijing as well.
Speaker 1: You know, one very key line from a major speech
Speaker 1: that Presidency gave last year was that, well, we can
Speaker 1: tell that digitization is really important, as we've seen over COVID,
Speaker 1: but what we must never do is to lose our
Speaker 1: manufacturing sectors because the real economy is absolutely paramount. And
Speaker 1: as I've said multiple times on hot lots before, the
Speaker 1: Chinese government really wants semiconductors, semiconductors, white body aircraft, life sciences.
Speaker 1: These are much more the technologies that Beijing is targeting,
Speaker 1: and I think Beijing has sent this a signal, and
Speaker 1: US in this case initiated a very severe cracknown to say,
Speaker 1: online education. While we're not sure that's as important as
Speaker 1: technology as for something, for example, something like chemicals video games.
Speaker 1: Children really shouldn't be playing too many of those, Um,
Speaker 1: they should be working in clean rooms for semi conductors instead.
Speaker 1: I'm exaggerating a little bit there, but I think that
Speaker 1: is a little bit more of the theme that China
Speaker 1: wants to do regulate the market better and then to
Speaker 1: prioritize the right source of technologies. Yeah, and I remember, UM,
Speaker 1: a couple of days after one of the crackdown announcements,
Speaker 1: or maybe it was on the day, we did see
Speaker 1: Chinese listed semiconductor stocks just absolutely spiking, So there was
Speaker 1: almost a rotation out of consumer tech and into semiconductors. UM.
Speaker 1: And I have more questions about what exactly China is
Speaker 1: trying to do when it comes to its tech industry
Speaker 1: and overall economy. But before we get there, you know,
Speaker 1: you mentioned some of the key phrases from party speeches.
Speaker 1: Common prosperity, disorderly spansion of capital has been another one
Speaker 1: that's come up a lot, And I know you're on
Speaker 1: the record saying that you read a lot of the
Speaker 1: party speeches, probably all of them, and you also go
Speaker 1: through like all the party the official party reading materials,
Speaker 1: like you know, the magazines they produce and things like that,
Speaker 1: and a lot of investors don't tend to do that.
Speaker 1: So I guess my question is, like, should we be
Speaker 1: paying attention to party speak? Were there hints of this
Speaker 1: in party speeches or things that she had said previously?
Speaker 1: And do you think that the crackdowns are sort of
Speaker 1: changing the behavior of investors in the sense that they're
Speaker 1: going to be paying more attention going forward? Cracy doesn't
Speaker 1: everyone read the party's main theory magazine, till Translation Seeking
Speaker 1: Truth as many of us do. Um Seeking Truth is
Speaker 1: a magazine that comes out twice a month. UM. Last year,
Speaker 1: I've read every issue and right now and still continuing
Speaker 1: the exercise. It's a beautifully laid out of magazine. It
Speaker 1: is features these thick pages, well printed pictures, uh, and
Speaker 1: a lot of the best writers in the party state.
Speaker 1: And every time I flipped through it, UM, you know,
Speaker 1: it's always led by a major speech or major essay
Speaker 1: by the General Secretary of the Communist Party C. Kinking
Speaker 1: in a fund that's distinct the rest of the h
Speaker 1: in the magazines. And so if you haven't had the
Speaker 1: pleasure of holding one of these things, you know, I
Speaker 1: recommend it just for the tactile experience alone. UM. So
Speaker 1: you know I did read, um, you know, every one
Speaker 1: of MS speeches um Gintilshire last year, which isn't as
Speaker 1: arduous and exercise as you might think. You know, one
Speaker 1: speech every two weeks, which usually isn't terribly long. He
Speaker 1: mixes a great deal of party speak along with some
Speaker 1: pretty straightforward and frank phrases that are easily compared priscible
Speaker 1: and so you know that is the signature style. It's
Speaker 1: not actually that much work, I think to engage with
Speaker 1: one speech every two weeks, and I think this is
Speaker 1: something that more of us should be doing. And really
Speaker 1: for me, the exercise that um, you know, for me,
Speaker 1: the meaning of the exercise is that it's really important
Speaker 1: to see what the party state engages as priorities at
Speaker 1: the moment. So for example, you know, if they have
Speaker 1: five issues dedicated on party history, well you know, maybe
Speaker 1: they're not thinking about for example, you know, some other
Speaker 1: big projects related to the environment, for example, and so
Speaker 1: getting a sense of what the major priorities are. You know,
Speaker 1: I think that is a decent way of getting there.
Speaker 1: It would be very reluctant to say that, you know,
Speaker 1: reading all of the party documents, reading Kosha, reading the
Speaker 1: People's Daily is an effective way to do uh investing.
Speaker 1: I think, you know, there are millions of these articles
Speaker 1: a day, can't possibly read them all. And there's also
Speaker 1: a lot of noise, um mixed in with these signals now,
Speaker 1: you know, when it comes to online education. I think
Speaker 1: what we found noteworthy was that President Senior Ping has
Speaker 1: mentioning this a couple of years ago. In fact, it's
Speaker 1: published in his big compendium, The Governance of China, Volume three, UM.
Speaker 1: And so you know, this has been a signal for
Speaker 1: a while, and the signals really started to escalate over
Speaker 1: the last couple of months. And so I think that
Speaker 1: is a place where we could have had a bit
Speaker 1: of a fairer warning. The state media gave us fair warning, um,
Speaker 1: if we only chose to engage it. But that's not
Speaker 1: to say that, um, you know, we have to be
Speaker 1: pouring over every People's Daily article. UM. But I think
Speaker 1: you know, it is worth keeping keeping in mind what's
Speaker 1: going on, what the party is saying, what the party
Speaker 1: is saying to itself, it's cadres UH and um, you
Speaker 1: know the broader world. I think there's something interesting you said.
Speaker 1: You mentioned that they took the survey. I think you
Speaker 1: said like seventeen thousand education companies and that hundreds of
Speaker 1: thousands of UH students. You know, the US is characterized
Speaker 1: as a democracy where there is a sort of direct
Speaker 1: feedback mechanism between the voters and the government and theory,
Speaker 1: and obviously China is not characterized as such. But these things,
Speaker 1: these actions that they take, such as going after the
Speaker 1: education companies or such as going after video game playing,
Speaker 1: say various things like that to improve like family values,
Speaker 1: as you put it, is there like this basic like
Speaker 1: sort of like feedback mechanism where even though there aren't
Speaker 1: elections per se as we understand them in the US,
Speaker 1: you still have this sort of like either direct or
Speaker 1: indirect response from the impulses that parents and families expressed
Speaker 1: towards what gets UH turned into government law. There are
Speaker 1: two mains of feedback mechanisms, UM that the party state
Speaker 1: are really engages. UM. So First, it maintains these open
Speaker 1: channels of petitioning where you can see um, you know,
Speaker 1: people usually elderly people lining up to know, voice their
Speaker 1: grievances and then tell you know, the government, UM what
Speaker 1: they're they're they're they're mad about. I mean usually these
Speaker 1: things are higher prices of hects or higher prices of
Speaker 1: gas or something. But you know that is you know,
Speaker 1: one of these things that are out there. And then
Speaker 1: the other is UM that the party maintains these active
Speaker 1: uh you know, groups of people that are actively soliciting
Speaker 1: people's opinions. And so this is UM. The survey was
Speaker 1: something that the Ministry of Education announced, UM, you know,
Speaker 1: surveying seven thousand different parents. You know, I think it
Speaker 1: is something that's logistically possible by the Chinese bureaucracy to do.
Speaker 1: I'm also aware that you know, for example, I currently
Speaker 1: live in Shanghai, and I know that the Shanghai government
Speaker 1: regularly hosts these grievance sessions just to tell them what's
Speaker 1: going on and UM, you know what the problems are. Now,
Speaker 1: whether this can be UM an effective replacement for democracy,
Speaker 1: I think absolutely not. Uh, you know, there's no mechanism
Speaker 1: for poor leaders to be removed by the people. This
Speaker 1: is all done, uh, certainly all done by a party basis,
Speaker 1: But I think, um, you know, I would suggest that
Speaker 1: there is a lot of very active surveys of public
Speaker 1: opinion done by the party state, as well as active
Speaker 1: solicitation of views by different people. This actually leads to
Speaker 1: the other big question about all of this, which is
Speaker 1: why now. So you know, there are these different explanations
Speaker 1: for why China is embarking on these various crackdowns. Um,
Speaker 1: you know, perhaps quality of life explanations, perhaps solidifying control.
Speaker 1: But at first clients, it doesn't seem to make much
Speaker 1: sense to be doing this in the middle of a
Speaker 1: global pandemic, um, when the economy is relatively fragile. Um,
Speaker 1: China just sort of emerged from the trade war with
Speaker 1: the US, although plenty of people would say that under
Speaker 1: President Biden relations have actually gotten worse between the U.
Speaker 1: S And China. So what's your take on why now?
Speaker 1: Because they could have gone after these respective industries, um,
Speaker 1: presumably at any time in history. That's a great question,
Speaker 1: and that's something I scratched my head a bit as well.
Speaker 1: And so I think the first thing to note is that, um,
Speaker 1: I think but the government realized last year over COVID
Speaker 1: was that, my goodness, a lot of people are using
Speaker 1: online services, for example, for food delivery or for online education.
Speaker 1: And for the most part, the Chinese internet space has
Speaker 1: been I would say, pretty minimal regulated until basically the
Speaker 1: last two three years. I think the over the last
Speaker 1: five years. Um. You know, when I visited a bunch
Speaker 1: of tech companies when I was living in Beijing, you know,
Speaker 1: they would often say that they are are fewer regulations
Speaker 1: relative to the US and relative to every other industry
Speaker 1: in China. And so I think, you know, I think
Speaker 1: the most important impetus is that the government realized how
Speaker 1: much more online everyone became last year in China. Probably
Speaker 1: something like this happened in the US as well, um,
Speaker 1: and so they can't let this be, you know, U
Speaker 1: governed space for much longer. The other um, you know
Speaker 1: why now issue is that I think, much more broadly,
Speaker 1: my view is that China will not open its borders
Speaker 1: for at least twelve more months, potentially for many years.
Speaker 1: And I think that's because COVID is still ravaging quite
Speaker 1: a few parts of the world and to Chinese don't
Speaker 1: want to leave China right now, and so there's sort
Speaker 1: of not that many costs to China for maintaining its borders.
Speaker 1: Shots hit more or less fields. It can manage a
Speaker 1: lot of these problems. Um, you know, it's certainly not ideal,
Speaker 1: but it can manage them. And it's better than letting
Speaker 1: COVID run free in Beijing, Shanghai and everywhere else. And
Speaker 1: so you know, if you remove this idea that um,
Speaker 1: this constraint that you know, things can only be regulated
Speaker 1: after things are really good, well, I'm not sure that
Speaker 1: they believe that there is going to be a much
Speaker 1: better time than this. So again, you know, I'm lazily
Speaker 1: reaching for the U S analogies here, but um, you
Speaker 1: know you mentioned the first sort of the anti trust
Speaker 1: aspect of all this and going after like the really
Speaker 1: big companies, and I think like one of the sources
Speaker 1: of anxiety in the US is just simply that like
Speaker 1: there are the big internet tech companies in the US,
Speaker 1: and consumer tech companies represent a major or some power,
Speaker 1: and a company like Facebook, I mean it's kind of
Speaker 1: like a government. They have like a Supreme Court and
Speaker 1: uh an internal checks and balances of what can get published.
Speaker 1: I don't know how well, it works, but it exists,
Speaker 1: and there's a perception that, say, like Mark Zuckerberg is
Speaker 1: as powerful as any other politician in the US. And
Speaker 1: I'm curious if in that bucket of regulation, that too
Speaker 1: is a source of the impulse in China, which is
Speaker 1: just that whether it's Ali Baba, or and Financial or
Speaker 1: some of these other big ones, that this sort of
Speaker 1: pure political power or pure power that gets accumulated by
Speaker 1: some of these companies becomes big enough to rival the
Speaker 1: state of the party. I think that's definitely underlying motivations
Speaker 1: for this crackdown as well. What I wonder about is
Speaker 1: that I don't feel that there is a broad sense
Speaker 1: among the Chinese people that the CEOs of the major
Speaker 1: tech companies are as powerful as the politicians. UM. But
Speaker 1: it's certainly worth acknologying that the Communist Party cannot suffer
Speaker 1: any perception that major business leaders are able to challenge
Speaker 1: its authority. And you know, I think it was certainly
Speaker 1: offended that Jack mob was so impudent as to insult
Speaker 1: the regulators UH Future Financial Forum. The positioning here is,
Speaker 1: I think this is one of these underlying motivations. UM.
Speaker 1: Perhaps these tech companies are UM you know, sort of
Speaker 1: the ponds of internal political struggles based on whose family
Speaker 1: homes which firm. These are some things that we understand
Speaker 1: not at all about UM. And I think from my
Speaker 1: perspective from having lived in China for the last few years,
Speaker 1: is that this has been UM one of the main
Speaker 1: narratives from UM, you know, foreign media about how why
Speaker 1: there's been a tech crackdown, and I see a pretty
Speaker 1: considerable discrepancy here. I think for those of us who
Speaker 1: live in China are able to see the excesses of
Speaker 1: these companies on a daily basis, companies like may Twin
Speaker 1: or the online education companies or Ali Baba. Meanwhile, these
Speaker 1: companies are celebrated elsewhere as UH having their crime as
Speaker 1: being only being too beloved, and so I think, you know,
Speaker 1: that's one of these underlying factors opera. From a lot
Speaker 1: of people's perspectives, these companies have sort of been getting
Speaker 1: out of hand, and they should be regulated quite a
Speaker 1: lot more extensively, which the party state is doing. And
Speaker 1: to offer an example, I think, UM, a lot of
Speaker 1: the people, a lot of the parents UM I've spoken
Speaker 1: to a lot of the people around me would say
Speaker 1: that parents around them have been pretty happy about this
Speaker 1: online education crackdown. These online education firms have become really
Speaker 1: good at playing parents off of each other to engage
Speaker 1: in a zero status game to pay more for their
Speaker 1: children while making um of children more miserable. I think
Speaker 1: a lot of them. What I see the government's efforts
Speaker 1: is to do a coordination game UM to stop parents
Speaker 1: from competing with each other, and then to coordinate parents
Speaker 1: against their own children to make sure that they don't
Speaker 1: play too many video games because now they can say, um,
Speaker 1: this is against the law. And so these are I
Speaker 1: thinks some some of the other backdrops that are going on.
Speaker 1: So when the crackdown on education or education tech um
Speaker 1: came out during the summer, I remember there was a
Speaker 1: bunch of commentary from people saying like this is so
Speaker 1: unexpected and so extreme, you know, China basically coming out
Speaker 1: and saying that for profit education firms are no longer
Speaker 1: will no longer be able to generate profits. That it
Speaker 1: meant all of the China market was uninvestable. So I'm
Speaker 1: curious to get your take about what all these crackdowns
Speaker 1: actually mean for investment in various China sectors. And also,
Speaker 1: you know you mentioned semiconductors earlier. And we know that
Speaker 1: China is very focused strategically on building up its semiconductor industry,
Speaker 1: and you've come on the show and talked about that
Speaker 1: quite a lot. But I can't imagine that it needs
Speaker 1: to squeeze capital out of consumer tech in order to
Speaker 1: get it into semiconductors. Um there must be plenty of
Speaker 1: money sort of going into that already. So I guess
Speaker 1: the question is what does this mean for investment overall,
Speaker 1: and is this the best way to get more investment
Speaker 1: into strategically important sectors. Probably not, is my gut answer,
Speaker 1: but it's the way that the party state has decided
Speaker 1: to do things. I guess the best way I can,
Speaker 1: you know, think about that action is, you know, if
Speaker 1: you sort of just signal two investors online education, you know,
Speaker 1: you should not be deploying any more capital there. But
Speaker 1: maybe more importantly, I'm signaling to the country's best and
Speaker 1: brightest in terms of the fresh grads. Now, I mentioned that,
Speaker 1: you know, at least when I was graduating from college
Speaker 1: some years ago, a lot of people still wanted very
Speaker 1: much to work in finance as well as a consumer internet.
Speaker 1: And I think, you know, on the margin if the
Speaker 1: party leaders UM, if the government is thinking well for
Speaker 1: the marginal student who can move from BETA and uh
Speaker 1: teeing quiversities China's best university and UM to stop them
Speaker 1: from going into consumer internet because they know that we
Speaker 1: Embijing don't like it anymore, and to go work on
Speaker 1: much harder technologies like life sciences and semiconductors and aviation.
Speaker 1: Maybe I think that is another one of their motivations.
Speaker 1: You know. Michael Lewis in Liars Poker said that, you know,
Speaker 1: he thought he would get the marine biology students from
Speaker 1: Ohio State to pursue marine biology instead, but instead, after
Speaker 1: he wrote Liars Poker, a bunch of marine biology students
Speaker 1: at Ohio State wrote to him and said, how do
Speaker 1: I get off to Wall Street? Well, you know, I
Speaker 1: think this is a little bit of what the government
Speaker 1: is trying to fight back against with respect to what's
Speaker 1: going on with investors, and I think certain types of
Speaker 1: VC funds could be facing pretty considerable challenges to their
Speaker 1: how they deploy capital going forward. But actually that that's
Speaker 1: been one of the questions I've been UM investigating, and
Speaker 1: in general, when I speak to these earlier stage funds
Speaker 1: dcs and PE s They would say, well, you know,
Speaker 1: the crackdown has been severe, but so far it has
Speaker 1: been limited to these UM segments, and the Chinese consumer
Speaker 1: market is still very big. You know, there are things
Speaker 1: like healthcare, there are things like fashion, there are things
Speaker 1: like manufacturing of different goods that don't necessarily how to
Speaker 1: fall a foul of party directives. And more importantly, for
Speaker 1: folks involved in the industrial sector or the high technology sector,
Speaker 1: they're very pleased. Indeed, So I think these signals are
Speaker 1: doing something to show, well, you know, stop the point
Speaker 1: capital in UM technologies. We don't like, I'll go do
Speaker 1: it in semi conductors instead. Do you think there's going
Speaker 1: to be a sort of broader macro impact? Okay, so
Speaker 1: you know you mentioned the sort of sectoral potential rotation.
Speaker 1: Maybe some VC money reallocated towards the harder tech out there.
Speaker 1: Is there any sort of macro implication with trade flows?
Speaker 1: I mean, it's interesting that the d D i p
Speaker 1: O or the d D crackdown was right after a
Speaker 1: I believe that was the US listed i p O.
Speaker 1: So there's gonna be some change in terms of like
Speaker 1: where the money potentially comes from. Are you thinking about
Speaker 1: how this could affect China from that perspective. Yes, Um,
Speaker 1: for now, I think it's a little bit too early
Speaker 1: to tell. But we've had someone like UM soft Bank
Speaker 1: UM publicly wondering whether they should still continue to put
Speaker 1: capital into China. And I think this is UM, you know,
Speaker 1: on the margin, one of these other things that are
Speaker 1: making people much more hesitant to deploy capital into China
Speaker 1: going forward. We have pretty regular pads from George sorrows
Speaker 1: now and the pages of the Journal or the Financial
Speaker 1: Times to talk about why investors should be legally barred
Speaker 1: from investing. You know, there is this ongoing Holding Foreign
Speaker 1: Companies Accountable Act in the United States, which might dealist
Speaker 1: all Chinese companies who don't comply with p c a
Speaker 1: O b audits. So I think this is one of
Speaker 1: these additional factors that are weighing on investor sentiment in China. So, Um,
Speaker 1: this is something else that I wanted to ask you.
Speaker 1: But one of the um things that keeps getting brought
Speaker 1: up when talking about the crackdowns and China's macro economy
Speaker 1: is this idea of the German model, and maybe China
Speaker 1: is trying to pursue something like the German way. In
Speaker 1: the sense that there's particular German regulation UM that sort
Speaker 1: of tries to boost UM its manufacturing export sector UM
Speaker 1: and maybe limit some of its financial sector, although you
Speaker 1: can argue they've done that with varying degrees of success.
Speaker 1: But anyway, UM, when it comes to the economic model
Speaker 1: that China is targeting out, like how do you see it?
Speaker 1: I think the German model is a pretty good um yardstick.
Speaker 1: Came across a new term to me recently, Rhineland capitalism,
Speaker 1: which is, you know, sort of this biddle way um
Speaker 1: that the Germans were promoting in the past, and I
Speaker 1: definitely see that China wants to do more with Germans.
Speaker 1: You know. I think at this point Germany is one
Speaker 1: of the very few Western countries today that have any
Speaker 1: semblance of you know, positive, um warm feelings towards China,
Speaker 1: mostly because there's a very big autos and industrial sector
Speaker 1: making quite a bit of money here now, you know.
Speaker 1: Being based in Shanghai, I spent quite a bit of
Speaker 1: time talking with Germans. The German industry here really is massive,
Speaker 1: and they've taught the Chinese to do a lot of
Speaker 1: different things, and the Chinese, i think, have repaid some
Speaker 1: of the favor in terms of you know, outright talking
Speaker 1: about how they want to be more like Germans, in
Speaker 1: terms of having more of an industrialized economy, in terms
Speaker 1: of having more mittel stand companies, which are smaller, medium
Speaker 1: sized companies that are really great at certain industrial aisha uh,
Speaker 1: and then in terms of trying to build these vocational
Speaker 1: schools to make sure that kids can still work for
Speaker 1: great technology companies like fox Con instead of terrible technology
Speaker 1: companies like ten cents and so I think there is
Speaker 1: a little bit more of that sense going on, and
Speaker 1: especially with common prosperity, maybe we have a bit more
Speaker 1: of a more even income distribution like how they do
Speaker 1: in Europe. So what are you watching for next? I mean,
Speaker 1: you know, that's sort of the question. Every It seems
Speaker 1: like every week or every day there's something new, some
Speaker 1: new regulatory crackdown. I mean that was sort of what's
Speaker 1: been striking about the last few months, just how it
Speaker 1: just seemed to keep snowballing. What are the signpost or
Speaker 1: areas that you're curious we might see further action. I
Speaker 1: suspect that we won't have any more um sectoral decapitations.
Speaker 1: Maybe there will still be on some more things on
Speaker 1: the margin with video games. UM. It's possible that they
Speaker 1: will cracked down further on things like real estate or
Speaker 1: with healthcare. But this is UM getting I think a
Speaker 1: little bit more speculative. I think at this point the
Speaker 1: framework for a lot of regulations is now UM fairly complete. UH.
Speaker 1: They passed the Data Security law in June and the
Speaker 1: Personal Information Protection Law in Hoggat A lot of this
Speaker 1: framework is mostly complete. And I think crucially for investors,
Speaker 1: now that we know UM what to UM that there
Speaker 1: is this you know, common prosperity, dual circulation, family values
Speaker 1: and rule of law initiative going on, you know, I
Speaker 1: think we are we do have our expectations set a
Speaker 1: little bit further now. For me, the biggest uncertainty is
Speaker 1: what's going to go next with the Cyberspace Administration. This
Speaker 1: is the c a C. And to me this is UM.
Speaker 1: This is to me the most remarkable story of the
Speaker 1: last UM while in which UM the c a C,
Speaker 1: which is a relatively new regulator and I know to
Speaker 1: crucially a UM party organization that has arrogated to itself
Speaker 1: a great deal of regulatory powers. Now that Cyberspace Administration
Speaker 1: UM c C is governed by the State Council, but
Speaker 1: it is a party organization that is a dual party
Speaker 1: and state organization, And the director of the c a
Speaker 1: C is a vice director at the Propaganda Department, which
Speaker 1: is one of the most important party institutions there are.
Speaker 1: And so I think investors, now, are you know, dealing
Speaker 1: with this very novel regulatory instrument that is now regulating
Speaker 1: I p O s, that is now regulating financial media,
Speaker 1: that is now regulating algorithms, And I have no idea
Speaker 1: what is going to regulate X. And I think this
Speaker 1: is one of these big uncertainties. You know. I think foreigners,
Speaker 1: foreign businesses, foreign investors are a bit more used to
Speaker 1: the sort of wildly state institutions like the National Development
Speaker 1: Reform Commission, the People's Bank of China or the Securities
Speaker 1: Regulatory Commissions c src UM. But you know, to be
Speaker 1: directly regulated by a party institution, this is to me
Speaker 1: very new and novel, and I don't know how to
Speaker 1: think about it. So this is another thing I wanted
Speaker 1: to ask you about, which is, you know, as the
Speaker 1: tech crackdowns were unfurling, we did see a lot of
Speaker 1: people talking about what this means for the future of
Speaker 1: the industry. So China is going after these big companies
Speaker 1: that are extremely well known, considered to be massive success stories,
Speaker 1: and then suddenly they're sort of, um, you know, being
Speaker 1: villainized by the state. What does that actually mean for
Speaker 1: tech in the sense of entrepreneurial spirit and whether or
Speaker 1: not people are going to want to go into that
Speaker 1: sector in the future. That's such an important point to Tracy,
Speaker 1: And you know, I think what, um, you know, the
Speaker 1: worst outcome of this ongoing tech crackdown is that it
Speaker 1: completely destroys the innovative and entrepreneurial spirit in China. Right now,
Speaker 1: I think it is too soon to say on UM
Speaker 1: what exactly will happen UM. You know, I would note that,
Speaker 1: you know, so far, when I talked to you know,
Speaker 1: friends who are entrepreneurs UM you know, certainly not big
Speaker 1: success UM like on the scale of jack Ma. What
Speaker 1: some would tell me is that they would love to
Speaker 1: have the problems of jack Ma. UM. You know, that
Speaker 1: means that they've made it really, really big. And for now,
Speaker 1: China's UM crackdown has whenever it comes to a personal level,
Speaker 1: it's really targeted the most elite you know, dozen or
Speaker 1: two dozen UM figures that a lot of people can
Speaker 1: identify on a billboard and that hasn't really destroyed. I think, um,
Speaker 1: a lot of the will by people to you know,
Speaker 1: still a billionaire. I although um that that that they
Speaker 1: may not be able to have any confidence in the
Speaker 1: near term of what to do going forward. And again
Speaker 1: I think I would situate a lot of these things
Speaker 1: as a sort of a spiritual you know, almost a
Speaker 1: civilizational values question in which I think the Chinese government
Speaker 1: is accepting that not all types of entrepreneurial hustle is good.
Speaker 1: I think now that you know, China is sort of
Speaker 1: living through its own guilded age. Um. Many people have
Speaker 1: said this. Uh. And in the guilded age, you know,
Speaker 1: there were a lot of hucksters and fraudsters out there.
Speaker 1: And I think that is a little bit of what
Speaker 1: Beijing wants to control. And so if it has to
Speaker 1: suffer some erosion of general entrepreneurialism, well, I think it
Speaker 1: is saying that you can't make profits by uh say,
Speaker 1: creating financial risks as financial and P two P loans.
Speaker 1: We're doing, in its view, monetizing status and anxiety and
Speaker 1: miserating students through online education, or by destroying the eyesight
Speaker 1: and UM the free time of children through video games. Now,
Speaker 1: I think that is a lot more of what Beijing
Speaker 1: is trying to do to lay down UM guardrails or
Speaker 1: these no go zos, UM you know, go play everywhere else,
Speaker 1: but these things are off limits. Well, Dan, you've given
Speaker 1: us another excellent overview of all the things that are
Speaker 1: going on in China, and of course it is quite
Speaker 1: a lot at the moment. So thank you so much.
Speaker 1: Thanks Dan, that was great. Always joy, Thank you so Joe.
Speaker 1: It's always really great to have down on the show.
Speaker 1: And there's so much to take away from that conversation. UM.
Speaker 1: One of the things that sort of stuck out to
Speaker 1: me is this idea, and I don't think a lot
Speaker 1: of people outside of UM Asia necessarily understand this point,
Speaker 1: but like the degree to which big consumer tech is
Speaker 1: actually embedded in China is just on a different scale
Speaker 1: to where it is in the US and the UK. Like,
Speaker 1: I know, everyone uses Facebook, everyone uses Google and Amazon
Speaker 1: and things like that, but you know, in China, like
Speaker 1: we Chat, um and financial like these apps are basically
Speaker 1: like one stop shops for living to the extent that
Speaker 1: like the government has to work with them. UM quite extensively,
Speaker 1: and and so from that perspective you can kind of
Speaker 1: see why the CCP would view this as a problem.
Speaker 1: It's almost like de facto privatization of government functions. Yeah,
Speaker 1: I thought that was a pretty interesting question, and I
Speaker 1: hadn't thought that about that. Oh when you said, like, well,
Speaker 1: this is sort of a weird type of correct out
Speaker 1: in the middle of still, you know, an ongoing pandemic.
Speaker 1: And Dan's point, it's like this was kind of a
Speaker 1: wake up call perhaps to the government of just how
Speaker 1: just how online the population is. I mean, obviously the
Speaker 1: size of these companies have been sort of known for
Speaker 1: a while, but perhaps it was driven home or greatly
Speaker 1: appreciated the degree to which, and you know, it's kind
Speaker 1: of the same here, you know, the degree to which
Speaker 1: some of these mega tech companies become the best arms
Speaker 1: for services. I mean, I think, you know, it's like
Speaker 1: I think back to last April or March, there were
Speaker 1: a lot of things you couldn't get, but you could,
Speaker 1: like you could always order something from Amazon throughout the
Speaker 1: entire pandemic. And so the degree to which large tech
Speaker 1: company has become like this sort of like lifeline is
Speaker 1: a pretty sort of fascinating thing totally. Well, the other
Speaker 1: thing that just struck me is I found it very
Speaker 1: useful his like bucketing of these like different things. So
Speaker 1: there's like the anti trust aspect, but also just this
Speaker 1: idea of like family values. And you know, it was
Speaker 1: interesting to hear him describe some of the feedback mechanisms
Speaker 1: that they get. And I remember it was like a
Speaker 1: few years ago. It was like one of those like
Speaker 1: five year plans or something. It was like, wasn't it
Speaker 1: like better growth not faster growth something like that. Wasn't
Speaker 1: that some cliche that was going around? Yeah, And I
Speaker 1: feel like some of the things you talked about, like
Speaker 1: making it easier to have families, or making it easier
Speaker 1: for parents to tell their kids to not play video
Speaker 1: games on Monday through Thursday because it's against the law
Speaker 1: or it's going to damage their eyesight or whatever. It's
Speaker 1: like feels like perhaps in keeping with some of these
Speaker 1: other like sort of like promises and priorities that the
Speaker 1: government has laid up, Right, So those promises and priorities,
Speaker 1: you know, if they were being taken on in the West,
Speaker 1: like you know, if you saw the United States government
Speaker 1: really tackling the antitrust issues with big tech, or if
Speaker 1: you saw the government actually cracking down on the high
Speaker 1: cost and competitive nature of education, you could see like
Speaker 1: they might actually get some support. But the difference between
Speaker 1: China and the U S system seems to be about
Speaker 1: how these things are actually getting rolled out. So you know,
Speaker 1: in China, you can wake up um on a summer
Speaker 1: day and suddenly the government is declaring that education firms
Speaker 1: are no longer going to be able to generate profits.
Speaker 1: Whereas in the States, if you actually got something like that,
Speaker 1: and of course you know you would never get something
Speaker 1: as extreme, but if you had a measure that was
Speaker 1: sort of targeting education cost, it would be going through
Speaker 1: layers and layers and layers of government bureaucracy and and
Speaker 1: so you would have it sort of well flagged in advance.
Speaker 1: And I think that's probably one of the key differences here,
Speaker 1: Like it's not necessarily what they're cracking down on, but
Speaker 1: it's the extremity and the way they're doing it. Yeah,
Speaker 1: the speed and ease and the sort of unilateral decision making,
Speaker 1: because right you could never do it Affen And I
Speaker 1: really do wonder whether there are people in the US
Speaker 1: on either the right the left, and I think there
Speaker 1: are who look at what China has done, especially with
Speaker 1: some of the big tech companies. It's sort of like
Speaker 1: admiringly thinking like, oh, you know, we've been wanting to
Speaker 1: do this forever. There's no mechanism because we could never
Speaker 1: agree on passing a law and there would be like
Speaker 1: a million layers of courts and regulations. Has sort of
Speaker 1: like wishing they could emulate the ease with which China
Speaker 1: can do some of these things. Yeah, I'm sure there
Speaker 1: are some parents out there who think that limiting the
Speaker 1: amount of time people or kids can actually play video
Speaker 1: is a good thing. All right, shall we leave it there?
Speaker 1: Let's leave it there. Okay. This has been another episode
Speaker 1: of the All Thoughts Podcast. I'm Tracy Alloway. You can
Speaker 1: follow me on Twitter at Tracy Alloway and I'm Joe
Speaker 1: Why Isn't All? You can follow me on Twitter at
Speaker 1: the Stalwork. Follow our guest on Twitter, Dan Wong, He's
Speaker 1: at Dan w Wong. Follow our producer Laura Carlson, She's
Speaker 1: at Laura M. Carlson. Followed the Bloomberg head of podcast,
Speaker 1: Francesca Levi at Francesca Today, And check out All our
Speaker 1: podcast at Bloomberg, under the handle at podcast. Thanks for listening.