Why China won’t bow its head to the West
A historical, cultural and personal perspective from a Chinese venture capitalist
The great power competition between US and China have huge impact on how investment community views China. Since 2022, a narrative has taken hold that China may be uninvestable, due to the fact that China seems determined to develop in its own way, thus risking more confrontation with the US. A directly opposite view, such as this The Economist article, suggests China may actually be a safe haven for investors, precisely due to the fact it has been increasingly untethered to the USD system.
How do China’s own investors view this crucial issue? Why does China just have to be different? Why can’t China just be content with playing by US rules? Is China an expansionist power? What does it mean for investors? Today we present you a translated article from Ms. 刘晨茹 Liu Chenru, the managing partner of 清泉石资本 Brookstone Capital, a China-based venture capital fund. The original title is 中美博弈下，一个投资人关于未来十年的思考 An investor’s thoughts on investment for the next decade in the context of Sino-US competition.
Below is a summary, including what we like about this article:
In the first part, the author sets up a sweeping historical overview of the post-war international order. Essentially, her view centers on economic interests. It was economic interests that drove China to embrace the western economic model in the last 1970s. It is also economic conflicts both between nations and within each societies that fundamentally explains the current round of conflicts that we are all experiencing.
In the second part, she extends the historical view into much earlier periods and goes on to explain how history has shaped a unique culture in China, and compare that with historical trajectory of the western civilizations. She touches on key differences in psychologies and resulting actions between a land-based civilization and a seaborne one. This refutes the naive view that today’s China has changed somehow from the late 1970s. The fact is, China may never have changed that much over the last several millenia, and today’s many events can be understood within that context.
Our favorite part is the third part, where she uses personal anecdotes and observations of generational changes to explain what she believes to be the next driver of growth: a brand-new generation of leaders, entrepreneurs and doers, with fundamentally very different childhood experiences and different outlook towards life, from the previous generations. This view is crucial, because without understanding its people, “China” is but an empty concept. (As creators of this newsletter, we also count ourselves as part of this new generation.)
The key message of the article resonates with another one, What the West Gets Wrong About China by Harvard Business Review. The HRB article suggested that one would always get China wrong without understanding the context. Although we believe Ms. Liu’s article gives a more fleshed-out description of the historical and cultural context.
Before we shows the full text of the article, we also want to criticize our own title for this issue. In fact, this is not about anyone bowing head to anyone else. It’s not about whether China should go on “hiding strength and biding time”, (as if China is going to punch somebody in the head someday later.) These terms and languages are implicitly adversarial, which, you can see from the following article, is actually not at the core of Chinese culture. China is China. It’s neither good nor bad. It is just different, operating in its own way, with a different historical context and different value system.
Highlights within the article are done by BAiGUAN.
An investor’s thoughts on investment for the next decade in the context of Sino-US competition.
by Liu Chenru
During the past year, I have felt some major differences among my friends regarding the future of China in the next decade. Many of my friends are also confused about the future development. Some of these differences are based on different value systems, and some are based on different judgments of macroeconomic conditions. At the formation of the new governing team in 2023, we also want to share some of our thoughts on these major issues that may help us to give confidence and determination to invest in China in the uncertain years ahead.
China's large-scale economy in the past has benefited from two engines, one is foreign trade, and the other is urbanization. Foreign trade mainly relies on China's low costs (labor, environment, land) to undertake external demand (from the US and Europe). Urbanization is mainly driven by the infrastructure construction (roads, bridges, airports) and commodity housing demand caused by industrialization during the process of undertaking external demand.
In a sense, China's economic organizational model in the past thirty years has mainly been constructed around these two main themes, coastal cities rely on foreign trade, and inland cities rely on real estate. The county-level administrative area is the intersection between the state and society and is the basic unit of local implementation of central policies. The county party secretary is the "CEO" of each unit, responsible for integrating resources to achieve goals. The goal, in the past thirty years, has mainly been economic growth. Corruption, to a certain extent, may have played a role in giving "CEOs" stock incentives. However, after thirty years, with China's demographic dividend almost disappearing and environmental protection receiving more attention, China's simple labor cost advantages have given way to Southeast Asia; and urbanization has also reached its final stage with the slowdown of population migration. When the basic construction phase is completed, the "CEOs" of this period have also completed their historical mission.
With the arrival of the post-urbanization era, today, at the bottleneck of decreasing newborn population and total population, many people cannot see the direction of the future, especially those beneficiaries who have adapted to and understood China's growth logic in the past thirty years. For many people, the future is shrouded in mist. Some people may draw analogies with Japan's economic development in the late 1990s to understand the difficulties China may face: after the collapse of the real estate bubble, Japan's economic growth stagnated. On the one hand, the US made Japan lose its foreign trade and currency advantages through the Plaza Accord, and then popped Japan's real estate bubble; on the other hand, through the blockade of Japan's semiconductor industry, Japan's semiconductor industry gave way to the Netherlands and Taiwan. The story seems somewhat similar today.
Therefore, when the US began to block China's technology in 2018, a sense of pessimism began to spread. After experiencing some uncertainty, many elite groups chose to emigrate to Singapore or other countries as soon as the pandemic lockdown ceased. Based on considerations of uncertain economic prospects and war, many long-term funds abroad also chose to reduce their holdings in China at this time.
As an investor, when the major logic for growth changes, it is inevitable to face macro problems. Understanding macro problems is [directly linked with] a person's values [and choices]. After thinking about these things clearly, it will give you determination and confidence in the turbulent years of the next decade. Choice is more important than effort, and this is also true for investment. I have always believed that simple linear extrapolation and analogy cannot effectively understand and answer these issues. To understand these issues and see the future, we may need to discuss them from three aspects:
The formation and evolution of the international order;
The culture and spiritual core of the Chinese people;
The generational changes under the intersection of Eastern and Western cultures.
Understanding these things may help us understand some of our top-level design arrangements in the post-urbanization era. - And in the next twenty years, our generation's position and mission in the new narrative we are about to enter.
Formation and Evolution of International Order: War and Peace
"The sky and the earth do not care, They regard the myriad things as straw dogs." [BAiGUAN note: famous quote from ancient book of Tao Te Ching] War is not just a target of humanitarian condemnation, but also a way for a new order to be formed. In other words, war is a tool for human society to spiral upward. Just as the order of feudal China was formed during the Warring States period, the current international order was constructed after two world wars. After the two world wars, the international order underwent three important changes:
The rise of the United States.
The formation of the Soviet Union.
The silence of the East.
Behind the war is economic power. The industrialization of the United States since the 18th century supported its comprehensive victory in the war.
On the one hand, after its victory, the United States began to dominate international affairs through currency, military, and economic means with the support of European countries. In terms of currency, White defeated Keynes and established the Bretton Woods system dominated by the U.S. dollar. In terms of military, the United States used its nuclear power to become the military ally of many countries (such as Japan). In terms of economy, the Marshall Plan helped Europe rebuild, and Japan and the Four Asian Tigers became a part of the U.S. economy through foreign trade. Overall, most of America's friends achieved peace and economic growth after the war.
On the other hand, with the support of military strength, the Soviet Union chose a different path after World War II. We now see that Russia and Eastern Europe's military and economic power has fallen behind, but during the Great Depression of the 1930s, there were instances of Americans wanting to emigrate to the Soviet Union. However, due to a series of economic and political mistakes later on, the Soviet Union collapsed in the early 1990s, and today's Russia inherits the political and military legacy of the Soviet Union.
For China, after World War II, China was still an agricultural society, and its per capita economic strength was far behind that of Japan and the Soviet Union. It was only the stubborn character of the Chinese people that enabled them to achieve political independence with rice and rifles - neither relying on the Soviet Union nor on the United States. In other words, they always stayed between the two largest political and economic entities. If China is representative of Eastern civilization, then during this phase, Eastern civilization was basically silent on the world stage.
Although China chose to be independent in politics, it relied on entering the international order constructed by the United States to achieve industrialization within a few decades in the latter half of the last century. In the 1970s, under the political appeal of resisting the Soviet Union's attempt to court China, Kissinger facilitated Nixon's visit to China, and diplomatic relations between China and the United States began to thaw. Pragmatic Deng Xiaoping discovered a simple rule after inspecting Southeast Asia and Japan: those who are friends with the United States become rich. Therefore, after 1978, China chose to fully embrace the United States economically. Therefore, in the 1980s when many county party secretaries went to university, and in the 1990s when Liu Qiangdong [founder of JD] and Ma Huateng [founder of Tencent] went to university, it was a period when Chinese culture and system fully learned from the West. Chinese people wore clothes designed by Europeans, watched Hollywood movies, studied Drucker's management, used Bill Gates' operating system, and the best place for elite students to go to university was to study in the United States. It was with the help of this trend that Mr. Yu Minhong, a teacher at New Oriental Education, achieved his first brilliance in life.
At that time, China's path of economic development could be "copied", or more accurately, it copied the homework of the Four Asian Tigers in East Asia - developing foreign trade and urbanization. Investing was also simple at that time. Just look at what happened in those developed countries, and China would follow suit. China's choice was to copy the homework in the economy and hide its capabilities and bide its time in politics. Chinese people's choices were also simple: doing foreign trade along the coast, exploiting resources in the inland areas, and developing real estate and engineering projects where there were no resources; investing in buying houses, or depositing money in the bank. Therefore, against the backdrop of this unanimous focus on "money", China went through a glorious and simple thirty years. These thirty years were also the golden age of the people born in the 60s and 70s. They went from their twenties to their fifties or sixties, and wealth and political resources were accumulated during this process. That generation was the first generation of people who became generally wealthy in China in several hundred years. It is also not difficult to understand why many elitists in that generation had a heartfelt recognition for the Western culture.
The international order of this process was also simple, with the United States being the only pole in the world. For the United States itself, the political and economic activities of those thirty years were dominated by the elites on the East and West coasts. The West Coast dominated technology, the East Coast dominated military and finance. Under the control of elites on both coasts, there were no major conflicts in the world, only local wars caused by disputes over resources (which were basically won by the US). The world became more and more flat, global trade was smooth, technological development was rapid, and the information industry swept the world. The whole world also formed a clear division of labor: the United States and Western Europe established the order, dominated technology and culture; China became a manufacturing power with its population advantage; the Middle East and Russia provided energy. Other countries or regions embedded themselves into this system based on their own endowments (Japan, South Korea, Singapore) or were excluded by this system (North Korea, Cuba, Iran).
Of course, the prerequisite for embedding oneself in this system is to be recognized politically by the United States.
We can understand the structure of this globalization from the perspective of the global division of labor in the communication industry chain. The technology and standard setting in the communication industry is controlled by the United States and northern Europe (Qualcomm, Apple, Google, Nokia, Motorola), China has the largest market (China Mobile), and is responsible for manufacturing base station equipment (Huawei), and of course, it also occupies a place in the design, manufacturing, and sales of low-end mobile phones (Xiaomi, OPPO).
However, after thirty years of rapid development, today, this system seems to have some problems. The increasing wealth gap and environmental and resource pressures caused by globalization and technological development are becoming more and more serious. From the perspective of the United States, the beneficiaries of this order seem to be the elite on the East and West coasts. Driven by profit maximization, a large number of factories and low-end labor have moved from the United States to China or Vietnam with lower costs. The collapse of the manufacturing industry in the Midwest has formed a rust belt. After the subprime mortgage crisis in 2008, the United States chose to export inflation to the world by using the status of the US dollar to digest its debt, exacerbating economic inequality. Subsequently, populist governments representing the poor rose. Trump was also elected president of the United States with the support of blue-collar workers. In short, whether it is the ordinary people of the United States or other countries, they are not satisfied with the previous division of labor system, and the balance of history is once again tilting towards fairness.
In addition, for China, with the disappearance of the demographic dividend and the situation of urbanization in the mid-to-late stages, China's domestic idle infrastructure capacity is considerable. There is also a natural demand for the pan-technology field to extend upwards in the industrial chain - not just manufacturing and sales, but also entering core areas such as chips and operating systems. For the former, Chinese companies need to go overseas to digest excess capacity and compete face-to-face with multinational corporations such as the United States and Europe in overseas markets; for the latter, this touches on the core competitiveness of American and European corporate groups. Therefore, the comprehensive sanctions against ZTE and Huawei by the United States that began in 2018 occurred.
Some people believe that America's hostility towards China comes from politics or culture. But I believe that this is often a rational economic behavior. If we go back two hundred and fifty years ago, the United States and Britain had a war of independence. If we talk about politics and culture, the United States inherited many of Europe's ideas. However, it still chose to declare independence through war. Under the capitalist Protestant ethic, economic interests are the entry ticket to heaven. In the past, the relationship between the United States and China was similar to that between Nike, Adidas, and Shenzhou International. If one day Shenzhou International wants to stand on its own, it will inevitably collide with Nike and Adidas. [BAiGUAN: Shenzhou is a Chinese garment manufacturer and a main supplier to western brand, listed in Hong Kong as 2313.HK]
Chinese Culture and Spiritual Core: What is Independence?
History has proven that among politics, economy, and culture, culture is the most resilient.
The inheritance of culture forms a country's aesthetics and mainstream values, which is the spiritual core of civilization rooted in cultural symbols. Over the past hundred years, undoubtedly, the dominant civilization among those still existing today is Western civilization. Ancient Greece is the birthplace of Western civilization; The Newtons and Darwins constructed the scientific, rational, and commercial civilization during the industrial revolution and sowed it worldwide; and the United States, after clearing the Native Americans from the continent, retained England's respect for science and business, removed the stratified thinking of the aristocracy, and brought Western civilization and capitalism to a new height in two hundred years.
Western civilization is an expansive oceanic civilization. Whether it is England, surrounded by the sea on all sides, or Greece, a union of city-states, where the local economy is difficult to support a large economic entity. Respect for trade and commerce has cultivated the spirit of contract and the concept of the rule of law; the emergence of Christianity and the Protestant Reformation have also nurtured the idea of equality for all and become the spiritual aspirations of Western people's pursuit of freedom. Individual heroism is what Western civilization values. This is not difficult to understand. In the history of Western civilization, many of the people who had foundational significance, such as Columbus or Newton, changed an era with their genius and extraordinary courage. However, oceanic civilization also has its natural shortcomings. A country that relies on commerce, trade, and finance means that some of the wealth is not self-created but need to be plundered from other countries' resources or cheap labor. This makes the profit-driven expansion of Western civilization accompanied by the export of war (or inflation). The Americas of 300 years ago and the Middle East of today are examples [of the targets of such export].
For China, the Yellow River Basin in the Central Plains is the birthplace of Chinese civilization. Over thousands of years, several important nodes have constructed the core of Chinese civilization. The first node is the Spring and Autumn Period, the Warring States Period, and the Han Dynasty that followed. Hundreds of years of war and ensuing peace established the status of Legalism and Confucianism in China's governance. The subsequent thousands of years were more of the unfolding and continuation of this order. The second node is more than a hundred years after 1840. Western culture, on the basis of absolute strength, entered China in a dominant way, causing a “change unseen in thousands of years." Although Chinese civilization has integrated northern nomadic ethnic groups, overall, the mainstream civilization in China's past was based on inland agriculture. Agricultural economy takes the family as the basic organizational unit, and culture advocates diligence, frugality, introversion, conservatism, and collectivism, promoting production (manufacturing), love of peace, not trade and wars. Thus, heavy agriculture and manufacturing have their cultural origins in China.
Chinese civilization has lasted for thousands of years, and although it has experienced many wars and dynasties, it has always presented itself in an independent posture - possessing a complete narrative system. This narrative system of cultural symbols, like an operating system, has been passed down to the present day. This operating system was formed in the Han Dynasty and underwent a major architectural modification during the hundred years after the end of the Qing Dynasty - humiliation and self-denial are the best source code. However, after the operating system's modification, maintaining national unity and stability still remains the two most important political cornerstones of this system.
Some people think that in 2018, why couldn't China simply choose to bow its head like Japan or continue to hide its capabilities and bide its time when facing US technology sanctions. I think this is like two people, one with an independent personality and the other without. Since its founding, Japan has been surviving under the strong influence of other countries' cultures and civilizations. The bottom color of Japanese culture is "空 emptiness." The meaning of emptiness is not that there is no culture, but an attitude of acceptance and inclusiveness. Therefore, when the US fleet arrived, the Japanese emperor quickly abandoned the set of practices learned from China in the past and turned completely to the West. But it is difficult for Chinese civilization [to do that]. Chinese civilization has [more] colors, just like Iran [/Persia]. Colors mean independence, and independence means that change requires stronger birth pains and longer time. It also means that after the change, it is not losing one's personality but reconstructing this operating system in a new way. China is not Japan, Australia, or Canada. Cultural power is very strong, which makes China choose its own path to integrate into the world - not arrogant closure or blindly identifying with the West and losing oneself.
Therefore, we see that despite facing US sanctions in recent years, China still chooses to follow its own path under the allowance of its strength. In terms of technology, China chooses to invest in areas such as semiconductors, chips, and operating systems; in terms of culture, after experiencing the negation of negation, it begins to recognize its own culture, and symbols such as Han-style clothing and Chinese poetry begin to revive. However, the construction of the new operating system that has experienced the “negation of negation” may take a generation to complete.
Intergenerational Transition in East and West Cultures: Chinese Youth in the Post-Urbanization Era
In 2022, after the lifting of COVID-19 restrictions in Shanghai, we planned a one-month surveying trip of regional industries in China, including a trip to Changsha.
Before going to Changsha, I heard from many people about the city's strong consumption. But when I arrived in Changsha, the vitality of the people there far exceeded my imagination - the downtown area was packed with people. Even at midnight, there were still young people doing manicures on the street. It seemed as if the shadow of the pandemic had never appeared in Changsha. In addition to consumption, Changsha has also formed a good industrial cluster, with BYD's central factory located in Changsha and some software companies also landing there.
When I asked why Changsha was so energetic, the common answer was: the low housing prices in Changsha. In Changsha, a typical residential unit only costs seven to eight thousand yuan [per squared meters], and even the best houses by the riverbank cost only twenty thousand yuan (~$3000 or ~$300/sft). Young people do not have much pressure to buy a house. Additionally, Changsha has many universities, and young people are willing to stay and spend money. When walking through the city center of Changsha, I noticed a phenomenon - many old districts were preserved and transformed into commercial centers with a sense of 层次感 layers and structures. These commercial centers that preserve the memory of old Changsha attract cafes, bars, and small shops. Changsha did not rely on large-scale demolition and construction to collect high urban construction taxes, but chose to protect some old districts so that a city can operate more economically and retain its memory.
Therefore, through Changsha, we may have seen a version of the post-urbanization era of a city, and even the momentum and appearance that a country should have. Without real estate, high housing prices, demolition, and construction, a city's economy can still thrive. The vitality of young people is the source of China's next growth curve.