Xi Jinping’s paranoid approach to AGI, debt crisis, & Politburo politics — Victor Shih

1. 0:00 – 4:03

   Is China more decentralized than the US?

   1. VSVictor Shih0:00

      AI apparently is one of the higher priorities for Xi Jinping. The party is very, very paranoid that some actor outside, but even inside the party, is gonna use it as a tool to usurp the power of the party. The Chinese leadership, they're not going to play golf three days out of a week. Xi Jinping and his colleagues are having meetings about policies 270 days out of the year. If Xi Jinping expresses a preference over a policy direction, that is the direction you have to go toward no matter what. If he observes that you're dragging your feet, uh, you will be purged.

   2. DPDwarkesh Patel0:37

      What is the succession plan after Xi is gone?

   3. VSVictor Shih0:39

      There are no plans right now. I think this transition is going to be more ruthless, more brutal, and potentially more disruptive.

   4. DPDwarkesh Patel0:48

      Today, I'm talking with Victor Shi, who is the director of the 21st Century China Center at UC San Diego. China is obviously the most important economic and geopolitical issue over time, and doubly so if you believe what I believe about AI. I was especially looking to talk to you because you have deep expertise not only in Chinese elite politics, but also its economic system, its fiscal banking policies. We'll get into all of that before we get into the AI topics. Is China actually a more decentralized system than America? If you look at government spending by provincial governments versus the national government in China, it's like 85% local plus provincial, 15% national. In the US, it's actually, if you look at state and local, it's 50%, national... uh, federal government is 50%. Um, when you think of an authoritarian system, you often think of it as like very top down, the center controls everything. But if you look at these numbers, it just seems like it's quite decentralized.

   5. VSVictor Shih1:39

      Mm-hmm.

   6. DPDwarkesh Patel1:39

      Or is that the wrong way to look at the numbers?

   7. VSVictor Shih1:42

      Uh, I think for a while China was quite decentralized. Um, so this is kinda in... from the mid-1970s all the way until the mid-1990s, China was very decentralized where local governments generated a lot of revenue.

   8. DPDwarkesh Patel1:56

      Yeah.

   9. VSVictor Shih1:56

      But they also spent a lot of money, uh, and it incentivized them to do, you know, kinda basically good things such as trying to attract as much FDI as possible-

   10. DPDwarkesh Patel2:08

       Yeah.

   11. VSVictor Shih2:08

       ... trying to attract as much, uh, local investment as possible, give tax breaks and so on and so forth. Um, so I think, you know, China had a very good period of mainly sort of private sector driven growth because of this fiscal decentralization. And that's the understanding of, I think, most economists. Um, but then there was a tax centralization in 1994 basically where the central government basically said, "Okay, this is ridiculous. We don't wanna end up like the Soviet Union, you know, and fall into different pieces. We need to control, uh, fiscal income." So then they grabbed the most lucrative, uh, source of taxation at that time, and it continues to be case, which is the value-added tax.

   12. DPDwarkesh Patel2:50

       Yeah.

   13. VSVictor Shih2:51

       Uh, and so the collection of value-added taxes, uh, and then also all... in subsequent decades, pretty much all other tax categories are now collected by the central government.

   14. DPDwarkesh Patel3:02

       Mm-hmm.

   15. VSVictor Shih3:03

       Then they reimburse part of the money to the provinces, and then supposedly they say, "Okay, now you can spend the money as you wish." But in reality, that's not the case. So in reality, it's kinda like, "Well, if you do this thing, then I'll give you a little bit of money, you know, but you have to do the thing that I want you to do to get this money, to get this grant basically." Uh, so then the fiscal autonomy, I would say, has been falling since 1994. I mean, there are different periods. Sometimes, you know, there's a little bit more autonomy. Uh, so, you know, sort of from 2000 to, um, rec- until recently, until 2020, the localities gained more autonomy vis-à-vis land sales. So that's when the real estate market was going very well. Even though they couldn't control the tax revenue, they could control the land revenue. Uh, but then the central government basically killed the land market in 2022. Uh, and, and now I think localities in China are highly dependent on the central government.

   16. DPDwarkesh Patel4:02

       Mm-hmm.

2. 4:03 – 21:54

   How the Politburo Standing Committee makes decisions

   1. DPDwarkesh Patel4:03

      Let's start at the very top. If you look at the members... First, I wanna understand the personnel. If you look at the members of the Politburo, uh, and you look at their past, a lot of them will be provincial leaders and then some local thing before that. But in many cases, they'll have stints as you said-

   2. VSVictor Shih4:22

      Mm-hmm.

   3. DPDwarkesh Patel4:22

      ... as they were the head of this, um, chemical engineering SOE or they have a... they studied... Xi Jinping himself was a ke- uh, like a... has a PhD in chemical engineering, right?

   4. VSVictor Shih4:32

      Something. (laughs) Some kind of... Well, but I, I think-

   5. DPDwarkesh Patel4:34

      Okay, okay.

   6. VSVictor Shih4:35

      Yeah, I don't-

   7. DPDwarkesh Patel4:35

      Yeah, so that's actually what I wanna ask about.

   8. VSVictor Shih4:36

      I'm not... Yeah.

   9. DPDwarkesh Patel4:36

      If you just look through the, the list, a lot of them are like PhD economist, PhD industrial engineer, et cetera, et cetera. Um, I mean, some of them when you look it's like, oh, I'm... they have a PhD in Marxist, uh, theory or something.

   10. VSVictor Shih4:47

       Leninist, yeah, Marxist thoughts, yeah.

   11. DPDwarkesh Patel4:48

       Um, wh- which that seems fake. But are they actual technocrats? If you look at their degrees-

   12. VSVictor Shih4:55

       Mm-hmm.

   13. DPDwarkesh Patel4:55

       ... they seem quite impressive. Uh, or is this just like fake made-up credentialism? If, if there's like a PhD economist in the Politburo, I'm... should I be like impressed and be like, "Oh, they probably really understand economics," or should I just think this is kind of a fake degree?

   14. VSVictor Shih5:08

       Some are... Look, so the former, um, premier of China, Li Keqiang, uh, his, his undergraduate degree, I think, was economics and he studied under one of the best economists in China.

   15. DPDwarkesh Patel5:20

       Yeah.

   16. VSVictor Shih5:21

       Uh, so I think he understood economics. Um, so in... I would say in the Politburo today, there is this wing of the Politburo who are military industrialists-

   17. DPDwarkesh Patel5:32

       Mm-hmm.

   18. VSVictor Shih5:32

       ... who were trained as engineers and they indeed, um, were trained in the best programs in China.

   19. DPDwarkesh Patel5:40

       Mm-hmm.

   20. VSVictor Shih5:40

       So Ma Xingrui, the party secretary of Xinjiang for example, in the Politburo, um, you know, graduated from Tsinghua University. Uh, Zhang Guoqing also, uh, who worked in military industry for years, uh, he gra- I don't know if it's Tsinghua or one of the other top science programs in China. So they know a lot about science, but does that mean that they know a lot about governing? I mean, that's... I, I think it's somewhat different question. But then you also have other cases, uh, like Ding Xuexiang, right? So we, we can talk about him 'cause he's in charge of cybersecurity in China.

   21. DPDwarkesh Patel6:15

       Yeah.

   22. VSVictor Shih6:16

       He has a technical background, but in metallurgical forging. Uh, graduating at- I wouldn't say... It's not the MIT of China, maybe closer to the IIT of China.

   23. DPDwarkesh Patel6:27

       Mm-hmm.

   24. VSVictor Shih6:27

       You know, just kind of like this second tier science, uh, institute, uh, founded by one of the Soviet experts who wanted to teach China how to do metallurgy. Uh, but that, does that kind of very specialized technical knowledge make you a better leader? I think it depends on the person, you know? And, and I think what happens in the Chinese Communist Party is that as people rise up, there's certainly, you have to have political acumen. If you don't have political acumen-

   25. DPDwarkesh Patel6:56

       Right.

   26. VSVictor Shih6:57

       ... you're not gonna make it. And some people, on top of their technical expertise, it turns out that they have some political acumen. But it's not something that you, you sort of know ex ante, except for the princelings, right? So the princelings, uh, the reason why they're special is not just because of their g- genes, you know, they're children of high-level officials, is that they gr- they grew up honing this political acumen because their parents could teach them about it. Um, so then some people turn out to have political acumen, they're pretty smart, they don't necessarily have the best degree, you know, degrees from the best universities in China, and they end up being very successful. So, it's not necessarily like, oh, you know, all the Peking and Tsinghua University graduates, you know, they all get to the very top. There are certainly a disproportionate amount of people like that in the Politburo-

   27. DPDwarkesh Patel7:49

       Yeah.

   28. VSVictor Shih7:49

       ... but they don't dominate because at the end of the day, it is somewhat random.

   29. DPDwarkesh Patel7:53

       Yeah. I still feel confused about how to model the competence of-

   30. VSVictor Shih8:01

       Mm-hmm.
3. 21:54 – 36:24

   Xi’s right hand man in charge of AGI

   1. DPDwarkesh Patel21:54

      Okay. Let's go back to Ding Xiuzhang. Uh, how do you pronounce his name?

   2. VSVictor Shih21:58

      Ding Xiuzhang.

   3. DPDwarkesh Patel21:59

      Okay. Sorry about... So Politburo has what, 25 members? 20, 25?

   4. VSVictor Shih22:03

      Yes, yeah, 25 members.

   5. DPDwarkesh Patel22:04

      Okay.

   6. VSVictor Shih22:04

      Yeah.

   7. DPDwarkesh Patel22:04

      Okay. Standing Committee has seven members. This is the, the key group inside-

   8. VSVictor Shih22:08

      Yeah.

   9. DPDwarkesh Patel22:08

      ... the Politburo. And he, this, this person is one of those seven. He runs the Center for Sci- sorry, the, the Central Science and Technology Commission.

   10. VSVictor Shih22:18

       Mm-hmm.

   11. DPDwarkesh Patel22:19

       For my... The reason I'm especially interested in him-

   12. VSVictor Shih22:21

       Mm-hmm.

   13. DPDwarkesh Patel22:22

       ... is because any large scale AI effort that China would launch would, um, be under his purview. Do we understand what he wants, who he is, what his relationship with Xi is, what he would do if AGI is around the corner, et cetera?

   14. VSVictor Shih22:39

       Yeah. These are all very good question. Um, so I, I think in addition to the Science and Technology Commission that you mentioned, another very important position that he holds is that he's the head of the Office of the Central Commission on Cybersecurity.

   15. DPDwarkesh Patel22:55

       Mm.

   16. VSVictor Shih22:56

       The head of the Central Commission on Cybersecurity is Xi Jinping himself, but the head of the administrative office, which runs the day-to-day operation of that commission, which basically a leading group-

   17. DPDwarkesh Patel23:08

       Yeah.

   18. VSVictor Shih23:09

       ... is Ding Xiuzhang. So, uh, and he took that position, uh, back in 2022, so he's been steeped in cybersecurity for a couple of years. Uh, I think by now he knows all the major players, uh, and some of the key policy issues. Um, his relationship with Xi Jinping is a very interesting one. So he only directly worked under Xi Jinping for one year. When Xi was in Shanghai, he was basically the very senior level secretary who would support whoever the party secretary of Shanghai was. And he worked under three different party secretaries of Shanghai, uh, supported Xi Jinping, um, for one year. For some reason, Xi Jinping just trusted him absolutely after that.And it's a mystery. And, uh, you know, I've looked at all the open literature, I've asked people in Shanghai, nobody knows why that's the case. I mean, uh, almost certainly, I think one reason is that he was gathering a lot of information about the other leaders of Shanghai and sending all of that information to Xi Jinping to, uh, basically let him know. Because at that time, as you know, the previous leader of China, Jiang Zemin, had a very big stronghold in Shanghai, so basically Xi Jinping had to sort of break that apart before he could assert control over Shanghai. Ding Xiuxiang likely was one of the people who sent all this necessary information to Xi Jinping in order for him to do that.

   19. DPDwarkesh Patel24:39

       Mm-hmm.

   20. VSVictor Shih24:40

       But beyond that... I mean, lots of people do that for Xi Jinping. (laughs) Truth be told.

   21. DPDwarkesh Patel24:44

       (laughs)

   22. VSVictor Shih24:44

       So beyond that, what else has he done for the big boss to earn his trust, I think is a big mystery. Uh, but the tr- you know, but the manifested outcome is that Xi trusts him a great deal because in 2013 he was promoted to Beijing to be the second-in-command in his personal office-

   23. DPDwarkesh Patel25:04

       Mm-hmm.

   24. VSVictor Shih25:05

       ... handling all the flows of data in and out of the desk of Xi Jinping, so that's a very important, uh, position. He became the first-in-command a couple years later. He took control over the entire apparatus that govern Xi Jinping's day-to-day life, uh, back in 2017. Uh, now he's a vice premier in charge of cybersecurity. So clearly this guy is trusted. Uh, you know, his preference for AI, AGI... So, uh, I, I tweeted this, uh, Davos speech, which you, you also looked at. Um, I think it's very revealing, right? So you look at it, you're like, "Well, what's..." So what he said was, uh, "We need to invest in AG- AI, but we need to do it... we can't go all out in investing in it without knowing what the brakes are. We have to develop the brakes also at the same time."

   25. DPDwarkesh Patel25:58

       Yeah.

   26. VSVictor Shih25:58

       I think that's extremely revealing. So basically, it's very different from the American approach because in America, it's all driven by private sector and of course all these... You know, except for one or two companies, everyone just invest, invest, invest-

   27. DPDwarkesh Patel26:11

       Yeah.

   28. VSVictor Shih26:11

       ... and try to reach AGI as soon as possible. For the Chinese government, they're very afraid that some actor outside, uh, but even inside the party, is gonna use it as a tool to usurp the power of the party. So they want to know that they have a way of stopping everything if it comes to it. So for them, developing the brakes is just as important as developing AI itself.

   29. DPDwarkesh Patel26:36

       Mm-hmm. What are the different organizational milestones we should be watching for to understand how they're thinking about AI, when things have escalated? So, uh, to add more color to this question, what I expect to happen, let's say next year-

   30. VSVictor Shih26:50

       Mm-hmm.
4. 36:24 – 40:13

   DeepSeek was trained to track CCP policy

   1. VSVictor Shih36:24

      everything.

   2. DPDwarkesh Patel36:25

      As somebody who is trying to observe what the party's doing, have you found that using LLMs has been helpful? And if so, which model g- t- gives you the best insight into what the CCP is thinking?

   3. VSVictor Shih36:38

      Uh, yeah, no, I- I've been using, uh, AI quite a bit. I mean, both to sort of code data. You know, it used to be, like, if it's text, hand code stuff, and now a lot of it can be automated. But in terms of finding out what the Chinese government is doing, um, I think some of the American models are okay, like, Grok is okay, but the most helpful has been DeepSeek. Uh, so to me, it's quite clear that DeepSeek, which of course, was, uh, first developed by a hedge fund to trade in the Chinese market, part of what they were, they really trained the model for was to detect important policy documents and meetings within the Chinese government. Because when you enter, you know, the right... Or even, not even, like, especially sophisticated prompts, you know, just like, you know, "What is the Chinese government doing when it comes to AI?" It comes up with a bunch of very high-quality links, which is very useful for my research. Uh, so then, you know, immediately you get a sense of like, what are the latest policies? What are the latest statements by high-level officials? It seems that, uh, DeepSeek puts some, you know, higher weighting, let's say, on, on this kind of content.

   4. DPDwarkesh Patel37:46

      Mm.

   5. VSVictor Shih37:46

      Uh, so I, so I have... You know, I don't dare to install it on my phone, uh, but, you know, I certainly have collaborators who have, uh, downloaded the open source model and installed into a hard drive, and I use the web, uh, interface for some of my, my research.

   6. DPDwarkesh Patel38:01

      Do you think it's just because they have more Chinese language data, and so it's just better at understanding the party communications?

   7. VSVictor Shih38:06

      So I've used, um, you know, sort of Baidu's thing, uh, and so I think the typical Chinese language models are more trained on social media content, which will, you know, come back with hits that are-

   8. DPDwarkesh Patel38:18

      Yeah.

   9. VSVictor Shih38:18

      ... like, more social media. It's like, oh, you know, if you ask about AI, we'll talk about, like, how AI gets used in different things instead of this kind of policy documents and meetings and so on and so forth. So it, it seems, you know, just from an inductive observation that DeepSeek, uh, you know, uh, is, is trained on this kind of content.

   10. DPDwarkesh Patel38:36

       Mm. So that Highflyer can make trades?

   11. VSVictor Shih38:39

       Yes, so that Highflyer can... I mean, you know, obviously, uh, China being China, government policies have a huge impact on how different stocks do.

   12. DPDwarkesh Patel38:49

       Right.

   13. VSVictor Shih38:50

       Uh, and that's often where you would find the alpha. In the old days, people used to call up their friends who work for this and that ministry to get insider information. But I think what Highflyer, uh, has discovered would also generate alpha is to really, uh, use algorithm to look closely at these policy documents.

   14. DPDwarkesh Patel39:07

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5. 40:13 – 46:22

   Xi versus Stalin

   1. DPDwarkesh Patel40:13

      Okay, and then this is gonna sound like a naive question, but, um, we're talking about how the party in the abstract wants to maintain control over every aspect of Chinese life and Chinese economy. But of course, the party is made up of individuals, and many of these individuals, Xi himself went through periods where the party had extraordinary control over people's lives during the Cultural Revolution and so forth.

   2. VSVictor Shih40:34

      Mm-hmm.

   3. DPDwarkesh Patel40:34

      And they personally and their families suffered as a result of this. Um, and they're educated people. Many of them have been in industry, right? These are not naive people. So maybe I'm just projecting too much of my Western bias here-

   4. VSVictor Shih40:48

      Mm-hmm.

   5. DPDwarkesh Patel40:48

      ... but what is the reason that they think it's so crucial that, uh, you know, the, the banks are run by the party and the AI is run by the party and nothing escapes the party state?

   6. VSVictor Shih41:01

      Um, yeah, so the Cultural Revolution generation, I think, you know, a lot of people suffered horrendously, including Xi Jinping himself. Uh, but then basically, you have two types of lessons that people drew from it. So the first lesson is like, "Oh, you know, the party's too dictatorial. You know, China needs to liberalize and so on and so forth." So you have a lot of people from that generation who feel that way. Uh, many of them now live in the United States. You know, basically-

   7. DPDwarkesh Patel41:25

      (laughs)

   8. VSVictor Shih41:25

      ... they, they, uh, tried to leave China as soon as possible in 1980s and, and succeeded. Uh, but for someone... Apparently, for Xi Jinping himself and others like him, the lesson was just don't be on the losing side. You know, in any political struggle, make sure you're on the winning side, because if you're on the winning side, then you can do terrible things to your enemies. Uh, so that apparently is the lesson that he learned, and he basically honed his skills and built his coalitions for, uh, the time that he would take over high-level positions in the party for decades, (clears throat) as it turns out. So if you look at the data, you know, he, uh, when he was in Fujian Province-He spent an inordinate amount of time hanging out with military officers in Fujian back in the 1980s, you know, late 1980s, early 1990s. And then you're like, "Well, why did he bother to do that?" You know, most local officials, they don't do that. I mean, you know, the military's there, you need to be nice to them-

   9. DPDwarkesh Patel42:25

      Right.

   10. VSVictor Shih42:25

       ...and all this stuff. But, like, he built a dormitory for them. He even joined a unit of, uh, anti-aircraft regiment. He tried as much as possible to do as much as possible with the military because he knew he needed the support of somebody in the military when the time comes. And guess what? Uh, sort of 30 years later, when he was about to be elevated to be secretary general of the Chinese Communist Party, many of the people that he knew back in Fujian are now generals. They're in charge of important military units. And once he came to power, then he really promoted some of these people. Uh, but then lately, of course, he's purging some of these people, which is, uh, really interesting. (laughs)

   11. DPDwarkesh Patel43:05

       Yeah, yeah.

   12. VSVictor Shih43:06

       Yeah. He had a strategic vision about his own career trajectory, and he pursued that, um, in a very determined fashion, I would say.

   13. DPDwarkesh Patel43:15

       What is the main difference between him and Stalin in that sort of political maneuvering sense? 'Cause all of this sounds very similar to-

   14. VSVictor Shih43:21

       Yeah. I, I would say early in their career, uh, they're very similar. So, uh, outwardly, they're very low-key because, you know, Stalin was the bureaucrat-

   15. DPDwarkesh Patel43:28

       Yeah.

   16. VSVictor Shih43:28

       ...very low-key, not flamboyant, not making, you know, loud speeches like Trotsky did. Uh, uh, but, you know, low-key, getting things done, uh, seen as a very reliable person. Uh, this was a reason why Stalin was chosen, um, in the f- as far as I know. You know, I don't know-

   17. DPDwarkesh Patel43:46

       Yeah.

   18. VSVictor Shih43:47

       ...that much about Stalin. Same thing with Xi Jinping. So, uh, his father, uh, belonged to actually the liberal faction in the Chinese Communist Party. Uh, his father never offended that many people within the party. I mean, you know, everyone at a high level will have, you know, sort of screwed over somebody (laughs) along the way. But his father was in, in the better category, let's say. Uh, and he himself was very low-key. While the other princelings were fighting for very good jobs in the capital city of Beijing or in Shanghai, Xi Jinping said, "Oh, no, it's okay. I'll go down to the villages. I'll work in Hubei in the rural area, then Fujian, which was kind of a peripheral area, uh, and then Zhejiang was slightly better, but still not Beijing or Shanghai." So, he got out of the way of this political infighting, um, I think similar, in a similar way that Stalin did. Like, he, early on, he did not confront people too much. Uh, but once he came to power, he knew, they both knew what it took to control the, the party-

   19. DPDwarkesh Patel44:52

       Mm-hmm.

   20. VSVictor Shih44:52

       ...which they, they govern over. Uh, basically, you form a whole series of coalitions to get rid of your most threatening enemy at a given time.

   21. DPDwarkesh Patel45:03

       Yeah.

   22. VSVictor Shih45:03

       Right? So for Xi Jinping, it was like, "Oh, well, you know, this guy, Zhou Yongkang, who controlled the police forces and also the Ministry of State Security at the time, doing all these irregular things, being fabulously corrupt, he's a threat to the whole party." So, he convinced Hu Jintao to join with him to purge Zhou Yongkang, which was successful. Uh, you know, Stalin did the same thing, you know-

   23. DPDwarkesh Patel45:25

       Yeah.

   24. VSVictor Shih45:25

       ...to Trotsky. And then after the most threatening person is gone, you form another coalition-

   25. DPDwarkesh Patel45:30

       Right.

   26. VSVictor Shih45:31

       ...to purge the next person and so on and so forth. So, they both basically did that until they achieved, uh, absolute power within the party.

   27. DPDwarkesh Patel45:38

       Yeah, yeah. And if, if you read the Stalin biographies, so many of them, in the early part, l- like half the people in the Politburo later are gonna end up in the gulags, and then many of the people in the Politburo later-

   28. VSVictor Shih45:47

       Yeah.

   29. DPDwarkesh Patel45:47

       ...have been to the gulag. Um, I wonder if there's a Trotsky- a Trotsky ano- a, a, analogous person in this story, somebody who was a flamboyant speechmaker.

   30. VSVictor Shih45:54

       Yeah, Bo Xilai.
6. 46:22 – 50:47

   Local government debt crisis

   1. DPDwarkesh Patel46:22

      let's move on to another topic I know you study deeply, which is the local government debt situation.

   2. VSVictor Shih46:28

      Sure.

   3. DPDwarkesh Patel46:29

      Um, what is the newest there? What is your s- sense of the situation now?

   4. VSVictor Shih46:33

      Yeah. It just keeps growing in absolute size, uh, because basically, uh, China is trying to tell the world that they don't have a high debt level-

   5. DPDwarkesh Patel46:43

      Mm-hmm.

   6. VSVictor Shih46:43

      ...which at the central level that is sort of the case, you know, it's still 60, 70% of GDP. But the reason why that is the case is because, uh, there are a lot of things the Chinese government would like to do. They push it down to the local level. But the authorization of local debt issuance is authorized by the central government. So at, at the end of the day, it's really the central government telling local governments, like, "Okay, you need to do this thing. I'm not gonna give you money, but I will give you the authorization to issue even more debt." Uh, so the debt level keeps going higher and higher. The, the one thing that has alleviated the cashflow pressure, uh, late last year was the central government, uh, authorized again the issuance of close to 10 trillion renminbi in special local debt to repay some of the higher interest-bearing debt of local governments. Uh, but that's an accounting exercise. It doesn't literally decrease local debt. It just changes from higher yielding to lower yielding. Meanwhile, the overall size of local government debt in China, I would estimate to be 120% of GDP to 140% of GDP.

   7. DPDwarkesh Patel47:50

      Whoa. That's atop the 60% that is owed by-

   8. VSVictor Shih47:53

      The central government, yeah.

   9. DPDwarkesh Patel47:54

      Yeah.

   10. VSVictor Shih47:54

       So total governmental debt is, yeah, it's, you know, pushing 200.

   11. DPDwarkesh Patel47:57

       And the high-level way to understand what this debt was for-

   12. VSVictor Shih48:01

       Mm-hmm.

   13. DPDwarkesh Patel48:01

       ...the debt in Western countries and other OECD countries is often because you owe money basically to pensioners. In this case-It's-

   14. VSVictor Shih48:09

       No.

   15. DPDwarkesh Patel48:09

       ... um, it's, it was just that they built bridges.

   16. VSVictor Shih48:11

       Borrowed, yeah, they built, they build all the high-speed rail, all the infrastructure, the beautiful infrastructure that you do see in China. And then more recently, industrial policies, right? So, uh, for example, if there's a new science park for AI, let's say, right, the land that they acquire, the infrastructure that's built is all built with borrowed money. Then there are these startups, uh, and then they're, the startups are partially financed by some of these central level investment funds that you read about-

   17. DPDwarkesh Patel48:43

       Mm-hmm.

   18. VSVictor Shih48:43

       ... industrial policies. But then actually, the local government also have their own seeder funds, which uses borrowed money to finance, uh, some of these venture deals.

   19. DPDwarkesh Patel48:53

       Mm-hmm. For startups, is the fact that they can get cheap credit from banks more relevant? Is the fact that they can get, um, loans from provincial funds more important? There's also these central government funds, the Big Fund-

   20. VSVictor Shih49:04

       Yeah.

   21. DPDwarkesh Patel49:04

       ... and so forth. Is that the... Which, which is the bigger piece here?

   22. VSVictor Shih49:08

       Uh, uh, so a lot of it depends on, like, your social network and your connections.

   23. DPDwarkesh Patel49:13

       Yeah.

   24. VSVictor Shih49:13

       So if you're a startup at Tsinghua University, you have access to private sector funds, but also some of the central government, uh, seeder funds, uh, if it falls in the right category, you know, semiconductors, AI, et cetera-

   25. DPDwarkesh Patel49:26

       Yeah.

   26. VSVictor Shih49:26

       ... et cetera. But if you're, uh, at Lian Wen Feng, I don't know. So at Lian Wen Feng because it started out as a financial institution, so it was mainly sort of private sector money from, from financial investors. Uh, but there are other AI, especially sort of more hardware-driven initiatives in the provinces, which are seeded by local government funds.

   27. DPDwarkesh Patel49:46

       Mm-hmm.

   28. VSVictor Shih49:47

       Uh, and, and the point about financial repression is that without financial repression, an investor in China can invest in Silicon Valley. They can go to Sequoia and invest money. But because of capital control, they cannot legally move more than $20,000 a year out of China. They have to find domestic investment. Uh, so as a result, many of them choose to invest in Chinese high-tech, uh, or they choose to put their money in the bank. So actually, a lot of people just choose to put their money in the bank, and then the state banking system is, uh, then financed to, or they have the deposits with which to lend to local government seeder funds, eh, for industrial policies.

   29. DPDwarkesh Patel50:28

       And the crucial thing here is that the banking sector is totally controlled by the state.

   30. VSVictor Shih50:32

       Yes.
7. 50:47 – 58:59

   BYD, CATL, and financial repression

   1. VSVictor Shih50:47

      right?

   2. DPDwarkesh Patel50:47

      There's a couple of mixed up questions I want to ask here, basically.

   3. VSVictor Shih50:50

      Yeah, yeah.

   4. DPDwarkesh Patel50:50

      So you said, well, if there were no capital controls, these people might want to take their money and go invest in Silicon Valley. Very basic development economics would show you that, like, if a country is less developed, they'll have higher rates of return-

   5. VSVictor Shih51:00

      Higher rates of return.

   6. DPDwarkesh Patel51:00

      ... so people would want to invest, the Silicon Valley would want to invest in China. Um, why would cap- getting rid of capital controls make capital go the other way? And this goes into other questions of why is it the case that the Chinese stock market has performed so badly even though the economy has grown a lot? And then why is it the case that-

   7. VSVictor Shih51:18

      Mm-hmm.

   8. DPDwarkesh Patel51:19

      ... um, th- th- they have a current account surplus and they're basically accumulating T-bills when, you know, the pattern you should see obviously-

   9. VSVictor Shih51:26

      Yeah, yeah.

   10. DPDwarkesh Patel51:27

       ... is that like they're, they can earn much higher rates of return building productive things in China than accumulating 4% yield-

   11. VSVictor Shih51:34

       Yeah, yeah.

   12. DPDwarkesh Patel51:34

       ... uh, T-bills.

   13. VSVictor Shih51:34

       Yeah. Well, so at the deepest level, I would say there's, there is a deep fundamental difference between capitalism and socialism. Uh, and it sounds very philosoffal- philosophical, but I think, you know, this might, uh, help sort of your Gen Z listeners, uh, think about this, because for socialism, they only care about output. And it's like, okay, uh, whatever capacity we're thinking about, whether it's grain production or metal, metal production, or these days, robotics, we just want more of it.

   14. DPDwarkesh Patel52:05

       Mm-hmm.

   15. VSVictor Shih52:05

       Right? So then, uh, the state can use the state banking system, which they control to allocate huge amount of capital to maximize the output of all these different things that they care about.

   16. DPDwarkesh Patel52:16

       Yeah.

   17. VSVictor Shih52:17

       But when you maximize the output, you don't necessarily make money doing that. Whereas capitalism wants to maximize profit, which is, you know, as you know, the difference between the cost of production and the amount that you can earn from selling the-

   18. DPDwarkesh Patel52:31

       Right.

   19. VSVictor Shih52:32

       ... output. Uh, for socialism, they don't care about that.

   20. DPDwarkesh Patel52:35

       But the companies aren't socialist, right? The companies are s- are profit taking.

   21. VSVictor Shih52:38

       Well, no, but because the financial system is socialist, they're forced into socialist-like behavior. You know, you can't go into a bank and say, "Look, I make robotics. Uh, this robot that I'm gonna make is going to be highly profitable, um, you know, down the road, but I, I can only make like 10 of them." And then the bank would be like, "Well, this is BS." I know a lot of startups don't make any money and then so... But at some point, notionally, you have to start making money.

   22. DPDwarkesh Patel53:03

       That's right.

   23. VSVictor Shih53:03

       Whereas the socialist banking system basically says, you know, even if you never make any money or hardly any money, that's okay. Uh, as long as the Chinese government tells us that this is a strategic sector, as long as you can prove to us you can actually produce the thing that we want you to produce, if you never ever make money doing that, that's perfectly fine.

   24. DPDwarkesh Patel53:22

       Mm-hmm. What is the sort of outer loop feedback, the thing which keeps the system disciplined? Here, there's private investors who care about actually earning a rate of return and so they're only gonna invest in companies which they think have a viable shot of become- becoming bigger, hu- huge companies that can actually be at the frontier in technology. If these banks are not actually competing against real investors-

   25. VSVictor Shih53:49

       Yeah, and it's not their money.

   26. DPDwarkesh Patel53:50

       Yeah, exactly.

   27. VSVictor Shih53:51

       Yeah, so they don't care.

   28. DPDwarkesh Patel53:51

       But it seems like this is compatible with many of the world's leadest comp- leading companies being, um, developed in this system. So how- how is it working?

   29. VSVictor Shih54:01

       Well, so this is where the bureaucracy steps in, right? So it's like, well, how would a bank tell what's a good company and what's not a good company?

   30. DPDwarkesh Patel54:08

       Yeah.
8. 58:59 – 1:11:33

   How corruption leads to overbuilding

   1. VSVictor Shih58:59

   2. DPDwarkesh Patel58:59

      Yeah. Going back to the local government debt burden-

   3. VSVictor Shih59:03

      Mm-hmm.

   4. DPDwarkesh Patel59:04

      ... there's a world where AI isn't a big deal and th- then there's a world where AI is a big deal.

   5. VSVictor Shih59:08

      Yeah.

   6. DPDwarkesh Patel59:08

      If we live in the world where AI truly causes huge uplift to economic growth and so forth, is it possible that this problem doesn't meaningfully harm China's ability to compete at the frontier?

   7. VSVictor Shih59:23

      Mm-hmm.

   8. DPDwarkesh Patel59:23

      And here's why that might be the case. It seems like this problem is especially affecting poorer provinces, um, whereas-

   9. VSVictor Shih59:31

      Mm-hmm.

   10. DPDwarkesh Patel59:32

       ... uh, you, you have the actual numbers, but-

   11. VSVictor Shih59:34

       Yeah.

   12. DPDwarkesh Patel59:34

       ... are Shanghai and Guangdong in a good position with respect to their fiscal, uh, situation? And could they keep funding, you know, top end semiconductors, AI firms, data centers, and so China could still keep competing at the frontier in AI even if the poorer provinces don't have the money to, um, fund basic services and so forth? And in the long run-

   13. VSVictor Shih59:55

       Mm-hmm.

   14. DPDwarkesh Patel59:55

       ... they get, they get advanced AIs and that, that's a big uplift to economic growth and they can just grow their way out of this debt problem.

   15. VSVictor Shih1:00:02

       Yeah, so (laughs) we can talk about that. I- I'm a bit skeptical about that, uh, for- for the case of China. But yes, indeed, as you said, some places like Shanghai and Guangdong, they're still in relatively okay fiscal, uh, positions. Uh, but then there are other sort of, uh, wealthier provinces with a lot of debt also. So Zhejiang Province, uh, which is where DeepSeek is located, actually-

   16. DPDwarkesh Patel1:00:24

       Mm-hmm.

   17. VSVictor Shih1:00:24

       ... um, and also Alibaba and all these tech companies, they have a high debt load. But because they- they start from a pretty wealthy place, they can still service the debt without too much difficulty. Uh, but actually, a trade war is gonna make it worse for Zhejiang Province, because a lot of the manufacturing export firms are also in Zhejiang. Um, but nonetheless, the case of China is that basically, the financial system is geared toward fulfilling the priorities of the party, i.e. the priorities of Xi Jinping. So even if they can't do anything else, they will do the things that Xi Jinping wants them-

   18. DPDwarkesh Patel1:01:01

       Mm-hmm.

   19. VSVictor Shih1:01:03

       ... to do. Uh, and AI apparently is one of the higher priorities for Xi Jinping, because he's held multiple study sessions, he's had different politburo meetings and so on and so... And Ding Xuexiang, who is one of his most trusted lieutenants, is in charge of it, et cetera.

   20. DPDwarkesh Patel1:01:17

       Right.

   21. VSVictor Shih1:01:18

       So I do expect a fair amount of resources being devoted to it, regardless of the situation in local debt. I mean, in fact, at the local level, things are so bad, uh, but they just don't care, right? So, uh, there are civil servants, teachers who are not paid, uh, four or five months out of the year. And then you can say, "Well, how can you run a government like that? Wouldn't it just collapse?" Uh, but then you have to look at the outside options. You know, for your teacher, for your very low-level bureaucrat, what option do you have? I mean, do you wanna go back to delivering food, you know, to people? Or would you rather at least take six, seven months of civil service salary, at least you have healthcare, at least you can get your free lunch at your workplace cafeteria every day. Um, people still choose to work for the Chinese government, uh, even if that were the case. But a lot of the previously very generous fringe benefits and so on and so forth, that has all been cut down because of the local debt issue. Uh, but they're still pouring a lot of resources into national defense and AI and technology.

   22. DPDwarkesh Patel1:02:20

       And what would a solution at this point look like? Because if you've already spent all this money... First of all, actually, why is it the case that these investments aren't productive? Because it's not like it's entitlement spending, where you're doing it for-

   23. VSVictor Shih1:02:33

       Yeah.

   24. DPDwarkesh Patel1:02:34

       ... I don't know, old people, but then at the end of the day, you're not getting any return for it. Theoretically, these are like, you're building real bridges, you're building airports. So w- why aren't they productive? And then what does a solution at this point look like?

   25. VSVictor Shih1:02:46

       Uh, well, so it was very productive, you know, I mean, I think you noted in this art Kroeber book review that you did, uh, in the 1980s and 1990s, because China lacked a lot of infrastructure. Uh, but once you built the first high-speed rail between Beijing and Shanghai, you built a second one, you built a third one, you know, there's very rapidly diminishing-

   26. DPDwarkesh Patel1:03:06

       Yeah.

   27. VSVictor Shih1:03:06

       ... return. Also, as you know, the population is basically shrinking in China. Uh, and especially in a lot of cities in Northeastern China and also in Southwestern China. Uh, so you really don't need high-speed rails connecting those cities to other places in China, because nobody lives there anymore.

   28. DPDwarkesh Patel1:03:24

       C- can I ask about this? So-

   29. VSVictor Shih1:03:25

       Yeah.

   30. DPDwarkesh Patel1:03:26

       ... if the reason that the provincial leaders kept doing this-
9. 1:11:33 – 1:19:43

   Probability of Taiwan invasion

   1. DPDwarkesh Patel1:11:33

      so you mentioned a second ago, "Well, why do they need this big military?" Obviously, the reason is not just self-defense, but a potential invasion of Taiwan. So given your reading of elite politics-

   2. VSVictor Shih1:11:46

      Mm-hmm.

   3. DPDwarkesh Patel1:11:46

      ... what's your sense on the probability that they would actually invade Taiwan this decade?

   4. VSVictor Shih1:11:52

      Uh, so first of all, it's, I think we do know something about Xi Jinping's preference, m- uh, mapping when it comes to this issue. Um, he has said a number of times that, you know, obviously China should be united, so I- I do believe that's sincere. But clearly, his desire to achieve that is not so strong that he would take a very risky gamble-

   5. DPDwarkesh Patel1:12:16

      Mm-hmm.

   6. VSVictor Shih1:12:16

      ... achieving it, because if that were the case, he would've done it already. He's been in power for 12 years.... you know, um, he hasn't done very much. I mean, you know, certainly the amount of pressure on Taiwan has ratcheted up. Um, and also from his other policymaking, we know that he's not a reckless policymaker.

   7. DPDwarkesh Patel1:12:36

      Was zero COVID kind of reckless?

   8. VSVictor Shih1:12:38

      Well, do you think that was reckless? Well, so that was actually conservative, right? So, he preserved the lockdown longer than was necessary.

   9. DPDwarkesh Patel1:12:45

      Yeah. I mean, it depends on how you... The- the- y- but you could say the same thing about Taiwan. It's like, it's conservative because in the long run, maybe they'll, they'll pose a national security threat, right? But, uh, it is-

   10. VSVictor Shih1:12:58

       No, no, no. But in other words, like-

   11. DPDwarkesh Patel1:12:59

       ... it is a change from the norm.

   12. VSVictor Shih1:13:00

       ... if he wants it so badly that he would just do whatever it takes to, to get it, he would have done it already.

   13. DPDwarkesh Patel1:13:05

       Yeah. I guess you could argue that he has been trying to build up-

   14. VSVictor Shih1:13:09

       Mm-hmm.

   15. DPDwarkesh Patel1:13:10

       ... enough self-sufficiency, uh-

   16. VSVictor Shih1:13:12

       Sure.

   17. DPDwarkesh Patel1:13:12

       ... that in the aftermath-

   18. VSVictor Shih1:13:14

       Yes.

   19. DPDwarkesh Patel1:13:15

       ... um, China would not be left in the lurch with food or power and that's why they're doing clean tech.

   20. VSVictor Shih1:13:21

       Yeah, yeah, yeah.

   21. DPDwarkesh Patel1:13:21

       That's why they're doing investments in, uh, semis and so forth, so that over the next few years, if they've built up enough self-sufficiency, they're in a position where they actually could without it being a hu- You, you couldn't have done the same thing in 2015.

   22. VSVictor Shih1:13:34

       Right. So, yeah. So then, then we've seen the Chinese government engage in all this behavior, stockpiling, you know, this and that, like oil, grain-

   23. DPDwarkesh Patel1:13:42

       Right.

   24. VSVictor Shih1:13:42

       ... so on and so forth, enlarging its navy, uh, you know, building all this landing capabilities and, and so on and so forth. Um, so then, then one argument is like, well, so there's a threshold. Once he feels that he reaches that threshold, then he'll go for it, you know? But then for me, it's like, I don't think that threshold is fixed.

   25. DPDwarkesh Patel1:14:02

       Mm.

   26. VSVictor Shih1:14:03

       Right? It's really conditional on a lot of different things. And there are some, uh, exogenous factors that will increase the threshold. Other exogenous factors will lower the threshold. So, I would say more recently, one factor that might have increased the threshold for him acting, uh, is what happened in Ukraine.

   27. DPDwarkesh Patel1:14:22

       Mm.

   28. VSVictor Shih1:14:22

       Right? So, Ukraine, you have a case where, uh, Putin was very confident about taking over all of Ukraine within a short period of time.

   29. DPDwarkesh Patel1:14:29

       Yeah.

   30. VSVictor Shih1:14:29

       Turns out he was wrong. He was getting all this bad intelligence.
10. 1:19:43 – 1:25:57

    Succession after Xi

    1. VSVictor Shih1:19:43

Episode duration: 1:29:56