China's view on innovation and copying ideas

The following is a conversation with Keyu Jin, an economist at the London School of Economics, specializing in China's economy, international macroeconomics, global trade imbalances, and financial policy. She wrote the highly lauded book on China titled The New China Playbook: Beyond Socialism and Capitalism that details China's economic transformation since 1978 to today. And it dispels a lot of misconceptions about China's economy that people in the West have. This is the Lex Fridman Podcast. To support it, please check out our sponsors in the description and consider subscribing to this channel. And now, dear friends, here's Keyu Jin.

What is the single biggest misconception the West has about China's economy today? The biggest misunderstanding is somehow that a group of people or even just one person runs the entire Chinese economy. It is far from the reality. It is a very complex, large economy, and even if there is an extreme form of political centralization, the economy is totally decentralized. The role that the local mayors, I call this the mayor economy, plays in reforms, but also driving the technological innovation that we're seeing right now. It is actually not run by just a handful of people. It's more decentralized than the US's. And I think more broadly, a big misunderstanding is really the relationship between Chinese people and authority.

So just to go back to something you said, there is a value for competition culturally. So on the business side, on the economic side, there is a cultural value of people competing in a meritocratic way? Competition is ferocious in China, especially when it comes to Chinese companies, but also in education. I should be thankful that I'm not born later that I am because I thought China was pretty competitive already going to the schools and studying for the exams. It is a different level today. Competition is not necessarily in the culture, I'd say, it's driven really by the changing economic and social circumstances of the day. The Chinese companies are all hardworking. They're all going after the market share. They all kind of want to do the same thing. It's not quite like in the US where you open a coffee shop while next door I'm going to open a bagel shop. In China, if the coffee shop does well, everybody wants to open the same coffee shop.

All right. So there has been this miracle in the Chinese economy from after Mao, under Deng Xiaoping, where the Chinese economy got transformed and grew incredibly. So can you explain what happened? The different transformations that happened, the different reforms that happened under Deng Xiaoping? Deng Xiaoping was by far our most pragmatic leader and I think everybody's grateful to Deng Xiaoping. My father's generation would not have seen that amount of prosperity and peace and opportunity without Deng Xiaoping. It started in the late 1970s when Deng Xiaoping came out with this open up and reform mandate. And it was very tough. Again, coming back to the big misunderstanding of China, it's not as if one leader decides that that's what we're going to do and then everybody follows order and does that. No. There are tons of political barriers, tons of incentive compatibility problems at the local level. In the end, you need the local provincial governors, the mayors to do the job. And how many prefectures are there in China? A lot. And they have their own interests. We know this around the world, politically it's the most difficult thing to do. But somehow Deng Xiaoping was able to break tradition, break convention, come out with this completely new way of thinking about society, life and economy. And it was so transformative.

So maybe can you speak to that? What are some important things to understand about the structure of the Chinese state? Well, the central leadership politically is extremely powerful and it's very consolidated. But they hold a very crucial key to the local governments, which is that they decide their fate. Am I going to promote them? Am I going to put them in jail? Am I going to fire them? Am I going to reward them? Am I going to punish them? They hold that crucial key. And I think what was very surprising for most of the Western audience is that when I mentioned about the mayor economy, they say, "Why don't our American mayors in each city do these very radical things and then push for GDP growth and technology innovation?" It's quite different. I think this is where China's very unique in the world, is that political centralization, economic decentralization, and the yardstick to measure local mayors' competence through, in the first stage, it was GDP growth.

Let's go, if we can, a bit to the personal. So, you grew up in China. What are some moments from childhood that were maybe defining to your understanding of Chinese culture and Chinese economy? We look back at those moments when everybody in China was very poor with a bit of nostalgia. I remember no doors were locked. I was in Beijing, and I remember every day in the summer, everybody just went downstairs and chatted with everybody else. It was very social. It was very community-based. The neighbors help each other. We had very, very little, small apartments, very limited access to certain goods. When I was born, even in Beijing, there were these vouchers for how many eggs you can buy, and even Beijing, there were three or four blackouts per week, typically. There was a sense of community. There was a very strong bond between people and within the family, because they were going after a common goal, making your life better, right? Struggling, striving to make your life better, and I remember being on the back of my father's bike, getting up 6:00 AM every day and going to nursery. That's the typical day. Not a lot of material goods, but people had a sense of purpose, and that's radically different. It's completely different now in China.

And the power, the geopolitical power, the military power, cultural power, influence on the rest of the world? Yeah, you get to choose which do you want. So, the first time you went to US, what was that like? You mentioned Harvard. How did that change your understanding of the world? Well, it's funny that we're talking about this now, because I was able to go to the US on a scholarship to an American high school, because the US, at that time, was open arms, all open arms towards international students. They kind of wanted to be the country that was going to educate the future leaders of the world and their elitist institutions, like Harvard, was really going to be, they're the center of the world. So, they welcomed students like me and many, many others to be exchange students to study in the US, and we thought, "Wow. We've never seen a more generous country." I was able to go to an American high school and live with an American family, which was, wow, can I say a big change from China, not only because I was plucked from the Communist Youth League party and then straight to supporting their democratic campaign, because the host family was running for State Attorney general in New York.

Let's go back to the economics, so can you just dig a little deeper on the relationship in China, between the government and the companies and the private sector? So, how much freedom do companies have? Another big misunderstanding, and a fundamental one, is that people somehow think that the state suppresses the private sector. It's not at all as simple as that. For the most part, if we look at the local government's incentive system, they want to help the best, private companies, which are the most promising, because it makes them look good. It adds to their GDP. It adds to the jobs, investment. They are so helpful to these private companies. Actually, I know many of these local government officials working tirelessly, day and night, especially in bad times, to coordinate between debtors and creditors, and to smooth out and define relationships with banks. They want to help these private companies, because again, their incentives are aligned. Deepseek is a private company, by the way, so it has done the country proud, and why would the state want to go and suppress these private companies, which ultimately is kind of a beacon, represents a beacon success for China.

Innovate first, regulate after, really interesting. I also, in my mind, am contrasting it with the way the Soviet Union and Russia, since operated. That doesn't sound at all like this model, and it's interesting that countries that, at least on the surface, had a similar cultural communist problems, the bureaucracies that form inside the communist state. It just seems that China broke away from that somehow. I don't understand exactly what happened. In the West, they group these economies together, as if they're the same thing. No, it's not the same at all. There's so many differences, so much more flexibility. You can have dynamic entrepreneurialism, at the same time have socialist characteristics, and I think this is what China has been able to shape and mold, a unique model that balances between government industry, between state coordination and market mechanisms, and between individualism and communalism. It's not necessarily black and white. You can have all these things at the same time.

Since we're talking about it, there was a lot of controversy around Jack Ma "disappearing" reappearing a bit later, and there's been sort of rumors of some tense relationships that he has with the Chinese government. What is important to understand about the whole situation? To what degree is it reflective of the issues entrepreneurs face in China? In the US, capital controls politics, one could argue. In China, it has to be the other way around. Capital must be reigned in by politics. As part of the capitalist class, do not have the ambition to exceed the powers of the political class, is really at the core of it, I'd say, is the biggest difference between US and China. There are important details that I think the West has not fully provided to the public. For instance, and financial, as innovative as it was, was doing banking jobs without being regulated like a bank, right? So that, obviously, poses a host of financial stability questions and rules and regulations and so forth, so the fact that IPO was halted, you could say that there were strong, economic, regulatory grounds for that.

So can you describe the DeepSeek moment and DeepSeek as it represents what China's thinking about in the space of AI? And does China have a chance at outrunning US in the AI race? DeepSeek was a surprise to the world, but I don't think it was that much of a surprise to the same degree to the Chinese. And remember that DeepSeek happened in times of crisis, urgency, not in times of comfort. A lot of these technological breakthroughs and leapfrogging happens in times of crisis. This is called crisis innovation. And you got to thank the US for that. When the Chinese were comfortably importing chips from the US, the whole industry stalled for 20 years. I mean, why would you plow in billions, tens and billions and even more when you can just import the best? You don't want to do your own innovation. It's because of these export controls, these sanctions on these companies, that Chinese companies in the Chinese state felt an existential crisis a few years ago by being cut off from these critical components. And guess what happened? In a short amount of time, a degree of domestic capacity ramping up and catch up has been nothing short of remarkable. Again, thanks to US truculence on technology.

So to you, maybe when you refer to Biden and Trump, if you go back to Biden, it would be the CHIPS Act. So the export controls created unintended, unexpected effect where it had the reverse geopolitical effect. I hope it was unintentional. Otherwise, you'd be questioning the level of intelligence of the US administration. But I think that the things they laid out did the opposite of what was intended. It sped up domestic capacity. It motivated the whole country to do this whole of a nation program to go after technologies, kind of like the way they go after Olympics, Olympic gold medals. They wanted to maximize Olympic gold medals, and they put the whole nation at work and all the resources, and that's what China did. Huawei, another example, they were sanctioned. Guess what? They have come back to life stronger than ever before. And this is not unique to this episode. If we look throughout history, these blockades don't work. The continental system actually indirectly led to Industrial Revolution in the UK. When the Spanish blockade, the Portuguese, they came up with a very ferocious, forceful naval power. And you're talking about China here. They just don't lie down and lie flat and say, "Oh, we give up." Right? They're more motivated than ever before.

All right. So can you talk through the whole saga of the Trump's tariffs that's still going on, especially tariffs on China? From your perspective as an economist, to what degree was it justified? To what degree was it effective? To what degree is it bad policy for US, for the west, for the world, also for China? China has been preparing for this for the last five years, and for the return of Trump and for Trump's maniac trade policies. You'd think that Trump also had five years to prepare for this battle with China. It didn't show. You can say that the Chinese, at least this time around, have played their hand pretty well when dealing with Trump's tariff threats and the trade war with a level of calibrated assertiveness. They have really thought through everything very elaborately. And look, this is not good for either country. Let's just be clear. It's bad for US and China and it's bad for the world. And every country has a stake in the US-China trade war because whether you trade directly or indirectly with China, you're going to be affected. They are one of the largest intermediate exporters in the world. And Chinese manufacturing goods anchor global manufacturing prices.

All right. You did mention immigration a little bit. I think that's a component of it also. You said your own experience was that US was much more open to immigration in the past. What do you think about this on the human side, the protectionism, the closing of the borders that the US is doing? What are the pros and cons of that from an economics perspective? On US immigration, I understand both sides of the story to be very honest. And I also understand a bit of the protectionist streak, not only coming from the US but also from Europe and various parts of the world, which is going to be a trend. I understand that before you care about people in the rural villages in Indonesia, you really care about the Northern Brits in this country and they have not fared well. I understand that your jobs may be under threat because of this uncontrolled influx of illegal immigrants.

So we talked about the economic side of tariffs, and you mentioned the other red line and the three T's. Can we talk about Taiwan? So how important is Taiwan to the Chinese economy and the global economy? Taiwan has among other things, TSMC, which is vitally important for the global economy. It's also very important for the Chinese leadership and the Chinese people. You don't want to ask what I think, ask the Chinese young generation. They would one day like to see unification. It's part of the patriotic, the dream, if you will. And it's a chip between the US and China. So everybody is watching Taiwan. But I'd say that this attention is not necessarily good for Taiwan, because all this uncertainty on the political risk has meant that investment there has dramatically been curtailed.

You mentioned one-child policy, so can we speak a little bit more to that? What broadly, what impact has it had on the Chinese society? On culture, you already mentioned some of it, some of the impact on the economics, on the culture, on the demographics of China. It's probably one of the most radical policies that China has enacted in its history. And the enforcement was very strict. In my class, nobody had a sibling except my friend who was a Uyghur. 98% of urban households had only one. The other 2% are twins, which you're allowed to keep. Thank goodness. If you had the good fortune of giving birth to twins, it had lots of unintended consequences on the economy and society as well.

There are constant predictions of China's economy collapsing. You have pushed against that narrative. But you've also spoken to some of the challenges it's going through. What's the GDP going to look like? Is the Chinese economy going to collapse? Is it going to flourish? What do you think? Collapse is such a strong word, and the West has been using this word repeatedly. If I remember correctly, maybe four to five times, maybe even six times since 1980s during the period of China's fastest growth. I tend to not think that Chinese economy will collapse. But will a slowdown continue? Will it be able to lift up again? Will it be able to come out of this cycle soon? I think that's more relevant. And the Chinese economy has a lot of potential because the fundamentals are still there.

So in the spirit of understanding China better, maybe to get a bit of your advice, if I were to visit China, what's the right way to visit to experience it, to see the people, to talk to the people maybe outside of the big cities? Is there any advice you can give to somebody going to China? Checkout Speed, his travels into China. I think they represent a more dynamic reality than just visiting Beijing and Shanghai and Shenzhen, the big cities. I actually think a lot of the opportunities, especially economic opportunities, are in the second, third tier cities now in China. And there's a return of talent. These companies, Pop Mart, they're coming from these second-tier cities that care about the local economy, about fun, entertainment. That's what the new generation is about, they don't want to be lining up some factory doing manufacturing jobs.