Call Me Back - with Dan Senor - China’s Great Wall of Steel? - with Matt Pottinger

Episode Date: August 13, 2021

China’s borders have been sealed for well over a year now. And those borders will be closed for the foreseeable future. That, obviously, is a result of the pandemic; but, is there a larger grand strategy at play? For decades now, China’s coupling with western economies has been the dominant theme of the global economic landscape - beginning with China’s 2001 accession to the World Trade Organization. But that’s been changing. Fast forward to a speech by President Xi Jinping to mark the hundred year anniversary of the Chinese Communist Party. He spoke before a massive crowd in Tiananmen Square: "The Chinese people", Xi said “will never allow any foreign force to bully, oppress, or enslave us. Anyone who tries to do so shall be battered and bloodied colliding with a great wall of steel forged by more than 1.4 billion Chinese people using flesh and blood.” On July 2, Chinese regulators announced an investigation into DiDi Global, a ride-hailing company, right after its IPO. DiDi had raised $4.4 billion in the biggest Chinese IPO in the U.S. since Alibaba’s in 2014. There have been similar moves against other Chinese companies listed in the US. Where will this go? Consider this: There are currently 244 U.S. listed Chinese firms with a total market capitalization of around $1.8 trillion, equivalent to some 4% of the U.S. stock market’s capitalization. Are we witnessing the decoupling of the US and China economies? Is this the one issue on which there seems to be a bipartisan consensus in the US? Is the Biden administration cementing the Trump policies towards China or reversing them? How is China dealing with the Delta variant and how will it factor into the Chinese Communist Party’s next moves? There’s no better guest to help us understand what’s going on than Matt Pottinger. Matt covered China and lived in China as a journalist for Reuters and then The Wall Street Journal. He covered the first outbreak of SARS in China. He then, in his early 30s, made quite a career change. He enlisted in the US Marine Corps, and served in multiple combat deployments in Iraq and Afghanistan. Later on, Matt played an instrumental role in the geopolitical story of our time: reshaping the West’s relationship with China, when he served as the deputy National Security Advisor in the Trump administration, and he was the architect of the administration’s strategy towards China. Today, he is regularly called upon from policymakers on both sides of the aisle, to consult on US policy towards China. As we enter a new phase of pandemic, what is going on with the US-China relationship and how will it play out?

Beijing has ambitions to internationalize the central bank digital currency. It's going to eventually force multinational companies to transact with China in that currency. And as those companies, those multinationals accumulate digital currency, China will have the ability to look in real time at all of their payments, at how their supply chains work, and also to freeze their accounts if they don't like something that a company says or does that offends the interests of the Communist Party. Welcome to Post-Corona, where we try to understand COVID-19's lasting impact on the economy, culture, and geopolitics. I'm Dan Senor.

China's borders have been sealed for well over a year now, and those borders will be closed for the foreseeable future. That obviously is a result of the pandemic. But is there a larger grand strategy at play? For decades now, China's coupling with Western economies has been the dominant theme of the global economic landscape, really beginning with China's ascension to the World Trade Organization in 2001. But that's been changing. Fast forward to a speech by President Xi Jinping to mark the 100-year anniversary of the Chinese Communist Party. President Xi spoke before a massive crowd in Tiananmen Square. The Chinese people, he said, will, quote, never allow any foreign force to bully, oppress, or enslave us. Anyone who tries to do so shall be battered and bloodied, colliding with a great wall of steel forged by more than 1.4 billion Chinese people using flesh and blood, close quote.

Hmm. A great wall of steel? On July 2nd, Chinese regulators announced an investigation into Didi Global, a ride-hailing company. Think of it as the Uber of China. They announced this investigation right after Didi's IPO. Didi had raised $4.4 billion in the biggest Chinese IPO in the U.S. since Alibaba's in 2014. There have been similar moves against other Chinese companies listed in the U.S. Where will this go? Well, consider this. There are currently 244 U.S.-listed Chinese firms with a total market cap of around $1.8 trillion, which is equivalent to some 4% of the total U.S. stock market capitalization. Are we witnessing the decoupling of the U.S. and Chinese economies? Is this the one issue on which there seems to be a bipartisan

consensus in the United States? Is the Biden administration cementing the Trump policies towards China or reversing them? How is China dealing with the Delta variant? And how will it factor into the Chinese Communist Party's next moves? Well, there's no better guest to help us understand what's going on than Matt Pottinger. Matt covered China and lived in China as a journalist for Reuters and then the Wall Street Journal. He covered the first outbreak of SARS there on the ground. Then in his early 30s, Matt made quite a career change. He joined the U.S. Marine Corps with multiple combat deployments in Iraq and Afghanistan.

Later on, Matt played an instrumental role in the geopolitical story of our time, reshaping the West's relationship with China when he served as the Deputy National Security Advisor in the geopolitical story of our time, reshaping the West's relationship with China, when he served as the Deputy National Security Advisor in the Trump administration, where he was the architect of the administration's strategy towards China. Today, Matt is regularly called upon from policymakers on both sides of the aisle to consult on U.S. policy towards China. As we enter a new phase of the pandemic, what is going on with the U.S.-China relationship, and how will it play out? This is Post-Corona. And I am pleased to welcome Matt Pottinger to the Post-Corona podcast. Hi, Matt.

Hey, that's great to be with you, Dan. That's optimistic to call it post-corona. I know, I know. When we started this project, we thought it was going to be a limited series with a clear end. We didn't know exactly when the end date was going to be, but we certainly thought it would be by now. We are still aspiring to post-corona, but it feels like we are entering a very bumpy phase of trans-corona. Right, exactly right. So let's jump into our conversation about China. And there's a lot of territory that we want to cover. But I just want to start first with where China is right now,

just in the pandemic, just in the public health crisis, and specifically the Delta variant crisis, because there's an avalanche of press coverage over here in the West about how we are dealing with the Delta variant. But there just hasn't been as much coverage because we're all focused on what's happening over here as to what's happening over there. So could you just first give us an update? Yeah, yeah. So look, China's got a got a completely different philosophy and approach to COVID from from what we have here. They're suddenly facing their first crisis, really, since they were able to eradicate the the original outbreak after they had covered it up for several weeks that seeded the global

pandemic. But they actually did a very good job of crushing the pandemic within their borders. But they have a different approach. Our approach is very heavily dependent on vaccines. You've got something like 70% of American adults that have now been vaccinated. China has vaccinated a lot of its population, but they don't have very effective vaccines. So their approach is really, you know, one of building the Great Wall even higher. It's extremely stringent border controls, using technology, surveillance technology and apps and GR codes so that every single individual throughout the day is monitored, where they are, where they're going, who they've come in contact with. And they have been able to keep any've got somewhere close to 2,000 reported cases that are attributed entirely or at least mostly to this new Delta variant.

So the Delta variant is different. 2,000? Yeah, close to 2,000 now inside of mainland China. And they have rolling lockdowns that are taking place. There have been cases reported in half of China's provinces. But they have they've jumped on this thing with with major lockdowns, mandatory masking. You know, everyone has a red or a yellow or a green QR code on their phone at any given time that dictates whether they're able to move or not out of their homes and so you've got lots and lots of people under lockdown travel is is dropping you know reports of people who you know motorists

are being stopped as they try to drive between cities at checkpoints and being turned back air travel is. They just announced this morning that they partially shut down the world's third largest container port because one of their workers had a case of this. So they're facing a crisis again. But again, their approach is going to be dramatically different from ours. Ours is, by default, we've had to learn how to coexist with this virus. And I think that's been true of most major countries, with the exception of some island nations that have, you know, Taiwan, Australia, New Zealand have been very effective at just, you know, using the oceans as a moat and stopping activity long enough for these things to peter out. With big countries like ours and India and Europe and Japan and elsewhere,

it's been harder to actually contain the thing. So it's been more about mitigating the effects, using heavy vaccination strategies and trying to coexist with the virus. The Chinese Communist Party has made clear that it has zero intention of following that kind of an approach. In fact, they've mocked democracies for the way that we've handled this pandemic, and they've made clear that they're going to have a zero tolerance approach. That might work, by the way. It's worked pretty well until now. China is not a typical country in this respect. They've got massive control over their people. They've

increased the degree of control they have over their population thanks to COVID. And they are determined to completely eradicate this virus, even this Delta strain. I saw one market study that approximately 25 cities have been currently tagged as, quote, mid to high risk in China, 25 Chinese cities. And if you look at those cities, they collectively account for about, you know, 12 to 15 percent of China's national GDP. How big of a, I mean, this phase that they're in right now, how big of an economic crisis? I know you said travels down, you know, retail, entertainment, et cetera, economy is sort of uneven at best. Is this, are they potentially heading into a real economic crisis similar to what we experienced in the first few months after our first wave. It's definitely going to depress

the economic recovery that hasn't really fully blossomed from the early 2020 crisis that they faced with the original pandemic that emerged from Wuhan. So what they're looking at now is the political cost as the first priority. They know that there's going to be a significant economic cost in terms of a slowdown in commodities trade and in travel and retail that could spark inflation. But they're willing to tolerate all of that because the much more significant concern for the ruling party is the potential political cost if they are unable to contain this thing. So they're willing to stomach some pretty steep economic costs in order to eradicate the virus.

And I don't think that that's all going to end in a month or two when presumably they've managed to contain this strain again. They've got a party plenum meeting later this year. They're hosting the Olympics, the Winter Olympics early next year. you know, 15 months from now, they've got their party Congress that happens only once every five years. And that's, that's going to be the meeting where Xi Jinping, I, I expect he's going to try to extend his rule for another decade. So they're not going to take any chances with a political and health crisis. They will take their chances with an economic slowdown. So it looks like, so it's unlikely that they'll reopen their borders in the near term. But you mentioned the Olympics.

You've got to wait until 2023, another year and a half. For them to reopen the borders? Yeah, I think so. Why 2023? They don't have a vaccine strategy that's going to get them to herd immunity. So this is the most important defense that they have against Delta strain and the strains that are going to follow, like Lambda, which is also a problem, also highly contagious. And so they're going to keep leaning on extremely stringent border controls as the first pillar of their defense. So then to your point about the Olympics,

so then how do they actually host the Winter Olympics in 2022? Yeah, they're building... This is their approach. They're building these chambers. It's like a bubble around the sites where athletes will compete. In some cases, they're not even allowing coaches we're getting word that coaches aren't even going to be allowed to interact directly in some cases with athletes certainly they're not going to allow spectators to come i think a lot of countries

aren't going to be sending official delegations. They'll send their athletes, but they're not going to send official delegations because of the genocide that's taking place in the Xinjiang region in China's northwest. So it's going to be a really weird and spooky games. So it'll make the Japan Olympics we just went through or the NBA bubble playoffs from the spring and summer, it'll make those look like freewheeling, totally open. And by the way, we got to give Tokyo its due. I thought that they did an amazing job under extremely difficult circumstances and with a lot of skepticism by a Japanese public that was worried about an influx of cases and so forth.

But they pulled it off. I think they did an amazing job. Japan did incredibly well in the Olympics as well. We did best with total medal counts and golds, but Japan was, I think, in third place. It was a pretty amazing event. No, no, I agree, all things considered. So in the opening, I talked about the tech crackdown by China right now, which is all the news, at least as it relates to China in the business press. But I want to take a step back and have you explain kind of what is the bigger picture here. So during the first wave of COVID, our first wave at least, what we call the first wave, first quarter of 2020, Xi had unveiled a five-year plan. I think it was March or April of 2020 that you and I have talked about in the past. Can you talk about that

five-year plan, what he basically articulated and how it fits into China's grand strategy that, in your view, is actually playing out right now? We're seeing it in this tech crackdown, but we're seeing it in other areas too. What are they trying to accomplish? What's the long-term plan? Yeah, absolutely. So the grand strategy that was laid out in a couple of seminal speeches that Xi Jinping gave last year and then institutionalized formally in the 14th five-year plan that their National People's Congress voted for earlier this year. The plan is one of what I would call offensive leverage and decoupling on Beijing's terms. Okay. So Beijing often complains about- Decoupling from the outside world.. Okay. So, so Beijing often complains about decoupling from

from the outside world. Yeah. And what they want to decouple, it's a selective decoupling, where Beijing has said rather explicitly that it wants its supply chains to be independent of industrialized democracies, you know, and other industrialized countries when it comes to high tech. So you know, the industries that are going to be the commanding heights of this century, Beijing wants to be wholly self-reliant. They'll steal technology, but they don't want to have to buy it. They don't want to have to import equipment and semiconductors and software from the West. They want to have those things themselves

and to be self-sufficient. At the same time, they want to make sure that those other industrialized economies become increasingly reliant on China for those same high-tech supplies. That is laid out explicitly from the top leader himself in his speeches and in their documents. Now there's another component of this. It is that China wants to continue importing. In fact, it wants to grow itself as an importer of raw materials, fungible goods from countries around the world, and to use the leverage that it acquires as a major importer of low-tech stuff in order to advance its political objectives. In other words, to acquire economic leverage that it can exert against those exporting

countries in order to achieve political aims that China's pursuing. So I'll give you an example. There are several, but one of the most poignant ones at the moment is what China's been doing to Australia. China, for the past more than a year, has been crushing Australian exports. It's basically put prohibitive tariffs and other non-tariff barriers in place that have done damage to beef exports from Australia,

certainly seafood exports, wine, coal, not iron ore incidentally, because China doesn't have another substitute that could replace Australia as a source of iron ore. So it's for things that are fungible that China can substitute imports from other countries that they're targeting right now. And then they issued a list of 14 demands to the Australian people, and the demands were all political in nature.

It said that Australia has to stop allowing its pressed You know, it has to muzzle its free press. It doesn't want Australian press to be able to criticize the Chinese Communist Party Australia has to give in to China's Excessive claims over the South China Sea and so on and so forth 14 these demands now The good news in this is that the Australian people have seen this for what it is, that this is an ultimatum that really would herald in a new era where other countries, including Australia, would be subordinate to

China. So the Australian people have refused to give in to any of Beijing's demands. And they've worked to find new markets for their exports. Substitution works both ways. You know, you can also find new export markets for commodities. And that's exactly what the Australians have been doing. And so they're riding through this storm with pride. And really, they've set an example for the rest of the world. How has this grand strategy been informed by Xi's interpretation of what led to the disintegration of the former Soviet Union? Yeah, so I think that it's fair to say that he's fairly obsessed with, and he's not alone in the Chinese Communist Party in being obsessed with trying to avoid the fate of the Soviet Union. So you had this incredible set of shocks that

buffeted the Chinese system 30 years ago at the tail end of the Cold War. China had experienced the Tiananmen protests in 1989 that they put down violently. They then saw the United States defeat Saddam Hussein's forces, leading a coalition in that massively lopsided victory in 1990, 1991. And then later in 1991, you had the collapse of the Soviet Union. So Chinese officials began studying obsessively what is it that they could do to try to prolong Chinese Communist Party rule at a time when the Eastern Bloc has collapsed, the Soviet Union had collapsed. And what they came up with was this, this threading of the needle,

this idea that they would allow certain elements of, of the market economy to help boost the, the economy. They would, they would loosen controls over people's lives to an extent, and also normalize the, the politics in such a way that Deng Xiaoping didn't want to see a return to a cult of personality, Mao Zedong-style leader in China. So he instituted some norms like retirement ages. He made it more of a consensus-driven approach. But he also had in mind all along the idea that once China was strong enough economically to confront the United States, it would do so. And that's the moment we're at right now. That's the moment that became, you know, the fig leaf of hiding its

capabilities and biding its time. That fig leaf blew away with the onslaught of the coronavirus pandemic beginning a year and a half or so ago. Now, if you look at the grand strategy that you summarized earlier, you'd think that the reach of Chinese tech companies and the reach of the Chinese tech sector globally, not just in terms of ultimately reaching consumers globally like say tiktok does uh and meaning not not it not just being a domestic chinese um product but actually something that that reaches global markets but also the ability to raise capital globally you'd think that that would be a priority for Xi and the Chinese Communist Party. But you argue that they either subordinate that to political control, or at a minimum,

they think that the way we see their moves in terms of clamping down on tech, and we'll get more granular in a moment on what they're actually doing on the clamping down on tech, but I'm just trying to understand, do they think that they can actually control tech and control the growth of the tech sector without setting back the economy? Right. Well, their economy. Yeah, it's great. It's a great question. And of course, you know, the paradigm that we've all lived by since, you know, the Deng Xiaoping era of reform and opening really took its fullest flight in the 1990s up until China entered the WTO a decade later in 2001. Which was what, 2001? Yeah, that was, they came in in December of 2001. So almost exactly 20 years ago. And we thought

that that would be the starting gun for further reforms, that that was just the beginning. In fact, that was the finish line. China had completed all the reforms that it wanted to complete in terms of marketization and liberalization in order to get into the WTO and to take advantage of its access to foreign capital and foreign markets. But they they allowed the reform drive to stall out and now it's moving rapidly in uh full speed reverse uh deliberately and so this this growth before politics idea where we we thought that China was always going to privilege growth uh before anything because it's we thought that it's uh the party's legitimacy was tied to economic growth. We now know that that's a delusion.

That's not at all how Xi Jinping is running China. He's putting politics before growth in everything. And that includes in the tech sector, where you had powerful, wealthy entrepreneurs. And let's face it, China's entrepreneurial class, a lot of it was trained in US universities and hung around in Palo Alto. And a lot of these guys worked at Silicon Valley firms or at a minimum were backed by Silicon Valley venture capital. And some of that libertarian spirit, you know, rubbed off on that entrepreneurial class that has really led the tech revolution in China.

That is a big problem in the eyes of Xi Jinping and the party. They do not view trustfully that entrepreneurial class. And so what you're seeing now is a deliberate multi-year campaign that we're at the beginning stages of, not the middle or the end yet. It's just the beginning. This is the beginning. They're going to assert their control over several sectors, beginning with technology, in part because they're worried about all of the data falling into the hands of foreign governments. They're worried about the data at the hands of empowered entrepreneurs in China. They want to control that data, and they want to control those sectors. But also, Xi Jinping has a bit of a bias against what we term the tech sector today in the United States.

At least the part that you read the most headlines about are consumer facing apps. That is not what Xi Jinping's vision for technology is moving forward in the 21st century. He wants hard stuff. He wants to make semiconductors. He wants quantum computing, less of a consumer-facing vision and one that's much more industrial and is tied to what he terms the real economy. He uses that phrase a lot, that China must not turn its back on the real economy and on industrialization. So let's talk about where this started. By my lights, it started with China, the Communist Party clamping down on the online payments economy, basically the duopoly of Tencent, WeChat, and Ant Group.

Is that right? And how did that clampdown begin? Yeah, I mean, I think that was the seminal event that at least alerted the world about this campaign was the preemptive cancellation of Ant Financial's IPO last fall. And that had followed a speech. And just for our listeners, this was an Alibaba company, Ant Financial, right? And just try to put in context how big Ant and WeChat, for that matter, how big a role they play in China. Yeah. So I know, Alibaba famously, you know, started 20 some years ago as an e-commerce platform and grew to become, you know, the Amazon of China. And Ant Financial was really the future of Alibaba. that were actually outgrowing the original e-commerce company, because all of the payments

in China were going over the Alipay platform and also their competitor, WeChat's payment platform. And in fact, the party had encouraged people using these kinds of payment systems because it creates data that's useful to the ruling party. They're able to see all transactions. They're able to see each individual's economic activity. But they also worried that as Ant Financial, as Alipay and WeChat Pay became bigger and bigger, that it would threaten potentially the sort of fiat privileges of the Central Bank of China. And so what they're really doing now is shifting to subordinate these private platforms to

a centralized government approach to electronic payment. And that's going to emerge publicly at the Beijing Olympics in just six six months from now with a central bank digital currency So it's gonna be very different from crypto and Bitcoin and things like that which are decentralized by nature This is going to be a centralized digital currency that will give China complete data over all economic activity involving. So any transaction an average citizen makes using this currency, the government will be able to track.

Not only will they be able to track it, they'll also have the authority to freeze those accounts, you know, to freeze currency if they want to at a keystroke. That's useful for keeping your own population in line, but also over time, Beijing has ambitions to internationalize the central bank digital currency. It's going to eventually force multinational companies to transact with China in that currency. As those companies, those multinationals accumulate digital currency, China will have the ability to look in real time at all of their payments, at how their supply chains work, and also to freeze their accounts

if they don't like something that a company says or does that offends the interests of the Communist Party. So China suspends Alibaba's efforts to launch the Ant financial IPO. Then fast forward to what the Chinese Communist Party did last month with Didi. Didi is China's version of Uber. It has something like 500 million users or some unbelievably high number. Didi was about to list on the New York Stock Exchange, and China did what? Yeah, in fact, they did list, even though there were signs that they were going to get into a lot of trouble or already were in trouble.

And the signs were that they didn't get approval from the Chinese government, from the Chinese securities regulator to list in the U S that's right. That's a key point. When you say there were signs, the signs were they were supposed to get approval or they should have gotten approval and they didn't. And they just proceeded. That's right.

And, and within a matter of days after they raised $4.4 billion, one of the largest IPOs out of China. $4.4 billion from Uber is invested in Didi. Suddenly Didi is not allowed to disseminate its app anymore. And the Chinese government incredibly also announced that they had moved the MSS, the Ministry of State Security, which is China's KGB, into Didi's offices to rectify the company and take charge of its data. So pretty incredible turn of events that happened just within a matter of days of them raising that money. And I think that that has really shaken, finally, the market's faith in the Chinese Communist Party to put

growth before politics. That delusion is now out there in the open. And it completely torched the value of a whole range of shares of stocks. Yeah, so gaming. Chinese stocks listed in the US, Chinese companies listed in the US. Yeah, as you look at this campaign, as I mentioned, they're at the beginning, not not the middle or the end of this multi-year campaign. They're looking at all sectors, starting with the other technology sectors. They're looking at at gaming. It looks as though from party, you know, authoritative party statements that they think that video games are very damaging to the health and welfare of minors. And and so those stocks have taken a bath. essentially um made public uh or or um uh you know ended the private sector's uh control of education so uh so let's just i just want to explain so that's an important that sector is

in china the the private tutoring if you will industry is a big industry a lot of big companies which actually attracted a lot of private equity and venture capital investors from the US. I just spoke to an investor the other day who invests heavily in education and in for-profit education. He said China was the hot market. There were all these supplementary education services offered to the Chinese market that were booming. It's something like a hundred billion dollar sector in China. And now China

is, the government is saying what to that sector and why. Yeah, that, that, that sector is now coming under state control. So Beijing does not trust private companies or their curricula. It wants to control directly the curriculum of education companies, even tutoring companies. But also, remember, Beijing now recognizes belatedly that it has a demographic time bomb on its hands. The country is going to grow old before it grows rich and the one child policy has has now been turned into a you know first into a two-child policy and then suddenly into a three-child policy as beijing tries to encourage people to have more kids and one of the complaints that the party frequently heard was that uh the high of education in China, and including private tutoring and the like, was an obstacle, you know, was a disincentive to have more kids.

And so part of this is about leveling the playing field, eliminating, you know, competition in education and putting education fully into the hands of the state in the hope that that might incentivize a higher fertility rate in China. So that's part of this. And so they've hit tech, they're hitting gaming, they're hitting education, as you said. What's next, healthcare? Yeah, healthcare is an obvious one that I think is going to drift into the crosshairs because of all of the sensitive data that it involves, but also for the same reason that they've gone after private education, that it's expensive. Healthcare is getting expensive. Beijing wants to control healthcare prices much more actively.

And so that's an area that's drifting into the crosshairs. Property is a more complicated one because property doesn't have – You mean just residential real estate you mean? Residential real estate in particular, even more than commercial. There are a number of Chinese companies that you've been reading about Evergrande, for example, the second largest residential property provider that is massively over leveraged. And so Beijing is going to look at property in a pretty hard way uh in the hope that it can diffuse this debt time bomb and uh and and mitigate against systemic risk to its financial system uh but they're going to do that very carefully they're going to do that more carefully than than they handled say you know

the dd ipo or the ant financial ipo or the private tutoring and education sector and that's because uh everyone in china you know or a huge number hundreds of millions of people own property china it's the only it's the only way that you can save money uh or or grow your wealth in china because uh you don't get a return on on bank, and you can't convert the currency to invest in stocks abroad. So everyone's wealth and nest egg is tied up in property. So that's going to be real brain surgery for the Communist Party. On education, the steps the government took, the Chinese government took, were one, there could be no private, I think, there could be no private for-profit education companies. They all had to be transitioned to effectively non-for-profits as a structural matter. And two, they couldn't raise foreign investment capital. Is that where they're heading with healthcare?

Because if the healthcare industry in China cannot attract foreign capital, that's like a really big deal for the global investing community that had seen this massive Chinese market as a place to deploy a lot of capital. So, you know, it's interesting. I wonder, from Beijing's perspective, whether perhaps they were fairly confident that they were going to continue to see a significant influx of foreign direct investment into China, even if public markets, you know, new IPOs on American stock exchanges began to falter. and you know beijing didn't seem to be all that concerned about uh ipos dropping off uh and it may be that in part their confidence came from just the

significant amount of passive investment that's been pouring into china uh into its stocks and bonds by virtue of index providers. So, you know, your MSCI and, you know, FTSE indices and Bloomberg, Barclays and the rest have over the past handful of years paradoxically increased the weighting of Chinese companies on those indices, even at a time when China has become much more opaque. The investment environment is more opaque today than it's been at any point in the last 25 years. There are almost no foreign journalists left in China. The New York Times has gone from 10 reporters to one reporter. The rest have been either expelled or are having trouble getting back in to China because of the COVID restrictions. So there's very little reporting. And of course, a lot of the domestic reporting that used to be fairly freewheeling in the economic space in China,

that's dried up as well. It's become an occupational hazard to write negative news stories about, for example, the Chinese stock market. So at a time when we have less and less information about what's really going on in China's economy and with its companies, these Western index providers are actually weighing Chinese companies more heavily. And that's leading to a massive flow, tens of billions of dollars in new investments flowing into Chinese bonds and stocks. So something like $2 trillion in Chinese stocks trading in the US on US exchanges. The Chinese government says their attitude is, is you know we'll live with the

volatility or the or the or the you know uh evisceration of of value in those stocks and by the way some of some of that investment will just move to exchanges in china shanghai hong kong shenzhen like that they'll they'll just kind of roll with that. Yeah, that's the plan. But of course, you know, better than anyone that all of the rest of the world's markets combined are roughly equal just to the scale and liquidity of US capital markets alone. So there really is no substitute. I think they're going to learn that the hard way. But again, politics is the driving factor, not economics right now for China and its top leader. Okay, so let's move to foreign policy and specifically Taiwan. In your view, there's a lot of noise and some sparks between kinetic potential kinetic sparks between China and Taiwan. But what, in your view, would trigger a real escalation from China towards Taiwan?

Yeah, I do think that the situation across the Taiwan Strait is more dangerous than markets are probably appreciating at this point. Ultimately, this is Beijing's ball. Beijing possesses the strategic initiative for what happens next, not Taiwan. Taiwan's not going to declare independence. The United States is not going to do something that would trigger a crisis. It's really a question of whether Xi wants to follow through with the party's long stated goal of, quote unquote, unifying or reunifying Taiwan. The Chinese word, by the way, tongyi, does not mean reunify, it just means unify. There's a pretty good argument to be made that Taiwan, well, first of all, has never been part of the People's Republic of China, and Taiwan was part of the Qing dynasty only very briefly. But this is a paramount goal for the Chinese Communist Party and for Xi Jinping personally. He's invested a lot of his personal prestige into bringing it to heel. He's shown

that he's willing to fight and to assert territorial sovereignty. You know, Chinese military forces killed roughly 20 Indian soldiers on their border last summer. He's conducting a genocide against his own people in order to bring ethnic groups in, you know, to heal in his northwest. This is the Uyghur population. Yeah, the ethnic Uyghurs and Kazakhs and other traditionally Muslim minority groups, and irrespective of whether people actually... That are basically living in concentration camps. Yeah, no, quite literally.

So well over a million people in those camps. And the birth rate for those ethnic minority groups has collapsed, almost completely collapsed. And then, of course, Hong Kong, who were agitating for the rule of law and for democracy. So Beijing has crushed that golden goose without really much of an afterthought about it. So I think it'd be foolish for us to think that that on taiwanese just bluffing okay and so so what you then have to start analyzing are china's capabilities and a lot of the focus has been on whether or not china and the people's liberation army have the amphibious sea lift that they would need to be able to conduct a successful invasion of Taiwan. Remember, amphibious assaults are pretty much the hardest thing that you can do militarily.

Not easy. But we've been looking very closely at this amphibious sea lift. And we found that if you only look at China's military sea lift, you know, traditional gray hull naval vessels, it looks like they may not yet have sufficient capacity. But then when you start to take into account civilian vessels that have been organized, trained, and refurbished to be able to carry military equipment, you start to see a multifold increase in their sea lift capability. So we may actually be pretty close to the point where they've closed that gap and will have sufficient sea lift to be able to roll the dice on an invasion. Let's talk about the current administration's approach, the Biden administration's approach to China. So the American public, if you just look at

survey after survey after survey, had been turning against, public opinion had been turning against China pretty consistently and pretty dramatically for the last few years, even before Trump was elected president in 2016. And, you know, and then obviously things just, there were plenty of reasons for that public opinion to turn even more sharply, right? As China became ground zero for a global pandemic, as China was crushing political freedoms in Hong Kong, as you've just said, as they're incarcerating hundreds of thousands, if not millions of its own citizens in Xinjiang. You just saw, not just in the U.S., a number of European countries too, people getting, governments and the public turning against China. So the Trump administration, the administration which you served, was at times highly criticized, I think sometimes unfairly, for being too aggressive in its approach to China. And there were sort of cooler heads were supposed to, quote unquote, prevail once the Biden

administration came into office. What has the Biden administration done differently from the Trump administration? I mean, the Trump administration imposed a number of policies and made a number of moves against China. What what has the Biden administration changed from from its predecessor? Yeah, it's interesting. I think I think the most interesting aspect of the President Biden's first, you know, half year in office on foreign policy has been the degree of continuity on on on China policy. So he didn't pick up where President Obama had left off. He really picked up where President Trump left off. And I attribute that to any number of factors. I think one thing

is once you get into office and you start receiving a daily briefing from the intelligence community, and you start to see just how striking and malign Beijing's intentions and activities are around the world, including activities that are directly designed to undermine U.S. interests, that has a sobering effect. And I imagine that may have led in part to incur costs for China's theft of our intellectual property. And China's theft of intellectual property has not abated. And so, therefore, it makes sense not to remove the one bit of leverage that we finally begun to build up vis-a-vis China. Some of these tariffs, though, were seen as radical when Trump first imposed them. And I don't think, I mean, when I speak to people in the Biden administration, my impression is there hasn't even been like a National Security Council interagency meeting to even discuss removing these tariffs. Yeah, I mean, I'm not even on there.

It's on no one's agenda. You heard Cassandra's crying that the sky would fall if the US put tariffs on China. Not only has that not happened, we actually still have record trade with China. Of course, the vast majority of it in the form of imports into our country, even with those tariffs. So, you know, the tariffs gave us leverage for the negotiations for that phase one agreement. And then, of course, the phase one agreement seemed a lot less relevant in the context of a pandemic that's cost us several trillion dollars, and which emerged in part because Beijing didn't cooperate with us or with the rest of the world or with the World Health Organization in those critical early weeks of the pandemic.

So that's one area where President Biden has held a steady course. Another, of course, would be the blacklist on investments. There's a blacklist of companies that was devised by the Pentagon over the course of 2020. And President Biden has now handed the list over the Treasury Department to be the stewards of it. And that list was just a blacklist on US investment in PLA associated companies. Yeah. But interestingly, President Biden's expanded the definition to say that egregious violators of human rights also could qualify for the blacklist. And once a Chinese company is on the blacklist, it means Americans have to divest. They're not allowed to buy stocks or bonds from those companies. So there are 59 companies on there now. I expect that over time, that's going to grow substantially, that list.

And they've continued sanctions on individuals and entities associated with the Hong Kong crackdown? They've expanded them. They've expanded those sanctions. And continued pressure on TikTok and other Chinese social media? Well, it's interesting you know plays in globally the TikTok case is interesting because it got tied up in court and the the Biden administration Justice Department decided to give up on the Trump executive order that banned uh downloads of TikTok but that's not the end of the story. Biden has moved forward with a Trump initiative to set up a review panel at the Commerce Department to look at Chinese software

and IT equipment and to potentially ban apps and equipment and software on national security grounds. So you may find that TikTok ends up, you know, emerging in a different process that also leads towards some kind of restriction. And it continued pressure on Huawei and other tech firms. I guess the big departures, you mentioned the WHO, so Biden is, the administration is rejoining the World Health Organization. Also the big departures, climate.

So cooperation, trying to cooperate at least with China on climate issues, which I think you are skeptical that those efforts will go anywhere. Yeah, I mean, if Beijing cares about a hotter climate and the effects that that's having, then they'll have an incentive to take action on it. They're not going to take action because we beg them to or because we make concessions to them in areas wholly unrelated to climate change. And therefore, I don't think that we should sacrifice any interest in pursuing

a common approach globally to climate change. Beijing is by far the number one emitter of these greenhouse gases, well over twice what the United States emits. It is showing no sign of slowing down its reliance on coal. And in fact, it's funding the expansion of coal-fired power plants internationally as part of its one belt one road program so you're seeing a huge increase in capacity of uh dirty coal-fired power plants that china's building and financing uh outside of its borders so yeah i mean do i think china is going to be uh cooperative on this no i mean it's just not in their nature to be. I remember back in 2018, I made an effort to entice the Chinese government to work with us on pandemic prevention. I was thinking of the original SARS coronavirus, but I was also thinking about influenza, because new exotic

strains of influenza usually emerge from southern China. And so China had not shared flu samples with the WHO in accordance with its obligations. And so I was, you know, working on finding areas where we could work together, even as we had a contentious relationship in other areas. And what better area than, you know, things like counterterrorism and pandemic control. These are things that are in our common interest. In the end, Beijing was not helpful. And I think it's because they determined that our interest in pandemic prevention was a vulnerability in their eyes. It was our vulnerability, and they wanted to leverage it to gain and extract concessions from us on other aspects

of the relationship that had nothing to do with public health. So that's the way that Leninists think. It's just the way that it is. You can't expect a Leninist totalitarian system to be extremely helpful and career decisions. And it got a tremendous response from our listeners because he made some pretty unconventional and contrarian decisions for a guy who was running PIMCO, one of the largest asset managers in the world, something like $2 trillion of AUM that he walked away from in 2014. You yourself have had some pretty interesting twists and turns in your career.

And I just want to, I talked about them briefly in the intro, but I just want to spend a moment with you on it before we wrap. You were a reporter with Reuters and the Wall Street Journal from what year to what year? And you were based in China for part of that. Yeah, from 97 to 2005, I worked as a journalist. I spent all those years in China writing for Reuters

and then for the Wall Street Journal. And then left journalism in my early 30s. Hold on, before we get to leaving, one key point. You were in China working for the Wall Street Journal during the first SARS outbreak. That's right. Is that right?

Yeah. And has that experience covering SARS for the Wall Street Journal during the first outbreak informed some of your thinking over the subsequent years on these kinds of epidemics, pandemics, during the first outbreak informed some of your thinking over the subsequent years on these kinds of epidemics, pandemics, and how and where they originate from?

Yeah, absolutely. I mean, with the 2019 emergence of a novel coronavirus and those early indications that China was not going to allow the WHO or the US CDC or others to come help was for me, you know, deja vu all over again. You know, I was very much informed by the cover-up that China had perpetrated over its epidemic back in 2003. And I was also informed by family members. I've got my brothers, an infectious disease doctor in Seattle, and my wife is a PhD virologist who spent years at the CDC and continues to do a lot of work on HIV and COVID. And so, you know, all three of those resources, my own, you know, past informed by reporting on SARS and then family members helped inform. And then that combination, late 2019, early 2020, you're in the White House now, in the National Security Council, and you have all that perspective that's informing you.

And while some officials and some of the media are playing down coronavirus, the COVID-19, you, based on your experiences, are saying, wait a minute, there's something here. Yeah, no, absolutely. I mean, over the course of January, I think the press was extremely complacent. You know, I remember a lot of these headlines about how, you know, trying to impose, for example, a travel restriction would be equivalent to racism and xenophobia. In fact, it bought us an extra month that President Trump went ahead in late January and decided to cut off travel from China. That bought us extra time that we desperately needed. We needed more than we got and in in the end if europe had uh imposed a travel ban as well i i think i think we would have had far fewer deaths in both europe and the united states the virus really didn't come into the united states in a big way from china it came in

uh via europe uh because the europe so your point is had europe cut off china travel too then it would have it would have there been less spread Europe, which then would have led to less spread in the U.S. You got it. It came in the back, it came in our back door. And we asked the Europeans to, to follow our lead in cutting off that so 2005, you leave journalism to do something that I think you are the only person I know of, or at least that I'm friends with, that left journalism to make this career move. Can you just describe what you did and why you did it? Yeah, yeah. There are a few of us, but it was an unusual move, I think. I was watching out of the corner of my eye from China. I was watching what was going on in Iraq and how the war that we got involved in there ended up being of a different nature than what we thought it was going to be. It was transforming into an insurgency. And so I was concerned that if we weren't able to

salvage some kind of a decent outcome in Iraq, it was going to damage our credibility and our power elsewhere in the world. And so I am the stepson of an Air Force officer. And my stepfather, Vic, had a big influence on me growing up. And so when I was 31 or 32, I signed up for officer candidate school in Quantico and joined the Marine Corps. Matt, we've kept you longer than we said we'd keep you, so we'll wrap it here. I thank you for your service, your service to the country, not only in uniform, but also what you did in government as a civilian over the last few years, and obviously how you informed many of us in journalism and continue to inform many of us today with your public commentary and analysis. It's badly needed. You are a unique character in American public life, and we need you to keep doing what you're doing. So I'm just grateful generally for what you do, but also want to thank you for taking the time to help us understand some of

these complex issues. And the bad news for you is we are probably going to ask you to come back at some point. I'll keep pulling your ratings down for what is otherwise a really good show. And so thanks for doing it. Thanks for what you're doing to inform audiences on a lot of important, complex stuff. Great. I'll come calling, Matt.

You'll be back. I'm post-corona. Unless post-corona actually comes and then you're off the hook. God willing. Thanks, Tim. That's our show for today. If you want to follow Matt's work, he's a Distinguished Visiting Fellow at the Hoover Institution, a think tank at Stanford University. You can check out his published work at hoover.org.

Post-Corona is produced by Ilan Benatar. Until next time, I'm your host, Dan Senor.