Odd Lots - Dan Wang On the Extraordinary Moment for China's Party Congress

Episode Date: October 13, 2022

The Chinese government's biggest political gathering comes at a time of numerous challenges.Next week will see a major gathering of China's top officials known as the National Congress of the Chinese Communist Party. This event only happens twice every decade, and this particular Congress is happening at an extraordinary time for both the Chinese government and the country. Not only are officials grappling with the impact of strict pandemic-related restrictions known as Covid Zero, but they're also facing turmoil in the economy and the real estate sector. At the same time, external pressures are picking up, with the US recently imposing sweeping curbs on the way semiconductor companies do business with China. So what's on the agenda for this major political event and what can it tell us about the future direction of the Chinese economy? Dan Wang, China technology analyst at Gavekal Dragonomics, joins us to discuss.See omnystudio.com/listener for privacy information.

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Joe, there is a big event coming up very, very soon. It is the National Congress of the Chinese Communist Party, something that is held every five years, which means it is de facto already a big event. But it's even bigger this year because it is happening amidst really, how do I describe it? this, a set of challenges for both the Chinese government and the Chinese economy. Yeah, I mean, look, you say every five years. And so five years ago was during the Trump administration. And of course, at the time, you know, trade tensions were obviously ratcheting up under Trump. But it feels like today in 2022, any of the sort of tensions and

long-term challenges facing the Chinese economy today or the Chinese political system, everything seems like it's probably like tenfold more intense and more ambiguous than where it was, say, five years ago. Right. So there's a lot of speculation around exactly what Xi Jinping has in store for this particular Congress. There are questions over whether or not China might ratchet down some of its COVID-Zero policies, although I have to say we did just see an editorial from the people's daily in defense of those policies. So that seems unlikely. But there is this broad question. question mark over what's going on with the Chinese economy and the government. Can it withstand all these pressures on real estate from the strong dollar politically and maintain some of the restrictions that it's had going for? I mean, really, what, two or three years now? Yeah. I mean, there's so many things. So you mentioned the real estate. You mentioned the COVID zero questions and the other big thing that is very new. And it's something that we haven't talked.

about in a while, but we'll be very familiar to Odd Lots listeners. And that is the growing restrictions on technology transfer, particularly semiconductors, some very aggressive moves from the Biden administration to restrict the export of certain technologies related to chips to China. That is a huge deal. Of course, we know that China has domestic ambitions, but we see semiconductor stocks. They've been plunging lately. That's a huge story. Right. So China technology hasn't been major issues since we had that big government crackdown, but it feels like the semiconductor angle is heating up again. So we are going to be combining all of this. All these headwinds, all these big questions, these big issues, and speaking to one of our all-time favorite Oddlots guests, we are

going to be talking to Dan Wong. He is, of course, a technology analyst over at Gabi-Cal Dragonomics. And he's left his farmhouse in Yunnan to come into the New York studio and walk us through everything that's happening in China right now. Have we ever recorded an episode with Dick? No, we have in studio. We've recorded. What is this? No, we haven't.

No, we did. We did one in the upstairs studio. Oh, I think we did. For TV, I've never been. I've never recorded odd lots in person. Really? Yeah. Well, I think Dan has taken the clear lead.

Anyway, we should probably talk about what we're going to talk about. Dan, thanks for coming on. It's great to be here in person, Joe, and you're a lot skinnier in person than the internet makes me to believe. I think that was an insult. Leave that in, Carmen. Dan, I'm going to start with a very broad question, but how would you describe the state of China's political economy right now?

There's no way around it, Tracy, that it is pretty bad. So right now, China is presently going into the third year of COVID-Zero, and it's not very clear when or in. if they can reemerge pretty quickly from that. China's economy is in the worst shape in decades, caused partly by COVID-0, and I would say mostly by the property downturn. Property is a very, very substantial part

of the Chinese economy by some measures over 50% of the marginal growth. And so it is really difficult for China's economy to do well as a whole when property sector isn't doing well. So the economy is being battered by COVID-Zero, mostly on the consumption side. The property downturn is affecting general sentiment writ large, and maybe the only thing that has been going fairly well has been China's production side, mostly intended for exports. But even that is starting to soften and think there isn't too much juice left in the squeeze for China's

economy and export to go really well when most of the rest of the world isn't going to be doing too well, especially if Europe and the U.S. soften in terms of economic growth soon. So, I mean, this sort of sets the stage for the National Congress, which I mentioned in the intro. That's set to begin on October 16th. What is actually on the agenda? And, I mean, sort of like background methodology question, but how do we know what's on the agenda and how How are these things sort of formulated by the party? How do they actually pick priorities? The most important event in China every five years is the Party Congress.

On October 16th, we'll have the 20th Party Congress. And it's a really great question about methodology, Tracy, because in general, our rule of thumb should always be that the Communist Party is a total black box. and they have a very good sense of Omerta that makes it pretty difficult for outsiders really to know what's going on, and the insiders don't really talk to the outsiders. So it becomes a little bit challenging for us to even interpret the results even when they come out. So what I'm watching out for are three big items on the agenda that will determine a lot of the future based on, you know, mostly what happens in terms of personnel. And I should say that the party Congress is really

an internal party meeting. It is not so much to lay out anything in terms of the specifics of policy choices. The party Congress is mostly for a way for the party to celebrate itself, determine the personnel, and then figure out what's going on in the next five years. And so I think there are three big questions on the agenda for this party Congress in particular. The first will be whether Xi Jinping, the China's top leader, will be China's top leader for the next five years. Now, consensus is that Xi will almost certainly have a third term, and I am totally with consensus. I think it is very, very unlikely that Xi will be removed or somehow retired in some sort of party decision. The second big question that I think we should, you know, pay attention to is just exactly the

composition of the personnel selected, both in terms of the Politburo Standing Committee, as well as the Politburo at large. And then we will have some idea of who is going to be the premier, and then some suggestions of who is going to be vice premier in charge of the economy, as well as a lot of other things. And so the third big question that I think we have to watch out for, and really maybe this is the most important question, is whether China's top leader Xi Jinping adenoints any successors to be the future leader of China. And right now, I think this is one of the big debates that perhaps Xi will allow some younger personnel in so that he is not China's top leader for a while, or maybe he just goes on ruling for a very long time. The last thing I'll stress about the party congress is, again, the Communist Party is a big black box. It is really difficult for us to interpret what goes on.

And there are now some questions among China Watchers, the people who follow the politics and read the tea leaves really closely. Some of them contend that, well, it may not even matter who is premier, whether that is someone like Wang Yang, who is seen as a reformer, or someone like Hu Quan Hua, who might not be so closely associated with Xi. The important thing here is that she has become all-powerful. He has been able to steamroll all opposition. And it is possible that personnel doesn't matter so much because there is now one guy who controls everything. And that's the most important thing. You can get the news whenever you want it with Bloomberg News Now. I'm Amy Morris.

And I'm Karen Moscow here to tell you about our new on-demand news report delivered right to your podcast feed. Bloomberg News Now is a short five-minute audio report on the day's top of the top of the news. stories. Episodes are published throughout the day with the latest information and data to keep you informed. Yes, there are other products like this from a variety of news organizations, but they usually rerun their radio newscasts throughout the day. That's not what we do. We create customized episodes that can only be heard on Bloomberg News Now. And we don't wait an hour to publish breaking news. When news breaks, we'll have an episode up in your podcast feed within minutes, So you're always getting the latest stories and developments.

Get the reporting and the context from Bloomberg's 3,000 journalists and analysts. We're all over the world. Listen to the latest from Bloomberg News Now on Apple, Spotify, or anywhere you listen. So just on the premier point, the existing premier is Lee Kicheng. And he has said this is going to be his last term as premier. And that's why we're talking about potentially choosing new ones. But he has this reputation for, you know, There's the Lee Kicheng Index, of course, and he has the reputation of sort of opening up China to foreign investment and foreign capital.

Does that go away as he exits? I don't think China will lose its openness towards foreign capital or its friendliness writ large towards multinationals that are willing to invest in China with this personnel change. I think in general in China, where you sit is what you stand for. And there will be someone standing up for a lot of these economic interests. So again, the party is a bit of a black box. It could be that Li Khajiang is shuffled into some other position like the leader of the legislature. That's one of the possibilities floating out there. In that case, he would still have some influence.

China is a pretty discretionary system in which the leader of the legislature. levers of power are not exactly always very legalistic, and a lot of it comes down to power and influence. So I suspect that there will be some substantial remnants of least influence, especially given that the economy is just such an important part of the communist party's message towards its own legitimacy. I want to get to the various things that it would be discussed in all of the issues facing China, but sort of one more housekeeping question on the Congress itself. Is it a vote? What happens? Everyone comes together. How do they decide on things? What is the sort of process by which the meeting turns into policy or priorities? Joe, they make the longest

speeches on earth. That's the only thing you need to know. I think part of it is whoever can withstand the super long speeches, especially by C. They get to decide the vote. I've heard, Don't they say like in communist countries that isn't that the sort of reputation that historically communist countries have had long speeches? So lack of democracy or lack of transparency is sort of counteracted by they say a lot of stuff. Yes, that's right. It's a very opaque way of getting around this transparency issue. You know, a lot of it comes down to basically the China's top party leadership getting together,

whether that is people currently on the Central Committee. There is the party elders, the retired people, the previous premiers and general secretaries have some way of casting their vote and influencing their decisions. And there is a formal way. I think a very good explanation is by Ling Lee of the University of Vienna. So I think I encourage readers to look at that piece to figure out what are the exact mechanics here. So I know Joe was kind of joking about transparency through speeches. But one of the things that we actually learned from you on an Oblots episode, I mean, you emphasize this point that every China investor should be reading the speeches and the publications that the Chinese Communist Party actually puts out.

And they do have this magazine called Seeking Truth that they put out regularly. And it does have interesting policy suggestions and ideas in it. And there was one that came out recently that had, I think, a previously unversely unlawful. published speech by Xi, where he was really talking about, I guess, building up China's external influence. How important is that idea as we approach the Congress? Like, is this something that China is serious about? And how do you see it going about actually building up that external influence? Sure. Well, Tracy, just to put a little bit of nuance on my point, I think that investors should be aware of what are the major pronounced.

of the Communist Party, especially speeches by Xi, but I think it would be a little bit much to try to read all of them. Now, I did read every issue of Chou Shir, the magazine that translates into seeking truth in 2020, and I'm afraid it broke me. And it was just far too much communist verbiage to process. But I think it would be a good rule of thumb to try to have some sense of what's going on in this magazine and how the party is communicating. communicating to its insiders and the upper echelons of the leadership. Now, President Xi has talked about making China have greater influence abroad, and that is a recurring message from him.

I believe it was sometime last year that President Xi said that what China should do is to make the country's image more credible and more lovable. And what has he done subsequently really to make China's image much more lovable? well, there hasn't been a very substantial shift in policies in any direction. So on the credibility side, you know, it's taken, you know, kind of a battering given how much the economy has suffered this year. And has China become a lot more lovable recently? Well, it's a little hard to see what the standards are.

But we haven't seen China create a lot of, let's say, anime skits on the Japanese style or, you know, really anything that, you know, makes China. very broadly appealing, there isn't that much culture that the rest of the world has really gotten. So I think I chalk it up to President Xi saying something important because he is always talking about these sort of things. But on any level, China's image has gotten worse over the last five years, over the last 10 years since the start of his term, especially given China's various alleged human rights abuses in Hong Kong, in Xinjiang, in Tibet, as well as the alignment with Russia earlier this year when President Xi declared a no-limits friendship with President Putin.

So by any measure, I wouldn't say that it has been, you know, a very big priority for the Communist Party really to win hearts and minds abroad. Since you mentioned the alignment with Putin, how would you summarize China's stance on the war today and the, in particular both the war itself and then the sort of trajectory of the relationship with Russia? I think it can be best described as tacit support for Russia's invasion of Ukraine. The Communist Party would never come out and say, yes, we support this special military operation, this pretty aggressive invasion in any explicit terms.

But diplomatically and rhetorically, I think it is fairly clear that Beijing is aligned with Moscow. Now, what hasn't very obviously happened is that China has not. in any big way try to help Russia work around these extraordinary U.S. sanctions that block a lot of technologies to Russia. It has not very broadly provided much financial support to say nothing of military support. And there are some signs that Beijing is not terribly pleased that it has shackled itself to Russia, which is not doing very well in the war. And so there are some rhetorical support. There is some public sentiment support rallied by the party. And so support of Russia, but there has not been any substantial material and financial support. And so that's

why I think, you know, it is kind of a diplomatic gesture, but not anything broader. So why don't we talk a little bit more about what's going on domestically? Because, you know, of course, there are plenty of foreign issues to keep us busy, but there's a lot going on within China itself. And you already mentioned, Dan, COVID-0. This has been going on for three years now. I guess the question that a lot of people would ask at this point is what exactly does Xi Jinping and the Chinese authorities, what do they get out of the COVID-Zero policy three years on? That's an extremely important question. So the first thing I should say is that COVID-Zero has proved exhausting to a lot of folks in China. There are a lot of public expressions of

discontent for COVID-Zero, that to say nothing of going abroad, that makes it difficult to leave one's own hometown or to travel to business centers like Beijing, Shanghai, or Xinjiang. A lot of people are really sick of having to have no notice and be locked in their apartment compounds for a few days at a time, perhaps weeks at a time. And many people are sick of going on the train, somehow being declared a close contact with others and then having to quarantine en route to whatever one's destination is. So it is pretty important to understand why China is still so committed to zero COVID. And I think if I had to try to read the mind of the Politburo here, I would say something like this, that the Chinese government

keeps saying that its most important job is to protect lives. And I want to, you know, take that statement at face value. And if I can, you know, try to imagine what it would be like for COVID-0 to run loose in China, I think that would be a very big catastrophe indeed. So if we take a look at, you know, the U.S. and let's say we have, you know, accept the number of a million people dead from COVID and use that as the benchmark. You know, I wonder how many deaths there would be in China if somehow there was, you know, let let loose. And I want to say, you know, it's perfectly plausible to me that this could be north of 10 million debts. And here the very rough, simple calculation here is that China has four times the number of the population of the U.S.

And then, let's say, one quarter, the medical capacity of the U.S. You get to 16 times the level of possible fatalities, but then you reduce that a bit because, you know, Asia can be, in China in particular, can be pretty different of how the U.S. manage things. And so, you know, if you're thinking about a rough benchmark of a possible 10 million debts, this becomes really unacceptable to the party. And I think no party official, Xi Jinping, least of all, will ever put his hand up and say that, you know, we are willing to accept this as the price of, you know, letting people run free. And I think the party has judged that COVID has not been only a public health crisis in the world, and especially in the U.S. It has not only triggered an economic crisis

and financial problems as well. It has also been a political disaster for the U.S. in which a very polarized country is somehow even more at each other's throats, I think is what the Chinese would think, in which the Republicans and the Democrats are even more disdainful of each other. And that is just maybe something that the Communist Party is able to appreciate, especially, that maybe makes sense, less sense to us today. As you mentioned, there's obviously a lot of frustration among people who have to deal with these restrictions and the unpredictability of them.

But I assume, I mean, there's also an economic cost and presumably they can't go on literally forever. So what is the cost, the longer the COVID-Zero policies are maintained? And then what does the ultimate way out? Is there, is it a accepting of a MRNA vaccine from a foreign drug manufacturer? What is a possible path out ultimately? Well, the cost has not really been apparent until 2022. I would say that China was pretty okay with the cost of COVID in 2020 when it was able to produce and nobody else was in manufacturing all sorts of goods. And so actually regained a lot of the share of the global economies manufactured exports. And in 2021, Beijing had felt so confident in itself, that it had the confidence to smash a lot of its most profitable companies, as well as trying to tackle systematic risks and property. And really, the cost came home this year when Omicron proved devastating to a lot of Chinese cities and that it is an ongoing rise in cases

as we speak right now, Joe. Right now, the Chinese economy is not doing well, mostly because of the property sector, but also zero-COVID isn't helping. It is really a really, crushing consumption, and then also it is contributing to a general exhaustion among people that they are locked down very, very often. Now, what is the way out? Well, I think that it would be a fairly long time. We would have a lot of warning before we can see that China is on its way out. And I am not predicting that there will be very substantial loosening after the party Congress. I think that would be a fantasy to think that somehow a week from now, China just decides it won't do any more lockdowns. I think it is a little bit more plausible that there will be more movement

in March after the National People's Congress, which turns party decisions into law, and there might be a little bit more movement. And I think the really two things to look for are things we would have a lot of warning. And first, the party has to feel very confident in its therapeutics as well as its vaccines. Now I'm not sure that Beijing will allow the imports of a lot of MRNA vaccines, but I think it is possible that they bet big on the inhaled vaccines, which are much, much easier to administer and possibly more effective in blocking transmission as well as the severity of the disease. And then that is something we would be able to see months ahead of time, because there would

be a very, very big drive, even if they are able to vaccinate one to three percentage points of the population, you know, it will take, you know, at least a month or two or three before many people are able to get shots in arms or shots in noses inhaled. And then I think they are also waiting a little bit for the therapeutics to be better so that they don't have something like 10 million people dead. And maybe, you know, the last thing to watch out for is that, you know, we have to consider that Beijing has spent nearly three years now terrifying people about this virus that a lot of people in China are very, very scared about.

mass compliance in China is still very high, and people are reluctant to, you know, get the virus and, you know, run free. And so I think what we'll see is months and months of propaganda and messaging saying, it's no big deal, guys, you know, the virus is endemic now. The flu has evolved to be more transmissible and less severe. And, you know, it's time for us to open up and rejoin the world. I'm not really expecting for that to happen beginning of next year. And I'm not even sure I would be very confident that it can happen at the end of next year and the end of 2023. What are the long-term consequences to China's economy of prolonged COVID-Zero policies?

I mean, basically prolonged closures, right? You mentioned consumption. The party has been trying to shift the economy more towards consumption and away from manufacturing for years. And it seems, if anything, this particular COVID-Zero policy has kind of put some of that into reverse. I agree. And they are much more focused on, you know, trying to boost recovery in terms of production. And China has always been much more of a supply-side economy. And it has been fairly remarkable that there was a big divergence between the West's response to the economic

crisis that is created by COVID. And that was to send a lot of stimulus checks and direct support to different households so that they are able to get. through this difficult time. China has sent almost no direct stimulus to households. It has not increased welfare benefits in any substantial way. Instead, China has been laser focused on trying to make sure that production can continue, probably because, you know, the American consumers can spend all of their new money from the government on Chinese goods. And so that has been a lot of its strategy for quite a long while now. Spillover stimulus. Still, that's right. That's right. And so, you know, the longer term, I think the costs are mostly going to be political on China.

Beijing has snipped off a lot of these people-to-people exchanges such that it is really difficult for businesses, for students to enter the country. And, you know, I think this is why also a little bit of why Beijing has felt pretty okay with the costs of the COVID-0. The costs are political, not exactly economic, so they are kind of unseen. And so it kind of feels that, well, it can continue this. But I think the long-term costs on China from being cut off from the rest of the world is absolutely catastrophic. And there's going to be far less understanding and willingness to engage after this year. So speaking of China's relationship with the rest of the world, perhaps when the Biden administration came into office, I don't know. But perhaps there was some thought that maybe, okay, Trump had a very hawkish stance on.

China and maybe that would get relaxed. But instead of anything, it seems to have ratcheted it up, and in particularly over the last several days on the subject of chips, which we touched on in the very beginning. And my sense is that the latest moves to restrict chip exports or the export of chip technology into China has some pretty real teeth. You see it in chip stocks, but everything's sort of been tumbling lately. But my impression is like this is pretty real and significant. So why don't you just sort of to start, give us your high-level overview of what's been announced and the significance of it. I really agree with your framing, Joe. I spent the last week in Washington, D.C., trying to get a handle of what are the most hawkish actions that could come out of the Biden administration

on China. And certainly the CHIPS action announced by the Department of Commerce's Bureau of industry and security on Friday represent, I think, a fairly big blow. This was a 139-page order consisting of eight parts that very substantially restrict semiconductors. And this very long order has been so complex that even a lot of lawyers I know are scratching their heads and trying to make head or tails of this. So at a first cut, I think this looks like a very dramatic order and the three things that I would really highlight in that are important in this order, are first controls on chips themselves. So a lot of the most advanced chips that are important for supercomputers,

as well as a lot of the most advanced chips that are important for supercomputers are now being cut off from China. That's the first item. The second item consists of controls on semiconductor production equipment, and the Commerce Department has been fairly clear. that if you are shipping semiconductor production equipment that is below 14, 16 nanometers or less to China, above 128 levels for NAND memory chips, as well as below 18 nanometers, half-pitch, or less for DRAM, then you need to get a license from the U.S. Department of Commerce with a

presumption of denial. And then the third most important highly novel control announced by commerce is a license requirement on U.S. persons from being able to support the development of China's advanced semiconductor industry. And this is fairly novel, I think, for the U.S. Department of Commerce to impose law controls on the level of U.S. persons. And so, you know, trying to cut off more people-to-people exchanges in China with respect to technology. That is another big thing. Now, I think the caveats to, you know, trying to take a maximally gloomy view is, first of all, you know, companies tend to be dynamic actors, and companies have already adapted to a lot of

U.S. controls by, for example, offshoring some of their U.S. production equipment such that they are able to ship, continue to ship goods to China while complying with U.S. regulations. And that speaks to a broader point, which is that there are a lot of lawyers in D.C. who are very, very clever and also pretty well paid, who are able to help these companies. make sense of these compliance requirements and still figure out some way to sell to China, which is, after all, the biggest market for so many semiconductor companies, whether we're talking about chips or chip-making equipment. So I think the key point here is that this is pretty likely to be damaging,

but I want to reserve a little bit of judgment, and I think we'll only really see the real impacts for a few months from now when everybody has had a chance to digest these rules. So we have seen some early reaction from China. I should say here that we are recording this on October 11th. And we've seen some noises about how these are unfair measures and they will hurt the Chinese economic recovery and things like that. What kind of response would you expect from China? What can they do here? And to a point that we've actually discussed before many times on the podcast, it does seem like every time there is some sort of technological

restriction imposed on China by the U.S., that the narrative in China itself is that this will only make us stronger. You know, it's sort of a short-term challenge that we need to overcome, but eventually it will help us build up our own domestic technological independence and prowess. Is that the same kind of messaging that we're going to see here? I expect so. And China has issued a lot of angry words and angry editorials about all of these things. But I think it is pretty standard for China. It is just a pro forma response. And, you know, I think there will not be, you know, very obvious response from Beijing on these regulations for, you know, two broad reasons. I mean, first, these rules were released when the entire country was on

a big holiday. And I think President Xi Jinping has bigger fish to fry rather than thinking about semiconductors over the next week. But I think Beijing is also aware that, you know, the impacts of these regulations will take some months to really bear out. And so it's going to see what the impact is before it really decides to take its gloves off. And what I want to emphasize is that Beijing has maintained pretty impressive strategic forbearance against lashing out at U.S. companies over the actions of the U.S. government. And I think during President Trump's trade war, many of us were expecting that Beijing would finally blow its top now and, you know, start plunging the knife into American companies,

whether that is Apple or Intel or Qualcomm or any other big U.S. company operating in China, and for the most part, it has proven itself remarkably restrained. And I think it has made the judgment that, first of all, it really wants more multinational investment into China. And anything that hurts these companies would ultimately hurt the country much more over the longer term. And second, Beijing has decided to really embrace a lot of these companies and hug them even closer. And that is a more subtle form of retaliation.

Because Beijing recognizes that when you have big companies like Apple or Tesla investing more in Shanghai, then they have a little bit more at stake. And then they go back to D.C. and advocate for a better relationship, better business relationship. So Beijing has recognized that businesses, big banks, whether that is BlackRock or anyone else seeking to tap into China's wealth management, know that big businesses are China's last and best friends in Washington, D.C. And would much rather that these businesses are advocating for greater engagement rather than the reverse.

Now, over the longer term, what I expect is for a lot of these regulations to, as you say, Tracy, to probably accelerate China's self-sufficiency in a lot of different technologies over the longer term. Now, you can define what success means here, and you can define what longer term means here. But in general, I think it is pretty difficult for any large country to monopolize key technologies over the longer run. These products are technologies. They're not magic. And the Chinese task is to reinvent a lot of existing wheels.

We know that a micron DRAM chip can exist because here it is, it does exist. And what the Chinese have to do is just an order of magnitude less difficult than trying to push forward the technological frontier and dream up new inventions de novo. And if progress in semiconductor slows down, which is a lot of consensus now, it just takes far too much money to continue building these big new fabs, then at some point, China will figure out a lot of these things. And I expect that these U.S. regulatory actions will ultimately constrain U.S. businesses and the U.S. position and mostly strengthen China's position, but only over the longer run.

So just one last question on the chips. I mean, we were talking a little bit about China's, you know, what it means for China. Why now from the Biden administration? And what is your reading of like, you know, this is, they're really cranking up the dial? How much is it about constraining China's own ambitions versus sort of this broader effort? And we saw it with the Chipsack to bring, you know, I guess re-shore and strength and give a leg up to domestic players. That's a great question, Joe. And I sometimes, I find it actually pretty remarkable that we've had a change. in administration, but there has not been very obviously any change, I think, at least with respect to technology controls, as well as other regulatory controls on China, for example, with tariffs. And I thought, you know, none of us were really expecting that, you know, Biden, which is completely reverse course from President Trump's years and, you know, just start making

China anything like a friendly power again. I think that card was never on the table. But I think it has been fairly remarkable that President Biden has proven himself mostly immune to these business concerns that, you know, they need to sell more in China, engage more with this market, fund future R&D, and not incentivize the Chinese create their own technology. Now, what I would point to for why there are more hawkish actions now, well, I think there are these two big events this year that really prompted a lot of the U.S. government to adopt a much more hawkish stance. The first was Beijing's tacit support of Russia in its invasion of Ukraine, in which it really

aligned itself with what the West considers to be just a very aggressive and hostile act. And that is manifesting also in Europe when people are especially unhappy with China's tacit support for the Ukraine invasion. And the other big event was after Speaker Nancy Pelosi's visit to Taiwan in August, a lot of people in Beijing were very upset, and then they had these very substantial military naval exercises that surrounded the island, and that has in turn upset people in Washington, D.C., that they want to be quite a lot more aggressive against China. And so, you know, Washington has already been pretty hostile and unfriendly towards China,

and then these two actions really sharpened their desire to do more against China. And what I find very interesting is that, you know, I spent a week in Washington, D.C., and I think what everyone acknowledges now is that the U.S. will continue to create highly novel regulatory measures, and the really big one that I'm watching out for is the creation of the outbound investment review mechanism, which has been long-threatened to review the investment of U.S. firms, whether that is a bank or an investment fund or a corporate direct investment. to set up a U.S. government body to be able to see what U.S. investors are putting money in in China and then possibly have the power to block that transaction.

This has been in the discussion for a pretty long time, but it looks like the U.S. government will probably create from the White House and executive order on this in the next few months, and then also the U.S. Congress will possibly legislate something into law as soon as this year, really to try to restrict either the likes of Sequoia and BlackRock from investing in China and or restrict the likes of Apple and Intel from investing in China. And that is just going to be another big blow to U.S. businesses and stop them from deploying capital where they like.

I'm Francine Lacua, an award-winning journalist, and I've got a new podcast, leaders with Francine Lacqua from Bloomberg Podcasts. I've interviewed everyone from heads of state to fashion icons about the new of the moment. But I've always been curious, who are these people as leaders? I don't think there's one right way to be a leader. Make decisions. A poor decision is always better than no decision. Listen to new episodes every other Monday. Follow leaders with Francine Lacroix wherever you get your podcasts. Speaking of investment, you know, the last time we had you on, I think it was in 2021. So last year to discuss the annual 10 episode. The annual 10 episode to discuss the

the big crackdown on tech companies. And at that time, we'd seen a number of crackdowns, you know, on online education firms, on video games, on the property sector that was just starting to ramp up and we're kind of seeing the consequences of that this year. What were the broader lessons that we've learned from those crackdowns or what have the sort of longer term impacts been? And the reason I'm asking is because it looks like, I mean, it looks like we haven't really stopped rolling out the crackdowns because I see a story right now about Chinese liquor shares dropping because of a local report about a potential ban on civil servants drinking alcohol, both at official functions and at home. So it seems like these are still on the table. So

walk us through the sort of longer term effects of these now that we're a year on and presumably we've learned something. Well, Tracy, I think it's great to bring up the booze because One of my favorite stories was from Bloomberg News a few weeks ago that highlighted that Tencent is no longer... Now smaller than that liquor company. And so, you know, what is the response here? Instead of boosting Tencent, what they're doing is bashing more of the liquor. So that's, you know, one other way that the government is able to use its industrial policy

to, you know, I guess, support tech in this way. Well, you know, the longer term of China's tech crackdown is, I think, you know, going to still take a long while to really figure out. I think one thing that is certain is that China's internet platforms have not had a good year and things are still really, really bad. Tencent in the Bloomberg story shed something like, I don't know, about $600 billion in value. Over the last year, it's absolutely enormous. And, you know, the mood at a lot of these tech companies is pretty grim. A lot of Chinese tech workers have been unhappy to be bashed by the Chinese government, and the Chinese government has also really significantly restrained a lot of their activities.

And I think we are in this new normal now in which it is pretty difficult for a lot of China's internet platforms to reach as much upside as they did. The ability to reach almost endless profits based on these digital technologies, I think is at its end. And so, you know, I think the mood these companies is not really good. And I suspect that even the Chinese government did not really intend for this. They wanted to control for a lot of these technocratic issues that these companies may not have handled very well. They may have tried to rein them in politically. They may have tried to shift them over to so that they're pursuing more strategic technologies like aviation as well as semiconductors. But at least in the short term, things haven't worked out

very well. I think that's mostly because the Chinese economy has been really, really terrible or the last few months. But, you know, it's also the case that these tech workers are feeling pretty dispirited and so are the VCs. So, Dan, you know, as we've been discussing, we do have the party Congress coming up on October 16th. But beyond that, what are you looking at as the sort of next flashpoint when it comes to the Chinese economy or the Chinese government? So the big thing right now is to go through the party Congress and we're going to, we're going to we will see what sort of personnel announcements are in place. Then I think the two big problems now with China is basically it all boils down to,

first, the property mess and second, zero COVID. And so the property mess is something that is mostly a policy-induced crisis that I think is in Beijing's ability to resolve. They have all sorts of self-imposed constraints not to really boost property in part because they're concerned about moral hazard issues, in part because China is close to reaching a structural peak in terms of how much it needs additional floor space per person. So they've been somewhat reluctant to really boost confidence again in the property sector. But that is something possible that we can watch for, that Beijing realizes that the economy

is quite bad and really has to solve this big issue. And then the other thing to watch out for is a possibility of the end of zero COVID, And I think I'm still not really expecting the country to just completely loosen up by the middle of next year. And maybe by the end of 2023, there will be something approaching normality. But what we do know is that there will be very substantial warning in terms of how much the vaccine and the therapeutics uptake is boosted, as well as to what extent Beijing is coming out with assurances saying that this is not a big deal, rather than people's daily commentary saying that we must maintain zero COVID. All right, Dan Wong, it was lovely having you on the show again.

Yeah, always great to catch up and fantastic to do it in person for once. Thank you so much. Always a pleasure. Thanks so much. I still think we did it in person one other time, but I believe you. Thanks so much. So, Joe, I love catching up with Dan. Me too.

It's always a fun conversation. Although, well, fun might not be the right way to describe this one because it does feel like there is a set of challenges building within China, particularly in the property sector. And we had that episode recently where we sort of dove into some of the very specific issues there. But it does feel like there are no easy answers at this point or no easy exits. No. And there's so much property. Obviously, you know, as we talked about in the beginning of the conversation, I guess everyone is being affected in some way or another by the ongoing war. China is sort of maybe dismay about how it's going, the relationship with Russia.

And, you know, the fact that the Biden administration has proved to be much more hawkish than perhaps people expected, particularly on this tech transfer issue, just an endless series of challenges, not to mention COVID-Zero. The other thing that I do find noteworthy is, you know, there are benefits of a centrally planned economy. And we saw some of those in the early days of COVID. China was able to shut everything down relatively quickly and contain the spread, and it was one of the, possibly the best performing economy in 2020 because of that. But there are a lot of downsides as well, and it feels like some of those are kind of coming home to roost now. And there are unexpected

consequences of, you know, trying to intervene in domestic industries. And I love the example of, you know, crack down on 10 cent and then mutai shares go up. The late. liquor company. And then you need to crack down on the liquor company. And then it's like, well, what happens next? It feels almost like, I'm using too many metaphors here, lots of mixed metaphors, but it feels a bit whack-a-mole at this point. Yeah, no, it totally does. And again, you know, this is helpful also just in understanding the process that's about to unfold with the People's Congress and having some sense of what to watch and how that will turn into a set priorities for the country. So just extremely, I thought it was fun. I mean, the topics are

serious, but I do genuinely enjoy learning so much from a guest like Dan. Yeah. Well, at the very least, we have been primed to watch those ultra-long policy speeches. So get ready for that. All right. Shall we leave it there? Let's leave it there. This has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Allaway. And I'm Joe Weisandthall. You can follow me on Twitter at the stalwart. Follow our getting Yes, Dan Wong. He's at Dan W. Wong. Follow our producer, Carmen Rodriguez, at Carmen Armin. And check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening.