The Peter Zeihan Podcast Series - Making Life Hard for Chinese Tech || Peter Zeihan

Episode Date: August 18, 2023

The Biden administration has issued its first wave of investment bans on the Chinese tech space - things like AI or tech with military applications. However, money isn't the problem for the Chinese; the real kicker is losing access to American know-how. Full Newsletter: https://mailchi.mp/zeihan/making-life-hard-for-chinese-tech

Hey everybody, Peter Zion here coming to you from Colorado's Front Range foothills. And today we're going to talk about the new investment restrictions on Chinese tech. Specifically last week, the Biden administration put a number of investment bars on private equity firms and retro capital firms in order to constrain capital flows to the Chinese tech space, specifically anything that might have a military application or involved in artificial intelligence. and they made it pretty clear that this is only the first of a series of restrictions that will get steadily deeper and wider as we move forward. Now, this is crazy important, although probably not immediately for the reasons that seem obvious. China's problem isn't money. The Chinese basically limit investment options, prevent money from floating abroad,

prevented from even to a certain degree getting into their own stock markets, in order to super-saturate the capital environment for Chinese firms, especially state-owned firms. Basically, they then use this captured capital to throw a bottomless supply of capital, whatever industry they think needs to have it. That's how they maintain full employment. That's how they've built all those roads. It's how they've had the explosive growth for the last 30 years. It's investment driven.

Not necessarily smart investment driven. Chinese returns on capital are some of the worst in the world. And a lot of the more recent data that's come out in the last three years, you know, COVID, who knows for sure, but suggests that a lot of that rate of return might be negative. That's not good. Anyway, bottom line is if the Chinese want to throw all money, a lot of money, a lot of money at AI, they can do that without any help from the outside. For those of you who have a hard time kind of wrapping your mind around that,

think of it this way. We know, talking to the bitcoins and gold bugs and all the fiscal conservatives, we know that the U.S. government spends too much money. That's obvious. And one of the many ways that the United States tries to square that circle is it expands the money supply. It prints currency to buy a government debt to keep it off the market and keep the whole thing from going wobbly.

Well, take a look here at the money supply for the big four economies. You'll notice that the Chinese surpassed us a long time ago, and the Chinese money supply is now roughly doubled out of the United States. In fact, the U.S. money supply has been shrinking for the last year. In the case of China, it is not significantly traded internationally, and most of what is traded internationally is done so in Hong Kong. So, you know, this is all domestic. So everything that all the people say about the U.S. Federal Reserve doing things wrong,

there may be some truth to that, but it's an order of magnitude worse in the People's Republic. Anyway, bottom line, China, money is not the problem. The problem is what's next. The reason that the Chinese really like American venture capital and especially private equity is it opens doors. It gives access to American firms and ultimately the American market. The Chinese are not doing a huge amount of cutting-edge technical development. They don't have it.

They certainly don't have the workforce to take any Urique ideas they have and transfer it, into a manufacturing system. They need the Americans for that. And what the Biden administration is doing is basically slamming that door in their face, saying that, you know, you can do this yourself if you can, that's fine. But you're not going to be able to tap

American capital, above all, American know-how and connections in order to then displace Americans in the wider market. Now, you can make the argument that this should have been done 10, 20 years ago. There's a fair argument to be made. But what we're seeing is only the most recent and an increasingly strict series of restrictions

by this administration on all things Chinese. The Chinese with over a trillion dollars of subsidies still haven't been able to move into mid-to-high-end semiconductors. Now they never can. In fact, it's an open question with these sort of restrictions where they can hold the place where they are right now because now a lot of the doors that allow them to operationalize things are simply closed. And this still, a year into the Biden administration's tech sanctions on the Chinese, this is still just the beginning. Remember that at the end of the day, the U.S. consumer market is over

triple the size of that of the Chinese, and without that, they don't have the flows that are necessary to maintain their employment system, much less their tech system. And now at the top, they're going to have a really hard time moving forward, because when it comes to the tech sanctions, the Japanese, the Dutch, and the Brits are already on board. They are by far the most of the most. three most important. The Taiwanese and the Koreans are basically in the process of crossing some T's and dotting some eyes in order to come along as well. And that's it. That's all of it. Yeah, that's all I got. You guys take care.