China Ascendant? Maybe, Maybe Not

China seems to be beating us at leadership in tech in just about every category. In a decade they are supposed to be the largest economy in the world. But is it all built on a foundation of sand?

China and the US are in an AI race and China is winning. China will dominate the next generation of 5G wireless networks. China is the first to land on the dark side of the moon. China leads the world in electric automobiles. A Chinese scientist conducts the first gene editing of human embryos resulting in two baby girls. The recent headlines just go on and on.

It seems that the US is ceding its decades long leadership in science and technology to the Chinese. While they built 15,500 miles of high-speed rail since 2008 we just cancelled a white elephant of high-speed rail in California started in 1996 because it was heading to a $100 Billion price tag for just 550 miles. Our National Science Foundation tells us that China now publishes 426,000 scientific papers, more than the 409,000 from the US – and the gap is growing. Kind of depressing, isn’t it? After all, the key to the 21st century is human capital and knowledge.

But a closer look reveals the Middle Kingdom is not quite at the cutting edge and in fact may be at a precipice. Let’s dig a little deeper. First, at the same time China is vigorously trying to recruit top academic scientific leadership from around the world by offering generous pay and research programs – successful entrepreneurs are being socially demoted and are leaving the country. What would you think if the brightest in Silicon Valley started pulling up roots for another country? Is this the proverbial canary in the coalmine?

The centralization of power and control in the communist party under Xi Jinping seems to be driving away entrepreneurs but let’s look behind some of those technology advances. Exhibit #1: the Chinese are far ahead of the US in AI patent applications. In the area of deep learning China files six times as many as we do. But, a closer examination reveals that many of the Chinese applications are for minor tweaks, not true innovation. Digging into the actual patents granted, a Chinese VC firm showed that the US owns 32% of global machine learning patents while China owned 23% of those as of 2017.

Exhibit #2: how about all those high-speed trains: well, they don’t make any money and may never do so. They were built by government fiat and debt, and could be drain on the Chinese for a long time. And while we are talking transportation –there is Exhibit #3:  Chinese leadership in electric cars. Here’s a dirty little secret, literally. Guess where the electricity comes from? 72% of the electric power comes from burning coal making China the world’s largest emitter of CO2.

Exhibit #4: Gene editing of babies – maybe we in the West are both horrified and jealous of this bold act, but surprise: no one in China knows about it. At first, the Chinese government praised the scientist who pioneered the work but when the international scientific community universally condemned him the story became one of the most censored in China. Unfortunately, you can’t unring that bell and China has different values and incentives in its science community. I understand there is a third baby on the way.

Maybe Chinese propaganda (coupled with besotted western journalism credulity) is just good at putting out a great story. But, there is a deeper problem. Remember human capital is the key to the 21st century and for China its demographics are its destiny and it knows it.

Projecting diminishing fresh talent and increasing expenditures on social support programs, China is just not making enough babies. It’s likely to grow old and population decline before it ever makes it into being rich. This is called the middle-income trap, and as the World Bank noted a few years ago, “of 101 middle-income economies in 1960, only 13 became high-income by 2008.” The vast labor pool is now shrinking due to the demographics – as the average age of the population increases, the number of actual working people shrinks.

Now, think about what made China the world’s second largest economy in just 40 years. First, the government loosened up its Mao Zedong’s legacy of an iron grip on every aspect of life. Under Deng Xiaoping and his more liberal approach to the economy the Chinese miracle blossomed through entrepreneurship and pragmatic innovation. Just look at some of his quotes:

“We mustn’t fear to adopt the advanced management methods applied in capitalist countries (…) The very essence of socialism is the liberation and development of the productive systems (…) Socialism and market economy are not incompatible (…) We should be concerned about right-wing deviations, but most of all, we must be concerned about left-wing deviations.”

This coupled with the then huge untapped labor pool (440 million moved from the countryside to the cities) resulted in unprecedented economic growth and rising prosperity.

Now look at where China is today. Xi Jinping seems to be returning to Mao like iron-fisted control. Leadership in innovation may not be quite what it seems to be at first blush. The “smart money” (entrepreneurs) is leaving the country. Finally, couple that with less people to do the work – What do you think will happen?

By John Pientka


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