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As one who invests regularly, it is always vexing how to incorporate the macro with the micro. Particularly in the global markets I focus on, one cannot ignore great top-down shifts in policy, politics, and macroeconomics. But nor can one really affect them. I tend to default generally to is an entrepreneur outstanding, is her opportunity or problem large and one she has a good shot solving.
There are two major, broad issues, however, I am digging deeply into as they do or will affect great innovators – and us all societally -- globally.
I will write more separately about my lens on the first, AI. I’ve never been one to spin up on new technology - I simply love unpacking rapid change, but FOMO and jumping on each trend is not my nature. And yet, with AI, I’m not sure most of us are anywhere near spun up enough on the changes, potential and questions for our society in a thoughtful way.
The quote attributed inaccurately to many has never been truer than today: “Technological revolutions are invariably overestimated in the short term and underestimated in the long term.” Look no farther than Marc Andreessen’s recent piece to garner a sense of where we are. But, more to come here.
Equally important with significant overlap in AI, and as I’ve written here on the China startup scene and here on how China is viewed in Southeast Asia, is understanding the nuance and complexity of and with China overall. It is exactly at the time where conventional wisdom becomes so uniform, so lacking in nuance, that it’s time to stop, breathe and listen.
I was thrilled to just attend the German Marshall Fund’s China Stockholm Forum, led be the deeply respected and leading China expert Bonnie Glaser and Andrew Small, who is also one of the best thinkers on global economic and technology changes coming.
Their recent books, hers on Taiwan U.S.-Taiwan Relations: Will China's Challenge Lead to Crisis? and his with a unique lens on the transatlantic strategic, business and tech concerns with China No Limits: The Inside Story of China's War with the West are simply the great must-reads on China right now.
Among what makes this gathering great is that it is intimate and includes serious China policy and business leadership from the United States and nearly every country in Europe. Zoomed in were additional insights from China. Questions were serious - not speeches - by people who know what they are talking about and are genuinely curious in unpacking these changing days.
There was plenty of debate and varying perspectives, especially geographically. It was an appropriately sober, realistic, but not hand-wringing gathering. I report on my several broader takeaways here without editorial comment:
I. State of Reality in Geopolitical Relationships:
1) There is no distinction between the party and the state; all decisions are of the party; Xi is the party. Ministries roles are to follow directives.
There are no longer many opportunities in Beijing today for alternative viewpoints. Many senior bureaucrats may have been from an era where policy/rules/regulations were sent around for comments, some sense of iteration. This, however, is no longer the case, and those still in central roles have adjusted. There is little to no room for constructive disagreement. Technocrats and policy experts have a seat at the table now not to argue or offer dissent. Dissent, in fact, is viewed as disloyalty to a point of near treason.
2) An overriding framework in Beijing is that China is under siege by an America looking to keep it down.
Patriotism runs deeply. Exchanges among peers in the West are significantly limited compared to a few years ago. Most of the public has the same CCTV view of the world and VPN access is progressively difficult.
In this vein, Americans often articulate constructs which are interpreted to verify America’s underscoring their hegemony. “Rules based order,” for example, to China means America’s rules - and they do not understand why nor believe the rules set by the West and especially America must be unchallenged. US attempts to strengthen transatlantic relationships are similarly viewed as acts of unifying countries against China under American leadership. The world is viewed, overall, now as zero sum. American failure is China’s win. America may be right to try to make a distinction between the Chinese people and their government at one level, but it also implies that a large swath of people sees the world as we do.
3) The days of “responsible stakeholder” are dead.
There is a Catch 22 - America and Europe is right to be sensitive in key areas strategic industry, technology etc. At the same time, the act of standing up to China is used as confirmatory evidence that we are ganging up on their rise in the areas they feel matter. Often quoted was one Chinese official: “You don’t mind us becoming a big fat pussy cat, but even there you try to defang us” in key areas like AI, biotech, quantum etc. The West wants a friendly tiger, but how friendly from China’s lens depends on the situation. The American handling of Huawei and placing over 1,000 Chinese tech companies on a security list is used as evidence internally of US broader intentions.
4) Smaller countries are viewed as less important, and it is the natural order of things for they to roll over in the face of greater power (Ukraine would fall in this category).
There is no statement from senior Chinese leadership ever expressing concern for the Ukrainian people or their suffering. China really doesn’t care about Ukraine, but for advantage they can gain in the region and keeping the West on its heals.
5) America and the West is right to be concerned about a China pursuing a “wolf warrior” strategy and mentality. But it fits into China’s strategic interest of not being ganged up upon - and the West is mistaken to think recent economic challenges in China will make them more “compliant.”
When security in China recently arrested Canadian citizens, they bluntly noted, “Canada must feel pain so allies of America will think twice.” The West similarly assumed hardship caused by Covid would open opportunities for dialogue, which proved illusory. In fact, economic pressures may have the opposite effect, many noting that Russia had been economically weak and still invaded Ukraine.
6) The West underestimates China’s strength in pushing in the “global south.”
China will take advantage of opportunity to make distinctions between themselves and the US in these markets - that they and their heritage as a former emerging market means their experience is more “shared.” Several noted subtle commentary, for example: “The west takes blonde refugees, but not yours.” China believes that they are exporting a Chinese model, but a successful path for the taking for any country rising on their terms. They believe they do not dictate what is right for any given country, but each country must devise their own solutions for economic growth and pick and choose from the China models most relevant.
7) Notwithstanding, China is also on a charm offensive especially with larger capitals in Europe - more focused on Berlin and Paris than the smaller nations which it takes less seriously.
They do have significant economic interests here, but the key driver is keeping the transatlantic unity at bay. Europe should be cautious. Some say EV from China is years away, but the European automotive industry so reliant on the Chinese market - “existential” said several - could be in for a shock with time. There was little expectation that China has interest in a Japan 1990s route, i.e., looking to build plants in the United States and integrate more with the American economy. This is an era of a China first strategy.
8) Each side wants the other to accept fundamental change. This simply will never happen.
There is less and less points of contact between east and west below the senior policy level. While there are still over 300,000 Chinese students in the United States, there are less than 400 American students in China.
Said one participant: “China does want a floor on the relationship with the US. But it is a floor based on America as competitors not as partners.”
II. Business Communities:
1) China has slowed down but relative to size, 2-3 % isn’t that terrible.
And it is important to think about regions as much as the country as a whole — e.g., Guangzhou’s growth numbers are much higher and there remains a great deal of buzz there. Experts cautioned about thinking China has “plateaued.” It must always be viewed in comparison to others globally, to their history, and keeping in mind that reaching one plateau does not necessarily mean there aren’t many others.
Having said this there are real ripple effects on slower growth. Drop in manufacturing means slow commodity consumption and decreased consumer behavior. Evidence of this is seen clearly in significant price war on cars and terrible real estate markets. China has fewer political tools to “fix” this quickly.
2) Anti-espionage laws are extremely chilling to foreign investment.
No one understands what they will mean and when. How can businesses be run with restrictions on their customer and/or internal data? How can anyone have confidence in an audit or data provided on operations in due diligence?
3) “There is tremendous fog on the field right now.”
Western businesses there reliant on the large market may continue to be investing, in fact on some days feels like business as usual. But new investment has sidelined significantly. “Billions are on hold right now globally.”
4) There is a wide breadth of industry looking for alternative markets to build.
This is driven by mixed signals. At one level, Chinese officials especially in Shanghai, have recently actively courted western executives with a clear message, “We are open for business.” Then some rule changes or local executives disappear, and global business has difficulty parsing conflicting messaging. “Their offering to the American board room right now simply is not compelling.”
Compounding this, at least in Beijing, is a sense that the economic teams are dis-empowered by Xi, especially vis a vis the security apparatus. In the end for Xi, ideology and security will always trump the economy.
Foreign SME’s have left China more aggressively, in large part because many of their customers have in the last two years. A good deal of shifting of business and money head headed to Singapore and Southeast Asia. Supply chain alternatives for them also found global enterprises now in Europe, some India and even Latin America.
The larger players, with decades of investment, are staying put more so for now. Sentiment, however, is worth watching. A survey of Fortune 500 CEOs said: 41% are assessing leaving; 20% assessing some increase due to market size; 39% not engaged in China in serious way and does not intend to. It is not yet a massive pulling out, but rather a massive wait and see. One noted that 63% of European companies would invest more if they had higher confidence in the regulatory environment and its predictability. One person noted the differences should not be viewed as between large and small businesses but asset light or heavy.
5) There was not significant concern over de dollarization.
88% of all transactions globally are done in dollars as compared to 4-7% of RMB and less than 2% of reserves. Aggregate RMB transactions in fact declined some over covid. The dollar is simply more liquid, has greater global confidence, and there is no compelling reason (yet) for there to be a change. Worth watching, however, that in the War over 2/3 of Russian transactions have been in RMB.
III. Human Rights:
This has become very hard to track and document. Very few journalists remain. That satellites are no longer finding camps does not say what has become of so many people, many possibly imprisoned below our ability of observation. Outside groups can no longer audit or visit to understand forced labor levels. China is simply doubling down, and acting like it does not care - this, for them, are domestic concerns. China de-emphasizes human rights in BRI etc. which will compound challenges to monitor and put pressure on human rights valuations globally.
Not a clear message or strategy offered on what the EU in partnership with the US can do here.
IV. Examples of Greater Partnership Among Transatlantic Allies:
1) Some hope, but also much devil in the details.
Some spoke hopefully about Trade and Technology Council; efforts working together in the G7; greater efforts to include the “global south.” Americans thought especially valuable in area of semiconductors and minerals. New central concerns in technology like AI and Quantum being taken up by the TTC. It is not clear how much pain any party will take to reach an agreement on sensitive issues.
2) There is universal adoption in the West of the term “de-risking,” but also great confusion as to what that means in application.
The Chinese see little distinction between de-risking and de-coupling. And, again, they view anything that unifies the transatlantic relationship as a threat. They are puzzled when we refer to Asia as a place in need of “development” but the Indo-pacific as a place in need of “security.” America also describes Asia as if China is not a part of it. Even among the West there was lack of clarity of the specifics to “de-risk.”
3) A challenge of competing concerns makes transatlantic cooperation complicated.
All, including the US (note the Inflation Reduction Act) should invest in themselves individually; All, including the US, will have differing views on how to engage with China; Europe believes there is advantage in NOT building the perception (let alone the reality) that we are always lock step - that to the degree Europe is viewed as acting under the orders of the United States there is less room to maneuver. “Europe and each country have its own voice.”
There is a desire for greater specificity and clarity on where we are aligned; where we are allies; and where we outright disagree.
And what might be agreed on at the senior levels of policy making in each capital, Brussels and Washington may not — will not - always reflect the politics of the respective political grounds. What coalition can be built among policy leaders who even agree if, for example, a strong minority in Congress supports Europe?
4) Europe must step up more in security and is doing so.
Europeans in particular noted that budget targets are being met, in large part due to commitments to Ukraine. Most do not believe that China’s Global Security Initiative seeks to replace the US — just too risky — but a program to offer alternative structures. China is pushing on an open door in many parts of the world that the West should not decide alone the rules of the geopolitical order. But overall, the CGS is viewed as too vague.
5) American 2024 elections hanging heavily on European participants.
Unclear how to scenario plan for a Trump or Trump-like administration.
V. Discussion on China Innovation and the Global South
We covered many themes I discussed here.
VI. Taiwan:
1) Xi behaves like an emperor and emperors like to do big things.
And the biggest thing for Xi is Taiwan. One person noted that for all our concerns, and with escalating language, China has not backed off their own date of 2049 - their target date for national rejuvenation. And Xi has said that reunification is a requirement for national rejuvenation — an indirect linkage that few believe is a hard deadline. After all, he would be 96 years old in that year.
2) We forget that Taiwan isn’t just an issue of democracy and checking China’s ambitions - but represents tenth largest US trading partner also.
There was some debate about how much Taiwan was “America’s issue,” but the Biden administration has strongly encouraged its allies to contribute to strengthening deterrence and Taiwan's security. European support militarily, politically and in civil society remains important. Israel apparently has been a good partner in this.
3) “Assurance is integral to deterrence.”
President Biden has been quick out of the box supporting deterrence but has done little on re-assurance. Few at the gathering could recall he himself reconfirming the One China Policy. Every European, including the Swedish Prime Minister, at this conference did so explicitly. It is important to make clear we are open to the possibility of a peaceful option with the consent of the Taiwanese people. But not sure the China echo chamber hears this clearly.
4) Not clear there is any political support in the US or Europe for military action.
The public favors status quo in both regions. Notwithstanding, belief that if Taiwan declare independence, or the US declared independence, or peaceful approaches don’t seem feasible, Xi goes - and the US will react accordingly.
VII. Ukraine:
1) China knows the War a drain on the US and Europe, and does not want Russia to fail.
They look at this through a much broader security lens.
Increased speculation that China has and will interfere with coming European elections.
2) Hotly contested was will/must China be part of any peace process and reconstruction.
One line of argument, surprisingly widely shared, was that China is the only player that can bring Russia to the table, and Ukraine has expressed serious interest in having China participate in reconstruction. In fact, as this argument goes, at a bill of at least $400 billion the US and Europe simply cannot manage reconstruction alone. At the same time, such engagement is a significant power dynamic shift that is hard to predict and a likely nose under the tent for greater efforts from China to divide the transatlantic relationship more broadly.
Others pointed out that whatever funds come will be structured as much as loans and not aid at a serious scale. Ukraine may want engagement with China, but how and how much is less clear. There is skepticism whether Beijing can actually bring Russia to the table and any role they have had or will have remains contentious. America has wavered between outright push back on China involvement to now more not to reject it out of hand and probing the specifics.
VIII. Five Focuses on Where do we go From Here?
1) The US and EU must find a more effective approach to engaging the Global South/EM.
2) There must be much greater creativity and cooperation in economic security.
3) There must be fast and experienced voices involved in cooperation in AI and new tech.
4) There must be great communication on where our collective/individual foreign policies are heading.
5) There must be consideration of if/when/how to have Chinese as a part of these dialogues.
And things are ever changing…