Hi,

China is such a huge subject and I’ve been acutely aware that my weekly thoughts can barely do it justice. I’ve asked my friend, David Schlesinger, to look after this week’s Exponential View with the aim to shine a light on the Middle Kingdom during these times of change.

David and I first worked together at Reuters over a decade ago, at which point he had spent more than 20 years working in the region. David went on to become editor-in-chief of Reuters, the world’s top newswire, before taking up a post as Chairman of Reuters in China. Now based in London, he runs Tripod Advisors, which helps companies understand the region. He also has an Emmy Award, which I think is quite cool.

Best wishes,
Azeem

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DEPT OF THE NEAR FUTURE

Greetings all. The only thing that really matters about China in the near future is the 19th Communist Party Congress, which will open October 18 in Beijing (if you haven’t received your invitation yet, you aren’t going!).

These Congresses are held every five years and set the players, the ideology and thus the policies for the years to come. We don’t know all the answers yet, but we know the questions. And we know that the key player is Xi Jinping, who is set for his second term as General Secretary (he’s also President, but that’s not a Communist Party title and isn’t up for grabs at this Congress). The gurus at Trivium have one of the best cheat sheets there is.

🎲 But let’s all start by being a bit humble. The truth is, China-watching is a mug’s game. The New York Times’ Nick Kristof, a multiple Pulitzer winner, really fine reporter, and long-time China watcher, was 100% wrong about every single one of his predictions when President Xi Jinping came into power in 2012. Gordon Chang has been calling for the coming collapse of the PRC annually since 2001. Someday he may be right, but it’s still standing.

Part of the problem is there are no real rules. And the rules you think you’ve learned over decades of study, don’t always hold. Christopher Johnson, one of the best China analysts there is and formerly with the CIA, talks about how Chinese politics has no rules, but Xi Jinping should break them anyway.

🀄 A lot of Chinese political discourse is opaque - no matter which language you’re reading it in. David Bandurski has a wonderful look at political numerology in the Xi Jinping era.

Speaking of Xi, he’s the guy you need to have your eyes on, no matter what your interest in China is. He’s accumulated a mass of power and it’s just getting stronger. In the West, we’re used to leaders coming in strong with a mandate and honeymoon period; they gradually lose power and eventually become a lame duck. In China it tends to work the other way - Xi inherited his predecessor’s structure and has steadily been making it his own; this Congress should be the apotheosis where he slots his own people in everywhere and has his strongest hand yet.

🗝️ For an academic (yet very readable) look at how Xi holds the political and economic strings, have a read of Barry Naughton’s paper.

Xi is going where no party secretary has gone before since Deng Xiaoping established a set of norms for policy-making under collective leadership. He is putting his stamp on everyday economic decision-making. Perhaps more tellingly, he is doing so in a way that extends central power and gives him personally direct instruments of pressure to reach into local governments.

🇰🇵 Since this is 2017, and maybe the end of times, we better have something on North Korea. Here’s a fascinating survey on Chinese academic policy views. The author classifies scholars by their recommendation to policy-makers, as 1) those who are for limited support for North Korea, 2) those favouring North Korea and, 3) those who believe China should cut ties with its neighbour.

DEPT OF THE INTELLIGENT ECONOMY

An excellent Goldman Sachs report, widely shared on Twitter, outlines how China is determined to become an “intelligent economy” by 2030. It’s got three aces up the sleeve:

• Chinese population generates 13% of the digital information globally, with expectations this will rise to 20-25% by 2020. The BAT triumvirate is positioned to capture this growth through e-commerce, online transactions, search, social/entertainment, and autonomous driving;

• More than 700 AI-related companies, more than 16k patents filed in the field in the past year, and $2.6bn of capital flow into the industry between 2010 and 1H16 makes it the second-biggest AI ecosystem after the US;

• To attract global talent and resources, big tech firms have opened research labs in Silicon Valley, and they offer competitive salaries. Baidu has even open sourced its machine learning platform.

A recent McKinsey paper put China’s digital economy in context.

• At $790bn annually, Chinese mobile payments are 11x those of the United States;

• China is home to 43% of the world’s tech unicorns (firms with a market cap above $1bn). China’s 89 unicorns weigh in at a total valuation of $380bn.

💎 China’s Central Bank began testing its own digital currency few months ago. Even though the government banned ICOs last month, the Ministry of Industry and IT launched a “trusted blockchain alliance” to speed up the study of the digital ledger just last week. Blockchain sage William Mougayar thinks that we’ll see crypto Yuan emerge after the Congress.

It is also useful to look at how policy and technology came together in China’s recent abrupt brake on cryptocurrencies. TechCrunch had a very good piece that set things in historical context:

_In a country with a stock market less than 30 years old, it’s little wonder that investor protections may not yet have evolved to be comprehensive enough for the complicated ecosystem of alternative finance. Imagine China having to replicate the regulatory framework that took decades to develop in the US following the 1929 stock market crash – all in less than 30 years!

This kind of uncertain environment is perfect for scammers, or what Matt Levine calls “hucksters and hype and bubbles and disaster.”_

🌾 And The New York Times had a lovely look at job opportunities in crypto industry for China’s struggling farmers and coal miners:

“Now the mine has about 50 employees,” said Wang Wei, the manager of Bitmain China’s Dalad Banner facility, using one of several metaphors for the work being done there. “I feel in the future it might bring hundreds or even thousands of jobs, like the big factories.”

How and who is the intelligent economy going to serve? As The Economist writes, underneath the seemingly homogenous population of China are great demographic divisions, looming over the economic growth and stability.

If demography is destiny, as Auguste Comte, a French philosopher, once said, then China has many destinies.

(Great visualisation of rapidly changing demographics. India is included, as it will become the most populous country in the world by 2027.)

🤖 The decreasing young adult population is already projected in Government’s warning that manufacturing will be short on 3 million robot operators by 2020.

DEPT OF SURVEILLANCE STATE

With facial recognition in place, China’s surveillance state grows in power. Twenty million surveillance cameras keep a close eye on citizens, while AI-enabled tagging of individual cars, pedestrians and cyclists creates a searchable database. (Watch the enlightening video.)

And scholar Stanley Lubman pointed out how a lot of new technology is going towards expanding China’s unprecedented domestic surveillance.

In one recent case, a woman accidentally used her son’s subway card, which resulted in her being accused of theft because her conduct was wrongly classified under the applicable algorithm. Also, although the data is supposedly “objective,” one acute observer, Shazeda Ahmed, has noted that some of the data is “peculiar and highly specific”: playing many hours of video games triggers a lower credit score, while purchasing diapers earns points for responsible behavior.

(This includes a headlong rush to collect genetic data as chronicled in this short video.)

🚫  The heavy hand of the state is felt most forcefully in the media. Here’s a fun (if you have a slightly warped sense of fun) look at all the currently banned words.

Mark Zuckerberg studied Chinese in vain: the government disrupted WhatsApp this week, forcing users to use controlled communication channels ahead of the Party Congress. (See also: Gordon Orr argues that China should be a board agenda item with rose-tinted glasses off. Relevant for every company with business activity in China.)

China’s strategy to become “cyber superpower” includes a call to keep online and offline under tight control:

We are resolute that positive energy is the overall requirement, and keeping things under control is the last word (管得住是硬道理). Online positive publicity must become bigger and stronger, so that the Party's ideas always become the strongest voice in cyberspace.

🎛️  The Party taps into rap music, too. Why? It attracts young cadre and encourages conformism:

One such "guichu" – a fast-paced clip of repeated images, sounds and catchy music – calls on citizens to be on the lookout and report people they suspect are spies to the authorities.

TASTY DIM SUM TO APPEAR SMART AT DINNER PARTIES

Chinese scientists use DNA “surgery” to remove blood disorder in lab-made embryos.

😷 The first fully automated dental implant performed in China, hoping to combat a lack of dentists and common surgical mistakes. (Video included for the brave among you.)

🐼 While the population of giant pandas has increased by a sixth since 2003 their habitats keep shrinking. (Also, panda diplomacy is a real thing.)

Recollections of one of the first men to walk the Great Wall in 508 days through snow storms and deserts. A story of perseverance.

Online markets for second-hand products are booming: underwear, lipstick, full-size commercial aircraft and rare pets are some of the delicacies on offer.

“North Koreans are poorer than us, but they’re spiritually pure”, a Chinese father tells his son as they cross the bridge at the North Korean border.

🚗 New regulations mandate carmakers sell at least 10% of new-energy vehicles in 2019, and 12% in 2020. Tesla’s largest supercharger facility is being built in Shanghai, with 40-60 stalls under one roof.

Golden week, a 7-day national holiday starts on Sunday. The Ministry of Transport expects 70.2 million road trips a day, including 15.9 million trips by boat.

⚠️  Not about China... But relevant wherever you live: a Stanford professor’s guide on how to deal with the assholes around you.

END NOTE

Finally, it’s important to remember that there is no “China”. There are so many sides to this huge, infuriating, fascinating, diverse place. Siyi Chen in Quartz wrote a good piece on the different narratives there are, and how skewed they can get.

Here’s to your China watching - and remember, even the experts aren’t expert, and everyone gets it wrong pretty often.

David (@daschles)

🐉  P.S. Azeem here: Please take a special moment to thank David for this fascinating SinoExponential View.

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