A future history of China in the 2020s

On automation, consumption upgrading and programmable money

Of course, I announce a comeback then disappear for a month. I’ve never been good at judging workloads. Thank you for bearing with me.

Given the terrible mood around China these days, the contrarian in me had something to say. What emerged was a speculative fiction piece about what a blue-sky future case for China could look like drawing on policy direction from 14th Five-Year Digital Economy Development Plan and 14th Five-Year Plan. I don’t expect you to agree with all of this, even I don’t, but I would like you to consider the possibility of another world.

Time Immemorial, Yang Yongliang (2016)

We look back on 2022 as a turning point for China.

A crisis is a terrible thing to waste. As the Chinese economy suffocated under zero-COVID policies, the broader realisation sank in. The rules of the game had changed. It took three years of upheaval to get there but get there China did. Not only was growth no longer paramount, but the drivers of growth were shifting. In the years that followed, trickles that started in 2022 became a changing tide that pushed many ships to a different shore.

The real estate market did not implode or explode but slowed down. The 2020 housing sale restrictions started the slump, but it was saved from a freefall with a series of 2022 Q4 rescue policies. Though the market bounced from one side to the other, the direction of travel was the same. The heydays of the real estate sector driving GDP and local government bankrolling land sales were done. As the old driver of growth tapped out, local governments shifted to taxing real estate, and people stopped buying houses as investments. As house prices stabilised, millions of young people experienced the possibility of homeownership without emptying the saving of an entire family. Most crucially, it freed up valuable disposable income for a whole swath of the population.

In five years, standards of living accessible only in Shanghai, Beijing and Shenzhen have proliferated across the second and third-tier cities. The gradual decoupling led to a flurry of opportunities for domestic China brands as they replaced their Western counterparts. Years of being the world’s factory had bequeathed the vital tacit knowledge needed for manufacturing across most industries. Most consumers preferred the new crop of domestically attuned products. B2B buyers had some hiccups in the transition, but with a large enough demand base and a quick enough iteration cycle, they switched soon enough. As brands emerge slowly but surely, good companies find that they can start raising prices to generate enough margins to reinvest in R&D and increase their worker’s wages; bad companies went out of business from the ruthless competition. The 2020s were a golden era for domestic Chinese brands, who in time, became global giants.

VCs, SOEs, and local governments were busy creating the next growth engine by investing in deep-tech sectors such as semiconductors, intelligent manufacturing, AI, quantum computing, biotech and many other buzzwords a la mode. Much of the ensuing investment proved unproductive, but hubris capital is often the bedrock needed to explore new paths. Spearheaded by the government and SOEs and hastened by China’s declining demographic, China digitalised and automated much faster than many predicted. This laid the valuable installation layer for a Cambrian explosion of enterprise software and smart manufacturing technology. Directed by the state, incubated by capital from private and state sources and adopted by enterprise customers who don’t see much alternative, China became a high-modernist state rooted in the real economy. China created their next long-term growth driver; at the same time, it created a new variant of industrial policy.

A mixture of endurance, grey channels, and persistence eventually allowed China to crack advanced semiconductor manufacturing, but the focus on the issue seems comically overblown in hindsight. There were enough reserves in the economy to stretch towards 2025, and most semi use-cases did not require the leading-edge 1nm to 10nm chips. Firms primarily made do with available semiconductors, abet sacrificing efficiency. An unintended positive upside was that software became increasingly efficient in offsetting the hardware lag.

Despite the consistent grumbling of manufacturing moving out of China, it never quite happened. Firms that left found that other geographies couldn’t replicate China’s manufacturing expertise even if they tried (and they really tried). Only the lower-valued manufacturing moved to South East Asia or South America, and China didn’t miss the business. Instead, higher automation made the Chinese manufacturing sector even more formidable in its efficiency. From Guangzhou to Jiangsu, manufacturing clusters colloquially became known as the ‘dark lands’; named after the autonomous factories with no need for lighting that operated around the clock. Goods moved from production lines onto smart container ships bound for all corners of the world without touching a pair of human hands.

The centralisation of power towards Beijing accelerated for the next decade. As local governments’ coffers depleted from the endless Covid test, they were forced to sell unproductive assets on their books to gain liquidity to keep functioning. Central government’s funding and loans provided a lifeline on the condition that the vicious resource competition between local governments de-escalated. This marked a period of increased resilience for the governance structure since the different layers now acted as one. Ultimately, it allowed Beijing to accomplish a more fundamental transformation, the digitalisation of the state.

While not entirely putting a country on the blockchain, China did get close to it. Databases tabulating everything from energy usage, and medical records to consumer credit spun up across the country. Federated learning algorithms flowed through the land, managing everything from national power grids and real-time SME micro-lending. Opaque and stuttering bureaucracy was replaced with evermore transparency and efficiency. The amassed data of the largest population known to man was carefully made available to enterprises in data exchanges. SOEs in education and healthcare drew on this new factor of production to create world-class public service for a fraction of the price relative to their Western counterparts. Common prosperity for the Chinese masses was technology-enabled. 

e-RMB enabled a governance paradigm shift in its capacity as programmable money. It allowed funds to be deployed and monitored with surgical precision. Now Beijing knew when and how the funds for rural Shaanxi primary education were spent. Soon the grey financial markets went the way of paper money, and taxes on income and capital gains were automatically collected before they could be funnelled to oversea havens. More effective fiscal deployment and collection saw increased government budget accumulation. Initially, the funds are spent on subsidising the ageing population’s cost of care and increasing social safety nets for the least advantaged. It also fed into ‘disruption compensation’ paid out to workers whose jobs were automated away, similar to how governments would pay homeowners for their lost land in the 1990s. In time, this leads to the creation of several sovereign funds with a hundred-year horizon that invests in sci-fi-esque categories of negative carbon capture, AGI, artificial womb and space colonisation. 

China did not take the bait to claim Taiwan in a war. Instead, the goal of reunification was trotted out dutifully with each congress gathering but always with the emphasis that this would be done on China’s own timeline. But China is patient, it took a hundred years to reclaim Hongkong from the British, and it may take another hundred years to reclaim Taiwan.

China under Xi reimaged the foundations of modern capitalism, namely its reliance on fossil fuels denominated in US dollars. China’s view of hegemonic order placed itself back in the centre of the world, as it had been for millennials before the Western renaissance. Green energy flowed as the economy's lifeblood, denominated in the digital RMB. As the global temperature rose, countries all over the world turned towards China as the largest and most efficient manufacturer of solar, wind, thermal and marine energy. Through this thread, China stepped into the global leadership position it has always envisioned.

In a decade, we can see that China embarked on the most ambitious reinvention a country has ever been on. For their radical approach of identifying transformational technologies and using a mixture of policy and market forces to bring them to life, future historians bequeath the title of venture capital state to China in the 2020s.

I’ll be back next month for a review of 2022. See you then!