Annual reflections of 2020

Let's learn what dual circulation actually means!

Welcome to all the new subscribers! I write a longform analysis about tech in China from the perspective of a 🐢 VC, sent out every week. If you like the content, please share with friends!

First of all, if you're reading this. Congratulations, we've made it through 2020! It's been a singular year in so many respects.

Second of all, I want to thank you for reading my newsletter. Since starting this during quarantine in a Chinese hotel in August 2020, we're grown from a handful of readers to thousands of you. I'm so grateful that you've devoted your attention and support to this.

I look forward to a great 2021 with all of you.

Since getting here, one of the things I’ve felt but couldn't quite name was the intense sense of existential threat that pervades China. I'm not sure whether it's rooted in its recent history, where the memories of harsh poverty have barely faded, or it's the reality of living in a nation where you're jostling against a billion others for a chance at anything. But the result is a land of scarcity mindset, where all games are zero-sum and the goal for each day is to stay alive. This breeds a very different type of mythical tech creatures relative to the abundance mindset backdrop for Silicon Valley. 

The most apparent manifestation of this mental framework is the bloody battle royales for every opportunity that arises. Everything means war because if a mythical tech creature missed this round, they might not be around for the next. Reality has never been kind in China. Baidu, Alibaba and Tencent were once hailed as the triumvirate of Chinese tech. Still, in a few short years, Baidu has ruined a series of moves in the Online-to-Offline and short video wars, and the battle has narrowed to a faceoff between Alibaba and Tencent. The dynamic of these two foes rules almost everything around them, and no area is off-limits.

However, all things shall change. A theory floating around Chinese internet for why anti-monopolistic regulations are coming in this year is that during Covid-19, the health codes on the Alibaba and Tencent platforms wouldn’t talk to eachother. This introduced complications during a time when technology compatibility should have been the last thing to worry about. Nothing goes untouched by the pandemic.

Covid-19 has forced shut a series of options for China, and in turn, set certain things in motion. The increased hostility toward China and Chinese tech abroad has hardened the Chinese government's resolve to go at it alone. Policy initiatives support a slew of domestic industries such as AI (if that can be called an industry), lithograph manufacturing, life sciences and consumer goods. The self-reliance strategy is not a foreign story to the Chinese population nor the Chinese government. They would prefer not to, as a recent Xinhua article which appeals to the incoming Biden administration clarifies. But many Chinese policy hawks have long talked about this day coming.

The Chinese economy's Covid-19 stagger has also shed lights on the other grey rhinos in the room - namely consumer internet's lack of yield and the breakdown of the Faustian bargain tech workers make with their employers. 

As I've written before, the low-hanging fruits of Chinese consumer internet space have gradually become exhausted. 2020 saw the manic tails of opportunity in the form of livestreaming e-commerce and Community Group Buying. Right now, tech companies and VCs are looking further afield to new grounds such as B2B SaaS or healthcare. Like the West, Chinese tech is looking for a new installation base, which has not yet crystalized despite all the dreamy talks of 5G. While industrial internet is all the rage in B2B, digitalization is a slow process. It's not easy for firms who don't conceptualize their issues as software problems to transform themselves so fundamentally.

The fewer opportunities, the harder the grind. The gruelling 996 work culture, where workers are expected to work from 9 am to 9 pm for 6 days a week, has pushed a generation to the brink. Mirroring the Chinese people's social contract with their government, compliance is given in return for material annual growth. Tech workers have traditionally cranked out the long hours in order to secure a house in top-tier cities after 3 or 4 years. But increasing housing prices and limited upsides in their work has made this all but a pipe dream. Daily infringements on toilet break time coupled with Logan's run-esque 35 year old age limit for developers has inspired soul-searching among this selected white-collar group. This can't last, everyone says, but what choices do we have?

So where does China go from here?

After consulting the state-wide OKR that is the 14th five-year plan and reading the tea leaves. We come to that unsexiest of subjects - dual circulation—the core framework for Chinese tech and beyond for the next five years.

Dual circulation was first announced in May 2020 and is so-called because it comprises of two types of circulation - internal and external circulation of goods and services.

Internal circulation effectively means that the Chinese economy rebalances towards a consumption-led economy from an export-led economy. China wouldn't be 'decoupling' from the world economy anytime soon. The external circulation component means that China wants to continue opening up the economy to foreign investments and free trade. Obvious but Chinese consumers want to consume foreign goods as well.

The dual circulation strategy means that Chinese economy will favour domestic consumption and imports as more significant GDP drivers than exports going forward. It's an economic direction that favours the middle class and the working class, and not so much the 1%. In order to have a consumption-led economy, you need to have a surplus income in the hands of many rather than a few (the current Chinese government is not a fan of trickle-down economics).

Ok so thanks for making me read all of that but what does that have to do with Chinese tech?

A lot, because this strategic direction means initiatives that focuses on the following:

  • Providing income surplus to the working and middle class

  • Prioritizing opportunities to SMEs

  • Encouraging balanced consumption-led practices

From this perspective, some of the government's current technology policies make more sense. Curbing big tech's monopolistic tendencies is one way to avoid decimating the emerging middle and working classes' businesses. Cracking down on Ant ensures that consumption practices are sustainable and driven through increased earnings rather than debt. The wrist-slapping of Community Group Buying players was to make sure the 'real' economy is not devoured. However, the fervour associated with CGB isn't dying down anytime soon. All in all, there'll be more supply-side structural reforms to balance resource allocations away from parts of the consumer internet towards core initiatives such as AI, semiconductors and cloud. That's the theory at least.

External circulation also means that the country will open itself up to more foreign investment. I see the direction of travel to allow more foreign access to the Chinese stock exchanges. More domestic tech IPOs (such as Kuaishuo) and tech giants returning from overseas (Bili Bili is raising on HK stock exchange) will see us enter an age where the public tech power will be concentrated less in the US.

The policy of dual circulation was a direct reaction to rising US hostilities. As the US posted sanction against all of the top big tech players (the recent sanctions against Ant completed the set), China has to look inward for growth.

That’s the last time you’ll hear Chinese policy from me for a while. Promise. But this wouldn’t be the last time you hear of dual circulation, I guarantee it.

So Chinese tech enters 2021 in a state of flux, at the end of the mobile era and not quite at the beginning of another. Forces have driven companies to start looking inward for the next growth engine, and the subsequent fights are playing out in lower-tier cities up and down the country. While the shadow wars between Alibaba and Tencent rages on, anti-monopolistic regulations could be the one to break the deadlock and allow some much needed air for startups to thrive. This could also be the opportunity for a generation of workers to find out what work-life balance means. In the background of all of this, is a sense of optimism. Yes, the river flowing ahead is strong, but not stronger than what they've crossed before. 


Premium subscribers will get my list of 2021 predictions tomorrow, so look forward to that. In the mean time, did you find Jack Ma? 


Reply to this email to let me know what you think, or find me @lillianmli where I write about what didn’t make it into the post