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00:00This has never happened before.
00:02No country has ever grown as fast as China.
00:04Not the U.S. after World War II.
00:06Not England during its days of peak power.
00:08China's population has been warring with each other for over a thousand years.
00:11Warring, splitting, unifying.
00:12Warring, splitting, unifying.
00:14Arriving today led by one man at the head of one party
00:17that has the sole intention of making sure that outcomes in the country are not random.
00:22That there are no surprises.
00:24That is the trademark of how China works.
00:26Understand the path that power flows, how decisions are made,
00:30and China stops being a puzzle.
00:32It becomes a map.
00:33That's what we're going to explore.
00:34The big strokes of how China works.
00:37Who has control?
00:38What gets made?
00:39What the people can do?
00:40How it interacts with the rest of the world.
00:42One, who controls the country?
00:44Despite being 4,000 miles wide and taking up five international time zones,
00:49China has one time zone.
00:50Everywhere in China, clocks are pinned to what time it is in Beijing,
00:54where the Chinese Communist Party operates from.
00:57Xi Jinping lives there.
00:59Emperors used to live there.
01:01It is the epicenter of China.
01:04And that one word, it is a critical one in Mandarin,
01:07the official language of China.
01:08This is the Mandarin for China.
01:10But to those in China, these symbols mean Middle Kingdom.
01:13But the cultural meaning of that word middle in China means most important.
01:18Not stacked in between others.
01:20No, no, no, no, no.
01:20The Middle Kingdom is the most important kingdom of the world.
01:24The center of the universe.
01:25Giving a picture of how China, certainly the leaders of China, see themselves.
01:29With that accepted as the national identity,
01:31the leader of the center of the universe naturally is granted complete and total control.
01:36So right after World War II in 1945,
01:38China resumed the bloody civil war.
01:40It paused on to deal with the world war that arrived on its shores.
01:43Four years after unpausing, the Chinese Communist Party, commonly referred to as the CCP,
01:48had won, installing itself as the one and only political party in China,
01:51forcing the group it defeated to flee to Taiwan.
01:54This is where the Taiwan-Mainland-China tension comes from.
01:58Taiwan is the other party, the party that lost to the CCP in the civil war.
02:02They wanted China to be a democracy.
02:04For the next 30 years, Mao Zedong, Chairman Mao, ran the country with an absolute iron fist.
02:09It's almost all bad.
02:11When he tours the country, crops were literally ripped out of the ground in one area
02:15and placed around the path of his train to give an appearance of things going well.
02:19People were terrified of this guy.
02:21Tens of millions died due to bad policy.
02:24Political opponents were killed.
02:25It's classic bad dictator stuff.
02:27So shortly after his death,
02:28the CCP established a practice of limiting rulers to two five-year terms.
02:33As soon as Mao Zedong has left the building,
02:36Xi Jinping starts rising up through the ranks of the CCP.
02:39Born to a senior member of the party,
02:41he gets the political game.
02:43Like, he really gets it.
02:44Climbing until he launches himself from governor of Shanghai
02:47into what is arguably the ultimate leader role in the world.
02:51I mean, there's no other person on the planet
02:54that has this kind of control over this number of people.
02:57This is power.
02:59And he doesn't want that to change.
03:00So in 2018, he moves to abolish term limits.
03:03Things are going really well in China.
03:05So the CCP gives it to him, establishing Xi Jinping as ruler for life
03:09with total control over everything that happens in China,
03:13starting with what the country makes, what it builds,
03:15what comes out of its factories.
03:17Two, what the country makes.
03:19It is a jarring difference from how the West works.
03:22Completely different.
03:23All of these companies are directly owned and controlled
03:26by the Chinese Communist Party.
03:27Completely and openly.
03:28It's not like it's shadowy, behind-the-scenes government ownership.
03:31They're called state-owned enterprises, or SOEs,
03:34and they carry immense weight and power in China.
03:37Oil companies, mining companies, agriculture, shipbuilding,
03:40defense, banking, all owned by the state.
03:42It's like if the U.S. government owned J.P. Morgan,
03:45plus all the other banks, Lockheed Martin,
03:47plus all the other defense companies,
03:48ExxonMobil, plus all of the other oil companies,
03:51and a giant heap of other critical companies.
03:55Under Mao, 100% of all companies of everything made in the country
03:59was controlled by the CCP.
04:00That dipped to under 40% after Mao,
04:03but it's now back up to 60% and climbing under Xi.
04:06But what are we talking about in terms of size?
04:08Like, how much of China's economy
04:10do these state-owned enterprises actually represent?
04:14The entire value of China's stock market is about $16 trillion.
04:17Some of the state-owned companies are listed on the Chinese stock market.
04:20You can buy shares in them.
04:21They make up about $9 trillion of the entire Chinese stock market.
04:24But the whole swath of SOEs that aren't listed,
04:27those account for at least another $9 trillion.
04:30Completely dwarfing regular and generally smaller businesses,
04:34and completely and totally controlled by the CCP,
04:36allowing them to pick and choose winners.
04:38Because when you control that scale,
04:41and that variety of companies,
04:42and all the way these companies interact with one another,
04:45it is not hard to make sure the companies they want to win,
04:48do win.
04:49Is that how you see it, Leiland?
04:50Well, state-owned enterprises have been around since the beginning.
04:53You know, you have a state-run economy.
04:55That's the way Soviets ran their economy.
04:57It's the way the Chinese and other communist parties run their country.
05:00But it hasn't always worked the way it has under Xi Jinping.
05:03This is Leiland Miller of China Basebook.
05:05You might remember him from the last video.
05:07Oh, he's back and he's always ahead of everyone else on China.
05:09In large part because the company he founded
05:12collects an enormous amount of data on China
05:15from people that are in China.
05:17That's exactly right.
05:18So China Basebook is the largest private data collection operation in the world
05:22focused on the Chinese economy.
05:24What we were doing is putting out an alternative
05:26to Chinese national statistics.
05:28And we were saying, look at their statistics,
05:30listen to what they're saying,
05:31but listen to us too,
05:32because we can see the problems coming
05:34that the government doesn't really want to acknowledge most of the time.
05:36Under Xi Jinping, it's really gone in one direction,
05:39which is towards centralization,
05:40towards making sure control is centralized under state-owned enterprises.
05:44And then once those companies do win at home,
05:48expand them to dominate their industry everywhere else in the world.
05:51It works like this.
05:52The CCP controls six of the biggest banks in the world.
05:55There is a line of communication between the CCP
05:57and the executives of those banks.
05:59In fact, the executives are usually CCP party members.
06:01Other CCP members sit on the board of directors.
06:04Sometimes the entire board of major SOEs
06:06are members of the Chinese Communist Party.
06:09So when Xi Jinping says,
06:10we want our solar industry to dominate everywhere around the world,
06:14the banks get the message.
06:16The message to them is lend money, lots of it,
06:19to Chinese companies in the solar industry
06:22at extremely low interest rates,
06:24interest rates way below what other sectors or companies will get.
06:27Compare this to the U.S.,
06:28where if a solar company wants to build out a new factory,
06:32they'll also have to take out loans.
06:33But the banks in the U.S.,
06:35who don't answer to the U.S. government,
06:36will lend an amount to the company they feel comfortable with
06:39at an interest rate they feel comfortable with,
06:41probably 8% to 10% for a younger company.
06:44So the Chinese solar company,
06:46getting all those cheap loans,
06:47can immediately price its panels 8% to 10% lower
06:50than the company in the U.S.
06:51without doing anything different as a company.
06:53And that's just the banks.
06:54State Grid Corporation of China,
06:56owned by the state and controlling 80%
06:57of the country's entire electric grid,
06:59will give favorable treatment to the new solar factory
07:01when it's ready to be hooked up.
07:03The aluminum company,
07:04Aluminum Corporation of China Limited,
07:06will make sure they get the aluminum they need
07:08before filling other orders all on down the line.
07:12Stacking cards heavily in favor of Chinese solar companies
07:16compared to every other non-Chinese solar company
07:18that has to play by normal market rules,
07:20by free market rules.
07:22This is how the Chinese solar industry came to dominate.
07:25The shipbuilding industry came to dominate,
07:27battery industry, EV industry, steel industry.
07:30This is the exact playbook
07:32for how China dominates global industries.
07:34What they're doing right now is they're saying
07:35there are parts of the economy
07:36that we're gonna be designated as important.
07:39It's advanced manufacturing, it's advanced technology.
07:42We are gonna get them the credit they need
07:43because this is important from a national security priority.
07:45But all these other areas of the economy,
07:47particularly in the aftermath of the great financial crisis,
07:49that were sprayed with endless amounts of loans,
07:52that's over, that is done.
07:53But you also need workers for these industries.
07:57Ships are not gonna build themselves.
07:59Three, what the people can do.
08:01For a very long time,
08:02where you were born in China
08:03is where you lived out your life.
08:04With very few exceptions,
08:05people are not free to just pick up
08:08and change where they live.
08:09There's a migration system in China called huku
08:12that decides where people can move from and to.
08:15This is what a huku book looks like.
08:16It's a lot like a passport.
08:17Because this system,
08:18it's not that different from traveling between countries
08:20where you have to pass through customs
08:22and show a passport,
08:23or a visa that says you're allowed to be there
08:25for longer than, say, a month.
08:26Strict rules of this system
08:27make moving from rural China
08:29to a city like Beijing
08:30and acquiring huku for Beijing
08:31almost impossible without some type of very special skill
08:35or connection.
08:36A person can pick up and just go to Beijing.
08:39But huku, those with huku get housing.
08:41Good housing, those without get dorms.
08:43Maybe factory housing.
08:45They get the good schools.
08:46Everyone else gets migrant public schools.
08:48They get healthcare.
08:49Cash or private insurance for everybody else.
08:51And the huku holders avoid
08:53what is a very real social stigma
08:55that comes when you don't have it.
08:57It's very unpleasant to live in any area of China
08:59if you don't have huku in that area.
09:02Which, it turns out, is very useful
09:05if you want to direct the flow of migration
09:07into certain areas.
09:09This next part still blows my mind.
09:11In the 1980s,
09:12the CCP set up these special economic zones
09:15around the country
09:16and granted land rights in the zones
09:17to companies that wanted to build out
09:19factories and manufacturing.
09:20One of these areas is Shenzhen.
09:23At the start of this all in 1980,
09:25it was a tiny village on the Chinese coast.
09:27Population, 30,000.
09:29Today, 40 years later,
09:31your iPhone or TV is probably made in Shenzhen.
09:35Put together by what is now
09:36one of 18 million residents.
09:39Because the CCP funneled its people
09:41from rural areas to where it wanted them to go.
09:44These areas where they wanted to build up industries.
09:4718 million.
09:47That's growth of 17,970,000 people.
09:51That's more than two New York's worth of people.
09:53And the offer to get them there
09:54was very relaxed rules on hukou.
09:56It was a draw so high that between factory jobs
09:59and a semi-hukou status,
10:0018 million people went to Shenzhen.
10:02Another 100 million to a handful of other areas
10:05under similar conditions.
10:06They weren't forced.
10:07They were shown a carrot
10:08that was better than the alternative.
10:10And they took it.
10:11This right here,
10:12this is where we should insert a VPN ad.
10:13Because just as migration is controlled in China,
10:16so is speech.
10:17The millions of people who have moved to these cities
10:19might enjoy the anonymity of walking around a big city.
10:23Anonymity, at least, to the people they're walking past.
10:25Not the security cameras watching them.
10:27But they cannot enjoy the pleasure
10:28of an online burner account
10:29or the ability to freely browse the web.
10:31Perhaps this is what really kicked off that trend.
10:34The most famous example, Tiananmen Square.
10:37This was the end of what free speech there was in China.
10:40Students wanted it.
10:42The CCP did not.
10:43The Great Firewall went up in 1998,
10:45blocking the entire Chinese internet network
10:47all from the rest of the global internet.
10:50There's a cool tool called Firewall Cafe.
10:51If you type in one thing,
10:53it'll show you the image search results of Google
10:55next to Baidu, the Chinese search engine.
10:57Back in the 2010s,
10:58someone created an unflattering meme
11:00comparing Winnie the Pooh to Xi Jinping.
11:02And so the Chinese internet was scrubbed
11:04of images of Winnie the Pooh.
11:06One pops up,
11:06and it's just the back of Winnie the Pooh.
11:08That is the only image of Winnie the Pooh
11:10on the Chinese internet.
11:11If you search Tiananmen Square,
11:13obviously on Google,
11:14you're going to get the guy
11:14standing in front of the tank.
11:16You will never see anything like that
11:18on the Chinese internet anywhere.
11:20But then the banishment of Jack Ma in 2021,
11:23founder of Alibaba,
11:24after criticizing China's banking system,
11:26that was the exclamation point
11:27for all of the world to see.
11:29And I quote,
11:31Chinese banks operate like pawn shops,
11:34only giving loans to those
11:36who have assets to pledge,
11:37not to those with good ideas or potential.
11:39What we have is a bunch of banks
11:41and financial institutions,
11:42not a system that supports the future.
11:46He said this in Shanghai during a big speech
11:49three days before his company
11:51and financial was supposed to IPO.
11:53This was not some little company.
11:55It was worth $300 billion
11:56and about to be the largest IPO of all time.
11:59Not just China,
12:00not just the US,
12:01but globally.
12:02The CCP took it as a direct challenge
12:05to their power.
12:06Within hours of the speech,
12:07Xi Jinping had personally picked up the phone
12:09and put an end to the NIPO
12:11and obviously Jack Ma's influence.
12:13But not just postponing the IPO,
12:15canceling it and rolling N financial
12:17into the state-owned People's Bank of China.
12:20We'll take that.
12:22And Jack Ma wasn't seen again for three months.
12:24One of the top 20 richest people in the world.
12:26The richest man in China disappeared.
12:28All because he said the bank
12:30should serve the purpose of business and ideas,
12:32not the party.
12:34I mean, everybody knows Jack Ma
12:35and what happened with Alibaba and financial.
12:38But there's many examples of companies
12:40that were sort of doing the wrong thing.
12:42These companies were cut down to size.
12:43They weren't allowed to raise capital.
12:45A lot of these leaders disappear.
12:46So Beijing has very direct and indirect ways
12:49of influencing the way these companies act.
12:51And if they misbehave,
12:52then there is a price to be paid.
12:54But let's take a step back for one second.
12:56Let's zoom out to 30,000 feet.
12:58We've seen all of this before.
13:02This was the dream of the Soviet Union,
13:04Imperial Japan,
13:05the playbook of ultimate centralized control.
13:08It's been tried.
13:09It has failed spectacularly each time,
13:11often with devastating consequences for the world.
13:14Mr. Gorbachev,
13:16tear down this wall.
13:17But since now,
13:19the Chinese Communist Party has done so far
13:22what all the communist socialist authoritarian countries
13:25have wanted to do.
13:26By traditional metrics like GDP,
13:28China is a smashing success story.
13:30It's worked,
13:31all while shunning the values of the West completely.
13:35But the ultimate,
13:36the true core difference between these two systems
13:39is the release valve.
13:40The economy gets bad in the US.
13:42The elected party gets voted out.
13:44The vote removes pressure from the system
13:46under an authoritarian system.
13:48The release valve tends to be extremely unpleasant,
13:51violent,
13:52a shattering of the prevailing system.
13:54So it is imperative to the CCP
13:56that the idea that something better is out there
13:59doesn't take hold.
14:01Four,
14:01how to interact with the rest of the world.
14:04This is another thing that blows my mind
14:05every single time I come across it.
14:07Of 192 countries measured,
14:09China has the second fewest immigrants
14:11by percent of population at 0.07%.
14:14Less than 2,000 people are made Chinese citizens each year.
14:17The US, on the other hand,
14:19has the most total immigrants.
14:2150 million Americans that currently live in the US
14:23were not born in the country.
14:25China is a country that looks inward intentionally,
14:29and this is not a new development.
14:30This is Guangzhou today,
14:32a few miles upriver from Hong Kong.
14:34It used to be called Canton.
14:35Back in the 1700s,
14:37it was the only port on the entire Chinese coast
14:40where foreign ships were allowed to enter China.
14:42This area in the harbor
14:44was the only place in Canton
14:45where foreign boats could anchor.
14:47And this area in Canton
14:48was the only land in all of China
14:51where foreigners could trade
14:53and interact with China's citizens.
14:54This, what was called the Canton system,
14:56remained in effect for almost 100 years,
14:58specifically as a way
15:00to keep foreign influence out of China.
15:02Eventually it broke.
15:03England, who was doing a lot of trading
15:04through this system,
15:05became fed up with the terms of trade
15:07between its merchants and China.
15:08War ensued.
15:10This is the Opium Wars.
15:11England won.
15:12Allowing England to write a treaty
15:14that forced China to open five additional ports
15:17on its coast to foreigners,
15:18hand over Hong Kong to England,
15:20and be more relaxed towards foreigners.
15:22The year the treaty was signed, 1842,
15:25kicked off what has become known
15:27as the century of humiliation
15:28that the Chinese,
15:29particularly the CCP, reference.
15:32We're talking multiple civil wars.
15:33We've gone over some of this,
15:34some based on converting to democracy.
15:36They were invaded by Japan,
15:38had to be rescued by the U.S.
15:39during World War II.
15:40It was humiliating.
15:41The whole time,
15:42Britain owned a key piece
15:43of the country, Hong Kong.
15:44But then,
15:45the country gets it together a little bit.
15:47The Civil War ended,
15:49and once Mao was out of the way,
15:51the old Canton system
15:52basically went back up.
15:53These special economic zones today
15:55are just the modern-day Canton system,
15:57the only place where foreign companies
15:58are allowed to operate
15:59with any degree of freedom.
16:01The Great Firewall around the Internet
16:02is like the wall put up around Canton,
16:04and it prevents foreign ideas
16:06from circulating.
16:07If China could get away
16:09without interacting
16:10with the rest of the world,
16:11it would.
16:12This is acknowledged.
16:13It is not a secret,
16:15but they simply cannot,
16:16and it's for two reasons.
16:17They don't have the resources
16:18to maintain their population.
16:20Farmland, oil, natural gas,
16:21they do not possess
16:22the critical elements,
16:24sand, quartz,
16:25to make things like semiconductors.
16:26And technology
16:27is the most critical thing of all.
16:29Fall behind on technology,
16:31and you're prone
16:31to being bullied
16:32by stronger militaries.
16:34This is how England
16:35won the Opium Wars.
16:36They had better ships.
16:37Why Japan was so easily able
16:38to invade China
16:39during World War II?
16:41Better artillery.
16:42China learned this technology lesson
16:44the very, very hard way.
16:46Some must be let in
16:47to make sure that most
16:48can be kept out.
16:50Why else would China
16:51give special privileges
16:52to Tesla when it set up
16:53its first ever
16:54overseas factory in Shanghai?
16:56Like, really special privileges.
16:59China was begging Tesla
17:00to come to China.
17:02Free land,
17:03and most importantly,
17:04Tesla China was allowed
17:05to remain completely
17:06owned by Tesla.
17:08Exactly zero other car companies
17:11that have set up
17:12a factory in China
17:13have gotten to retain
17:14full control
17:14of the China arm
17:15of their business.
17:16Usually,
17:16when you set up
17:17a factory in China,
17:18a Chinese business partner
17:19gets 50 or 51% ownership
17:21of the Chinese side
17:22of the business.
17:23Making this Tesla deal
17:25a textbook example
17:26of the catfish effect.
17:28Have you heard
17:28of the catfish effect?
17:30Tesla is pushing
17:31American car companies
17:31very hard,
17:32making them innovate,
17:33threatening their survival,
17:34like dropping a catfish
17:36in a tank of sardines.
17:37The sardines swim
17:38harder and faster,
17:39trying to stay alive,
17:40making them last longer
17:41after they're caught
17:42and ultimately taste better,
17:44some say at least.
17:45Well,
17:46China wanted that effect
17:48for its car companies.
17:49Tesla was the catfish
17:51for China's
17:51electric vehicle industry.
17:53They show up,
17:54set up shop,
17:54and boom,
17:55start selling EVs
17:56to the Chinese
17:57left and right.
17:58It quickly became
17:58their second biggest market.
18:00The stock price reacted.
18:02What did Chinese automakers do?
18:03Almost immediately
18:05started copying techniques
18:06that Tesla pioneered.
18:07Gigacasting,
18:08camera-based autopilot,
18:10battery cells.
18:11Not because they just
18:12took it from Tesla,
18:13but also because
18:14Tesla had to start
18:15sourcing parts
18:16for this stuff
18:17from Chinese suppliers.
18:19The Chinese suppliers
18:20weren't making
18:21what Tesla needed.
18:22They didn't know
18:23these techniques at all.
18:24Until Tesla showed up,
18:26they had no reason to.
18:27But the Tesla catfish
18:28dropped in the tank,
18:30chased them around,
18:31demanding cutting-edge parts.
18:33Once they were making
18:34them for Tesla,
18:35they could sell them
18:35to anyone,
18:36particularly their
18:37local car companies.
18:38And voila,
18:39it worked.
18:40The Chinese electric
18:41vehicle market
18:42was born off the back
18:43of Tesla.
18:44And now,
18:45Tesla is way down
18:46the ranks of EV
18:47purchases in China.
18:49Some people and companies
18:50must be let in
18:51so that China
18:52is exposed
18:53to new technology
18:54so they can use
18:56that technology
18:56to stay up-to-date
18:58and make sure
18:58that most people,
18:59militaries,
19:01can be kept out.
19:02And that,
19:03ladies and gentlemen,
19:03is how China works
19:04in broad strokes.
19:06Tight,
19:06top-down control
19:07over what gets made,
19:08where people can move,
19:09and who and what
19:10is allowed into the country.
19:11The Soviet Union
19:12and others
19:13have tried it.
19:14Is China going to
19:15pull it off
19:15in the long run?
19:16I don't know.
19:17The historical odds
19:18are stacked against it,
19:19but I tend to agree
19:21with Leyland.
19:21But you move it to now
19:22and you've got a lot
19:23of people over the last
19:24five years who've been
19:24saying China's going
19:25to collapse.
19:26China's always a day
19:27away from collapsing.
19:28Everything's going
19:29to fall apart.
19:30You know,
19:30Europe had its
19:30financial crisis.
19:31America had its
19:32financial crisis.
19:33China's up next
19:34and the entire
19:34Chinese system's
19:35going to fall apart.
19:36That is not going
19:37to happen.
19:37And it's very important
19:38to understand why
19:39that's not going to happen.
19:40It is a non-commercial
19:41financial system,
19:42which means it doesn't
19:42work the way
19:43that the West does.
19:44Everyone say goodbye
19:45to Leyland
19:45and follow them
19:46on Twitter
19:46at ChinaBaseBook.
19:47I do recommend.
19:49Also, we've got
19:50a mountain of great stuff
19:50coming out in the next
19:51few months,
19:51so make sure to hit
19:52that subscribe button
19:53and I will see you all
19:55in the next video.
19:56See ya.
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