An investor's thoughts on the next decade amid the Sino-US game

There is no need to miss the past, China’s best times have just begun.
In the past year, while communicating with many friends, I have sensed some major differences in opinions about China's future ten years.
Many friends also have many confusions about future development.
Some of these differences are based on value systems, and some are based on judgments about the macroeconomy itself.
We would also like to share some of our thoughts on some big issues at this moment.
Understanding these issues may help us have deeper confidence and determination in investing in China during the uncertain decade ahead.
China's past economic boom was fueled by two engines:
One is foreign trade and the other is urbanization.
Foreign trade mainly relies on China’s low costs (labor, environment, and land) to meet foreign demand (the United States and Europe).
Urbanization is mainly about taking on the demand for infrastructure construction (roads, bridges, airports) and commercial housing caused by industrialization in the process of external demand.
In a sense, China's economic organizational model over the past three decades has been mainly structured around these two main themes, with coastal cities relying on foreign trade and inland cities relying on real estate.
County-level administration is the intersection of the state and society and is the basic unit for local implementation of central policies.
The county party secretary is the "CEO" of each unit, responsible for integrating resources to achieve goals.
This goal has been primarily economic growth over the past three decades.
To a certain extent, corruption may serve as a disguised form of equity incentive for "CEOs".
However, thirty years later, with China's demographic dividend almost gone and environmental protection emphasized, China's simple low-cost labor advantage has given way to Southeast Asia.
Urbanization has also reached its final stage as the large-scale population migration has slowed down.
When the infrastructure phase is completed, the "CEOs" of this period have also completed their historical mission.
With the advent of the post-urbanization era, many people cannot see the direction of the future at a time when the number of newborns is gradually decreasing and the total population is declining.
Especially the beneficiaries who have adapted to and understood China's growth logic over the past three decades.
For many people, the road ahead is full of fog.
Some people also use Japan's economic development in the late 1990s as an analogy to understand the current difficulties China may face:
After the real estate bubble burst, Japan's economic growth stagnated -
On the one hand, the United States, through the Plaza Accord, caused Japan to lose its foreign trade and currency advantages, thereby bursting the Japanese real estate bubble;
On the other hand, by blocking Japan's semiconductor industry, Japan's chip semiconductor industry has given way to the Netherlands and Taiwan.
These plots seem somewhat similar today.
Therefore, when the United States began to block Chinese technology in 2018, a sense of pessimism began to spread.
After experiencing some uncertainties, many elite people chose to immigrate to Singapore or other countries as soon as the epidemic was reopened.
Due to the uncertain economic outlook and considerations of factors such as war, many long-term foreign funds have chosen to reduce their allocations to China at this time.
As an investor, when the overall growth logic changes, macro issues cannot be avoided.
The understanding of macro issues is like a person's values. After thinking these things clearly, it will give you stability and confidence in the turbulent years of the next decade.
Choice is more important than hard work, and the same is true for investment.
I have always believed that simple linear extrapolation and analogy cannot effectively understand and answer these problems.
To understand these issues and see the future clearly.
We may need to discuss this from three aspects:
1. The formation and evolution of the international order;
2. The cultural and spiritual core of the Chinese people;
3. Generational change at the intersection of Eastern and Western cultures.
Understanding these things may help us understand some of our current top-level design arrangements in the post-urbanization era.
And in the next twenty years, our generation’s position and mission in the new narrative will be discussed.
01
The formation and evolution of the international order
War and Peace
From the perspective of "Heaven and Earth treat all things as straw dogs", war is not just an object of humanitarian criticism, but a way to form a new order.
In other words, war is a tool for the upward spiral of human society.
Just as the order of China's feudal era was formed during the Warring States Period, today's international order was constructed by the two world wars.
After the two world wars, three important changes took place in the international order:
1. The rise of the United States.
2. The formation of the Soviet Union.
3. Silence of the East.
Behind the war was economic strength, and the industrialization of the United States starting in the 18th century supported the overall victory of the war.
On the one hand, after the victory of the United States, with the support of European countries, it began to dominate international affairs through three means: currency, military, and economy.
In terms of currency, White defeated Keynes and established the Bretton Woods system dominated by the US dollar.
Militarily, the United States has used its nuclear power to become the military leader of many countries (such as Japan).
Economically, the Marshall Plan helped Europe rebuild, and Japan and the four Asian tigers also became part of the U.S. economy through foreign trade.
Generally speaking, America’s friends have basically achieved peace and economic growth after the war.
On the other hand, the Soviet Union, backed by its military might, chose a different institutional path after World War II.
We now see that the military and economic strength of Russia and Eastern Europe has fallen behind in all aspects, but during the Great Depression in the United States in the 1930s, there was a situation where Americans wanted to immigrate to the Soviet Union.
However, due to a series of economic and political mistakes in the later period, the Soviet Union collapsed in the early 1990s.
Today's Russia has inherited the political and military legacy of the Soviet Union.
For China, after World War II, it was still an agricultural society and its per capita economic strength was far inferior to that of Japan and the Soviet Union.
It’s just that the Chinese are stubborn, and they still achieved political independence by relying on millet and rifles.
It is neither dependent on the Soviet Union nor on the United States.
In other words, it is always caught between these two largest political economies.
If China is the representative of Eastern civilization, then at this stage, Eastern civilization is basically silent on the world stage.
Although politically, China chooses independence.
But economically, in the second half of the last century, China relied on entering the international order built by the United States and achieved industrialization within a few decades.
In the 1970s, in order to counter the Soviet Union's political desire to win over China, Kissinger facilitated Nixon's visit to China, breaking the ice in Sino-US diplomacy.
The pragmatic Deng Xiaoping discovered a pattern after visiting Southeast Asia and Japan:
Those who make friends with the United States become rich.
So, after 1978, China chose to fully embrace the United States economically.
Therefore, the 1980s when many county party secretaries went to college, and the 1990s when Liu Qiangdong, Ma Huateng and others went to college, were periods when China's culture and order were comprehensively learning from the West.
Chinese people wear clothes designed by Europeans, watch Hollywood movies, learn Drucker's management, and use Bill Gates' operating system. The best place for university elites is to study in the United States. It was with this favorable climate that New Oriental teacher Yu Minhong achieved the first glory of his life.
At that time, China’s economic development path could be “copied”, or more precisely, copied from the homework of the four Asian tigers.
Engage in foreign trade and urbanization.
Investing was simple at that time. Just look at what happened in those developed countries and what will happen in China.
China's options are:
Copy homework in economics and bide one's time in politics.
The choice of the Chinese is also very simple. They engage in foreign trade in coastal areas, develop resources in inland areas if they have resources, and engage in engineering and real estate if they don’t have resources.
You can either buy a house for investment or put it in a bank as a deposit.
Thus, in this context of everyone looking at "money" together, China has experienced a brilliant and simple thirty years.
These thirty years are also the golden age for those born in the 1960s and 1970s.
They grow from their twenties to their fifties and sixties, accumulating wealth and political resources in the process.
That generation was the first generation in China to become generally wealthy in hundreds of years.
It is not difficult to understand why many elitists of that generation identified sincerely with Western culture.
The international order in this process is also simple, with the United States being the only pole in the world.
For the United States itself, the political economy of those thirty years was dominated by the east and west coasts.
The West Coast dominates technology, while the East Coast dominates military and finance.
Under the control of the elites on both sides of the Taiwan Strait, there are no major conflicts in the world, only local wars caused by disputes over energy and other issues (which are also generally won by the United States);
The world is becoming flatter and global trade is unimpeded;
Science and technology are developing rapidly, and the information industry is sweeping the world.
The whole world has also formed a clear division of labor:
The United States joined Western Europe to establish order, dominate technology and culture;
China has used its demographic advantage to become a manufacturing powerhouse;
The Middle East and Russia provide energy.
Other countries or regions are embedded in this system (Japan, South Korea, Singapore) or excluded from it (North Korea, Cuba, Iran) according to their endowments.
Of course, the prerequisite for being embedded in this system is that it must be politically recognized by the United States.
We can understand this global architecture from the perspective of the global division of labor in the communications industry chain.
The technology and standard setting of the communications industry are in the hands of the United States and Northern Europe (Qualcomm, Apple, Google, Nokia, Motorola). China has the largest market (China Mobile) and is responsible for manufacturing base station equipment (Huawei).
Of course, they also have a place in the design, manufacturing and sales of mid- and low-end mobile phones (Xiaomi, OPPO).
However, after three decades of rapid development, this system seems to have some problems today.
The gap between the rich and the poor caused by globalization and technological development is widening, and the pressure on the environment and resources is increasing day by day.
Looking at the United States from the mainland, the beneficiaries of this order seem to be the elites on the east and west coasts.
Driven by the pursuit of profits and cost optimization, a large number of factories and low-end labor have moved from the United States to China or Vietnam, where costs are lower.
The decline of manufacturing in the central region has formed the Rust Belt.
After the subprime mortgage crisis in 2008, in order to digest its debts, the United States chose to use the status of the dollar to export inflation to the world, exacerbating the inequality in economic development.
Then, populist governments emerged that represented the poor.
Trump was also elected President of the United States with the support of American blue-collar workers.
In short, ordinary people in the United States and other countries have become dissatisfied with the previous division of labor system, and the balance of history has once again tilted towards fairness.
In addition, for China, with the demographic dividend almost disappearing and urbanization in the middle and late stages, a large amount of infrastructure production capacity is idle in China.
There is also a natural demand for the industry chain to extend upward in the pan-tech field.
It is not just about manufacturing and sales, but entering into more core areas such as chips and operating systems.
For the former, Chinese companies need to go overseas to absorb excess production capacity and compete directly with multinational companies from the United States, Europe and other countries in overseas markets;
For the latter, this goes to the heart of the competitiveness of the US and European corporate clusters.
As a result, the United States imposed comprehensive sanctions on ZTE and Huawei starting in 2018.
Some people believe that America's hostility toward China comes from politics or culture.
But I think this is more of a rational economic behavior.
Let's go back two hundred and fifty years to when the War of Independence broke out between the United States and Britain.
In terms of political culture, the United States inherited many concepts from Europe.
But they still chose to declare independence through war.
Under the capitalist Protestant ethic, economic gain is the ticket to heaven.
In the past, the relationship between the United States and China was similar to that between Nike, Adidas and Shenzhou International.
If one day, Shenzhou International wants to launch its own clothing and footwear brand, the company's customers (Uniqlo, Nike, etc.) will most likely part ways with Shenzhou (which is indeed the case).
Shenzhou will also have its own difficulties, because it knows that if it does not make progress, it may one day be replaced by the Vietnamese OEM factory.
So, at this time, if you were Shenzhou, what would you do?
You can choose to continue to be a OEM factory and move the factory to Vietnam where costs are lower.
You can also choose to establish your own brand.
Decades ago, under pressure from Onitsuka Tiger and Adidas, Nike's founder chose to switch from an agent to his own brand and infuse the American spirit into this brand.
There is nothing wrong with both choices. In addition to economic benefits, it is also a kind of inner recognition:
Will you choose to continue to survive as a vassal of someone else's order, or build your own order?
Behind this choice, in addition to inner pursuit, it also requires the support of strength.
This is also the choice facing China’s economic development in the post-urbanization era.
The way to integrate into the world is to continue to be a vassal of the Western order, or to make independent claims based on its own values ​​and economic interests.
02
The cultural and spiritual core of the Chinese people
What is independence?
History has proven that among politics, economy and culture, culture has the strongest anti-fragility.
Cultural heritage constitutes a country's aesthetics and mainstream values, which is the core of civilizational spirit rooted in written symbols.
Over the past hundred years, there is no doubt that the dominant civilization among the civilizations that still exist today is Western civilization.
Ancient Greece is the birthplace of Western civilization;
Newton and Darwin of Britain established and spread scientific, rational and commercial civilization around the world during the Industrial Revolution;
After clearing out the indigenous peoples of the American continent, the United States retained Britain's respect for science and commerce, eliminated the rigid class thinking of the British aristocracy, and brought Western civilization and capitalism to a new height within two hundred years.
Western civilization is an expansionist maritime civilization.
Whether it is Britain, which is surrounded by the sea, or Greece, which is a combination of city-states, the local economy can hardly support a large economy.
Respect for trade and commerce fosters the spirit of contract and the rule of law.
The emergence of Christianity and the Protestant Reformation also gave birth to the idea of ​​equality for all, which in turn became the spiritual appeal of the Western people in their pursuit of freedom.
Individual heroism is advocated by Western civilization.
This is not difficult to understand. In the history of Western civilization, foundational figures such as Columbus and Newton often changed an era with their genius and extraordinary courage.
However, maritime civilization also has its natural drawbacks.
When a country is mainly based on commerce, trade and finance, it means that part of its value is not created by itself, but rather requires plundering resources or cheap labor from other countries.
This means that the profit-seeking expansion of Western civilization will be accompanied by the output of war (inflation).
America 300 years ago and the Middle East today are representative examples.
For China, the Yellow River Basin in the Central Plains is the birthplace of Chinese civilization.
Over thousands of years, several important nodes have formed the core of Chinese civilization.
The first node is the Spring and Autumn Period and the Warring States Period and the subsequent Han Dynasty.
Hundreds of years of war and subsequent peace established the position of Legalism and Confucianism in Chinese governance.
The next few thousand years were more about the development and continuation of this order.
The second node is the more than 100 years after 1840.
Western culture entered China in a forceful manner based on its absolute strength, triggering "changes unseen in a century."
Although Chinese civilization integrated the nomadic peoples to the north, overall, China's mainstream civilization in the past was based on an inland agricultural economy.
The agricultural economy takes the family as the basic organizational unit, and the culture emphasizes diligence and thrift, and is more introverted, conservative, and advocates collectivism.
Promote production (manufacturing), peace-loving rather than trade wars.
From this we can see that the emphasis on agriculture and manufacturing has its cultural roots in China.
Chinese civilization has gone through thousands of years. Despite many wars and dynasties, it has always presented itself in an independent manner.
It has a complete narrative system.
This narrative system of written symbols has been passed down to the present day like an operating system.
This operating system was formed in the Han Dynasty and underwent a major architectural revision a hundred years after the end of the Qing Dynasty.
Humiliation and self-denial are the best source codes.
However, after the operating system was modified, maintaining national unity and stability remain the two most important political cornerstones of this system.
Some people wonder why China cannot choose to bow its head like Japan or continue to bide its time when facing US technology sanctions in 2018.
I think this is like two people, one with an independent personality and one without.
Since its founding, Japan has lived under the strong influence of the cultures and civilizations of other countries.
The underlying color of Japanese culture is "emptiness".
Empty does not mean the absence of culture, but an attitude of acceptance and inclusiveness.
Therefore, when the American fleet arrived, the Japanese emperor quickly abandoned the practices he had learned from China and turned to the West.
But it is difficult for Chinese civilization to do so. Chinese civilization is colorful. Like Iran, color means independence, and independence also means that change requires greater pain and longer time.
It also means that after the change, one does not lose one's own personality, but rather rebuilds the operating system in a new way.
China is not Japan, Australia or Canada. The power of culture is strong, which makes China choose its own path to integrate into the world.
It is not about being arrogant and closed-minded, nor is it about blindly identifying with the West and losing ourselves.
Therefore, we see that despite facing US sanctions in recent years, China has chosen to follow its own path as long as its strength allows.
In terms of technology, China chooses to invest in semiconductors, chips, operating systems and other fields;
Culturally, after experiencing the negation of negation, people began to identify with their own culture, and symbols such as Hanfu and Chinese poetry began to revive.
However, building a new operating system that has gone through the negation of negation may take a generation to complete.
03
Generational Transformation in Eastern and Western Cultures
We set our sights on Chongqing in the western region
I have heard from many people that consumption in Chongqing is booming.
 
The central streets were crowded with people, and it was rare to see such a scene even in Shanghai. After midnight, there were still young people doing manicures on the streets.
The shadow of the epidemic does not seem to have appeared in Chongqing.
Apart from consumption, Chongqing's industrial clusters have also been well formed. A series of new energy vehicle companies such as Huawei Wenjie, Avita, and DeepBlue have gathered in Chongqing, and some software companies have also settled in Chongqing.
When asking why Chongqing is so vibrant, a common answer is:
Housing prices in Chongqing are low.
In Chongqing, ordinary commercial housing only costs 15,000 yuan, and the best houses by the river are no more than 20,000 yuan, so young people do not feel too much pressure to buy a house.
In addition, Chongqing has many universities, and young people are willing to stay and dare to spend.
When walking through the city center of Chongqing, I discovered a phenomenon that the city center of Chongqing has preserved many old towns, and through some transformation methods, these old towns have been turned into layered commercial centers.
These commercial centers, which retain the memory of Chongqing's old city, have attracted a number of cafes, bars, and small shops to move in.
Chongqing did not rely on large-scale demolition and reconstruction to collect such a high urban construction tax, but chose to protect some old urban areas to make the city operation more economical and reasonable, while also preserving the memory of the city.
Therefore, through Chongqing, we may have seen a version of a city in the post-urbanization era, or even the potential and appearance that a country should have.
Without real estate, high housing prices, demolition and construction, a city's economy can still develop well.
Young people are energetic and the city is more vibrant.
The vitality of young people is the source of China's next growth curve.
Perhaps, the three decades of urbanization and foreign trade economy led by those born in the 1960s and 1970s helped China achieve industrialization and build basic infrastructure.
When the infrastructure is completed, new people who can adapt to the new era will appear.
Yang Guoqiang and Xu Jiayin came on the scene during China's booming urbanization period. They worked together to complete the process of China's infrastructure construction and also stepped down at the end of this process.
In the next stage, there may also be the emergence of government figures and entrepreneurs who are able to adapt to the new era.
On a rainy day this spring, I went to have lunch with my college classmates near the Zhejiang Provincial Government.
After graduating from college, my classmate worked briefly in a local business department and then went to work at the Zhejiang Provincial Government Financial Office.
During her tenure, she handled many private equity funds' collapses that disguised as debt, and also experienced the transformation of the government functions of local financial offices in the listing process after the transition to a registration system.
She described to me what it was like to work:
She doesn't think of herself as an official, but more of a civil servant who helps companies solve problems.
A similar thing also happened in Nanchang, Jiangxi.
The last stop of my one-month research last year was Nanchang City.
The night I stayed there, I stayed at the home of a senior from university.
My senior sister’s husband was born in 1981 and works as a section chief in the Provincial Development and Reform Commission.
Through interacting and chatting with him, I could feel that he was different from the previous generation of department-level officials in Jiangxi that I had known before.
He seems to be more open and willing to learn from others.
I am not sure whether these two cases are isolated cases or relatively common phenomena.
However, in my life and work over the years, I have discovered a phenomenon that the generational gap in China is very large.
There are significant differences between before 60 years and after 60 years.
Those born between 1960 and 1975 are closer.
People born between 1975 and 1985 are one generation, and people born between 1985 and 1995 are even more similar.
In general, from a psychological point of view, people born before 1975 were generally poor in their childhood and have memories of hunger.
The sense of scarcity formed during adolescence will make this generation as a whole attach more importance to material things.
This generation came of age at a time when China began to see a dramatic gap between the rich and the poor.
Many of them believe that having wealth means having everything.
People of this era tend to consider value purely in a material way.
The differences between people born between 1975 and 1985 and those born after 1985 often come from their original families.
Many of the parents of those born between 1975 and 1985 were delayed by the Cultural Revolution.
Therefore, economically speaking, many people born during this period do not have the material foundation provided by their parents, nor do they have as good opportunities as those before them.
During the period when they need to get married and buy a house, house prices also generally rise.
Many people of this generation are burdened with heavy mortgage loans.
Compared with those before 1985, the circumstances of some people after 1985 have changed again.
They have no memory of material scarcity, and their parents are well educated.
This generation is still the generation of only children, and parents will concentrate educational resources on one child.
A childhood filled with love will make this generation feel more secure and more willing to choose to believe.
And a sense of security itself is the source of building a long-termism and creativity mentality.
Moreover, they grew up in an era of globalization and rapid technological development, and learned to absorb a wide range of information from both home and abroad from adolescence.
Many of them have bridged the information gap between the East and the West as they grew up, and naturally understand both China and the West and have an international perspective.
We can see that there is currently a generational shift taking place in important positions in government and business.
The difference in the underlying architecture will cause these people to make different choices than their predecessors when they move into decision-making positions.
Although this generation of young people and young people in the longer term future are unwilling to work in factories to produce low-priced products, they may invent industrial robots to replace manual labor.
They may not just want to immigrate abroad after making money, but instead use their savings to incubate the next startup in the field of artificial intelligence like Wang Huiwen.
They may not spend 680 million yuan to build a Jinshi Museum on the banks of the Ganjiang River, but instead think about how to move the working methodology of the Suzhou Industrial Park to Ganzhou, Jiangxi, so that enterprises migrating from Guangdong to the inland can receive better services.
Because this generation of young people is actually no longer so lacking in creativity and patience.
The elites among them respect science more and are more tolerant of characteristics.
However, this country still needs to give more encouragement and tolerance to basic disciplines and innovation in its university and other systems.
Innovation requires risk-taking, idealism, and capital with a long-term spirit.
These underlying cultural connotations will need to be constructed in China in the urbanization era in the next twenty years.
China will also see enterprises and entrepreneurs in all walks of life that embody the essence of this period.
This is also part of the source of the structural opportunities facing our investors over the next decade.
04
Conclusion
The cultural foundation sometimes determines the underlying tone of a nation's values.
When change comes, these backgrounds will determine the choices we will make in the face of many uncertainties over the next decade:
What do you believe in?
What do you want to happen?
These judgments are difficult to come from linear extrapolation.
Only by deeply understanding the connotation of this nation, the changes over the past 100 years, and the hard work and resilience of ordinary people around us can we inject heartfelt confidence at this moment:
Just as thousands of years ago, the nomadic peoples in the north brought bloodiness to the tolerant character of the people in the Central Plains.
Similarly, the development and westernization of the past three decades, as well as the prosperity of the southeastern coast, have also injected the seeds of adventure, openness, and innovation into the Chinese character.
With the infusion of this culture, China will usher in a revival after the negation of negation.
The process of negation is bound to face turbulence in the process of order transformation.
Compared with the past thirty years, social values ​​in the future will be more diverse and things will be more complicated.
But overall, as an investor, I am lucky to encounter this era in my best years.
The next decade will still be a decade in which many good companies and entrepreneurs emerge in abundance.
While seeing the risks, we must also see the opportunities. There is no need to miss the past. The best era for China has just begun.