SCOTT GALLOWAY: China’s economy is on track to beat the US in some crucial ways. Here’s what we should be learning from them.

Beijing military flypast communist party centenary
People in the streets of Beijing take photos and wave at planes flying in formation to Tiananmen Square for the celebrations of the 100th Anniversary of the Communist Party of China, on July 01, 2021 in Beijing, China.
  • Scott Galloway is a bestselling author and professor of marketing at NYU Stern.
  • The following is a recent blog post, republished with permission, that originally ran on his blog, "No Mercy / No Malice."
  • In it, Galloway discusses what the US can learn from China as it joins the superpower playing field.
  • See more stories on Insider's business page.

The Hall of Fame for Catastrophic Geopolitical Decisions is concluding its first-ballot induction of the decision to nation-build in Afghanistan. After we acknowledge the recency bias, and stop blaming Biden or Trump, we can ask W to write, in chalk made from the bones of 370,000 dead souls, "I seriously fucked up" a billion times.

So … I need a distraction. Typically, I turn to time with the kids and then Zacapa … in that order. However, as we register that it's impossible to lose a war with aplomb, and my home state is governed by a mad king, I'm left wanting for something stronger. Let's venture one concentric circle out.

The post-Cold War era is over. From 1990 to present, the United States has been the sole superpower. But as influential as we've been, American interests are no longer the organizing principle around which everything aligns. The last three decades have been a period of fractious regional conflicts, largely hapless efforts by the US to exercise state power at home and abroad, and corporate/private interests running unchecked.

Read more: China pioneered tying QR codes to identity. The pandemic is normalizing similar systems for the West.

But we have returned to a bipolar world, and a superpower duopoly will again be the organizing principle. This time the countervailing force against the US is China.

Scott Galloway

21st century China

Every nation's progress is dwarfed by China's march in the post-Cold War era. In 1990, its GDP was roughly $400 billion in current dollars. Today, it stands at $15 trillion, an annual growth rate of 13%. By comparison, the US economy, which has done well during this period, grew at 4.35% per year. According to World Bank data, 750 million Chinese were living below the international poverty line of $1.90 per day in 1990; that number has fallen below 10 million. There are more households with wealth over $110,000 in China than in the United States: 100 million versus 99 million. Read that last sentence again.

Though the US economy remains larger and more efficient than China's, both tower over every other country.

Scott Galloway

China's status as the other half of the duopoly stems from more than economic heft. China spends $250 billion per year on its military, more than any country besides the US, which spends over $700 billion. (The next biggest spender is India at $75 billion.) China's 2.2-million-person active military is the largest in the world. A recent analysis from the International Institute for Strategic Studies concluded that China "is the state best placed to join the US in the first tier" of cyberwarfare capability. It's also the only country vying with the US for the lead in patent grants, space launches, and Olympic medals.

China is the world's most capable manufacturer. Its factories produce 28% of the world's goods (the US is second at 17%), and its sophisticated supply chain is essential to our digital economy. Over just the past 20 years, China has become the leading trade partner of three times as many countries as the US.

Scott Galloway

China is willing to flex these muscles. Its Belt and Road Initiative is spreading Beijing's influence (and debt) throughout the developing world, with a projected investment of $1.2 trillion in 60 countries by 2027. China has exported more than 500 million COVID-19 vaccine doses. The US has shipped 110 million.

But favors from Beijing come on Beijing's terms. Try making a movie critical of China, and you likely won't find a major production company or distributor willing to work with you, because Beijing will shut off access to its box office, the largest in the world. Some of the toughest actors on screen cower under the threat of reduced ticket sales and apologize for referring to Taiwan as a country. Spoiler alert: Taiwan. Is. A. Country.

After Canada arrested the CFO of Chinese electronics manufacturer Huawei at the request of the US, China started limiting imports from Canada and sentenced a Canadian citizen to death. Beijing has also used trade policy to intimidate (among others): Norway for Liu Xiaobo's 2010 Nobel Peace Prize, Australia for an investigation into the origins of COVID-19, and Sweden for declining to use Huawei for its 5G networks. And the country maintains an active program of forced repatriation (i.e. kidnapping) of Chinese nationals abroad who run afoul the state's interests.

In sum, China is second only to the US in hard and soft power but far ahead of the rest of the world, and it's the only nation besides America with the will and means to exercise that power on a global scale. Is China our enemy or competitor? The answer is yes.

21st century Cold War

The 21st century Cold War will look very different from the US-Soviet rivalry of the 20th. Some of this augurs in favor of a more cooperative, less combustible relationship. The Great Firewall is more permeable than the Iron Curtain, economically and culturally. China's manufacturing depends on healthy US and European economies to provide customers. Before COVID-19, there were more than 300,000 Chinese students studying in America.

But with interdependence and digitization comes a host of soft tissues and chokepoints. The prospect of a Soviet tank corps pouring through the Fulda Gap kept 20th century Cold Warriors up at night, but at least that would've been public and obvious. Terror-by-proxy, intellectual property theft, and cyberwarfare can destabilize US interests in ways harder to attribute or measure.

Scott Galloway

Learning from competitors

As well as being interconnected, we face many of the same challenges. In both countries, powerful corporate interests suppress competition and skirt regulatory control. Both countries wrestle with the corrupt influence of social media on education, productivity, and happiness. Both countries have birthed an economic elite that's looking to pull up the ladder and ensconce its descendants in dynastic wealth. More than a few issues of this newsletter could've been written in Chinese without much amendment.

The government facing these challenges in Beijing is profoundly different from the one in Washington. A one-party state can't be voted out of office, only overthrown. If you lose reelection in a democracy, you can procure a speaking agent and sleep through board meetings. If you get ousted in a one-party state, you usually get shot. Chinese leaders, with singular control and no exit strategy, have the ability and motivation to think long term. China has been playing the long game for generations, and it shows. The US has been governing via Twitter and also, it shows.

This is not a post defending China's system of government. Mass surveillance, genocide, and shitty vaccines are not an acceptable trade for economic success. But you don't have to like a competitor to learn from it. And some of China's recent actions are worth considering as we begin to repair/improve our system.

Crackdown

For better or worse, the Chinese Communist Party (CCP) has proven what's possible in a world with fewer checks and balances. What once seemed like a rap on Jack Ma's knuckles has in less than a year transformed into a systematic overhaul of the national agenda. Xi Jinping's message is clear: National interests will not cede to private ones.

National interest No. 1: No more monopolistic abuses. In April, Chinese antitrust regulators fined Alibaba $2.8 billion, or 4% of its domestic annual sales, for an anticompetitive practice they call er xuan yi, or "choose one out of two." The phrase refers to Alibaba's tendency to punish merchants who sell products on rival platforms as well as its own. Regulators later fined food-delivery giant Meituan $1 billion for the same reason. And, as of this week, China will issue a sweeping new privacy law that makes it more difficult for big tech companies like Alibaba to collect consumer data.

No. 2: No more toxic platforms that harm the well-being of children. This month, a state-owned media company grilled online gaming, branding it as "opium for the mind." Perhaps "opium" is overkill, but they're not wrong. Chinese gamers on average register more than 12 hours of gaming a week, more than in any other country. When the article was published, Tencent's stock plummeted (gaming is one-third of its revenue). The company reduced the amount of time kids can game per day and banned real-money transactions by children under 12. The money spent by minors on the platform didn't compare, it seems, to what could be lost by snubbing the government.

No. 3: Protect economic mobility. China has recognized that its education system is turning into a caste system (as in the US). As the CCP put it, it's become "severely hijacked by capital." With a less than 2% acceptance rate at China's Ivy League (Peking, Fudan, and Tsinghua), the private tutoring market in China has boomed, enabling the wealthy to pay extra to buy their kids into the best schools, so they in turn can accumulate more wealth. America's response to this issue? Lock up Aunt Becky for two months. China's? Require all private tutoring companies to go nonprofit and ban them from going public or raising foreign capital. If that casts a chill over the entire Chinese education market, so be it. The CCP, like the universe, is indifferent.

Scott Galloway

And just this week, Xi called for the regulation of "excessively high incomes." These are only a few of the forceful attempts he's made to right societal wrongs. Unfortunately, the inevitable product of unchecked power is that he's also wronged a lot of rights. (See above: genocide.) Which system is best - one ruled by an authoritarian leader or by filibusters? Simple, ours. But, again, that doesn't mean we can't learn from theirs.

System comparison

Ultimately, this Cold War is likely to be decided on the same basis as the last one: as a competition between social-economic systems. The US prevailed in the Cold War because its system produced superior economic returns. The Soviet economy collapsed in a quixotic effort to maintain military parity on a relatively anemic economic base. And the burden of its failed occupation of … Afghanistan. While the US begins this contest with significant advantages over China, China enters as a more potent competitor than the Soviet Union at its peak.

A simple way to describe the outcome of the Cold War is that democratic capitalism defeated authoritarian socialism. In a sense, the China-US rivalry will determine whether democracy or capitalism was the fulcrum of victory. China has embraced capitalist economics … within an authoritarian state.

Every modern nation is trying to achieve innovation and economic growth while moderating ascendant private interests that run roughshod over the commonwealth. The challenge is to properly price externalities including emissions, monopoly abuse, and income inequality - howls at the night moon by the innovation class as we shit in the well during the day.

I perceive these choices along two axes, the degree of economic freedom private enterprise enjoys and the amount of social planning done to protect the commonwealth.

Scott Galloway

The US has more or less abandoned action on social concerns in favor of unregulated economic activity. American corporations largely do as they please, and we have neutered the institutions meant to protect the commonwealth. Would Michael Milken have been sentenced to 10 years in federal prison in 2021?

China has taken the opposite approach, sacrificing economic freedom (though it's staying within the framework of a capitalist, free-market economy) in favor of state planning and protections. My 1980s libertarian roots tell me this is doomed to fail, but the past 30 years of Chinese success suggest I should rethink more than my sartorial preferences from that decade. I just reread the last sentence and I sound like a douchebag.

Social democratic countries, Germany being the largest and most successful, attempt to strike a balance. My gut says this is no man's land, the worst of both worlds, and sluggish growth will hamper the European welfare-state model. It's worth noting that China's growth has in many ways come more at the expense of Europe than the US. For example, China is now home to eight of the largest global companies, leadership seized mostly from Europe.

Scott Galloway

The holy grail would be a system that fosters maximum innovation and hard work but also invests in future generations. We often think of economic freedom and social planning as mutually exclusive, a zero-sum game. (You can also achieve neither, as in Russia.) Is the best of both worlds achievable? The US flirted with this in the mid-20th century, but we focused on the interests of white men in our social planning. Since then, we have devolved into a system that separates us by identity rather than character, failing to register that greatness is achieved in the greatness of others … together.

Mother of all macro bets

One of the most interesting ways this century's bipolar conflict will differ from the Cold War is that our two systems are financially connected, meaning we can invest in one another. And we do: Chinese entities hold more than $2.1 trillion in US financial assets, including government and corporate debt and equity, while US entities hold nearly $1.2 trillion in Chinese assets.

Americans are by definition heavily exposed to the US economy. One way to hedge against Chinese success in the bipolar investment race is to invest in Chinese equities. Consider that an investment in the Chinese economy generally in 1990 would have returned 13% per year, far outpacing the S&P 500's return of 8% over that period. Individual opportunities were even more lucrative. In 2000, Masayoshi Son invested $20 million in a young Jack Ma's internet startup. In June, Softbank's stake in Alibaba was worth over $150 billion - one of the greatest venture investments of all time. (Despite Softbank's efforts to give it back via $10 billion subsidies for people looking to rent desks.)

BTW, ever wondered who would "play you in the movie"? I found out yesterday. But I digress.

Currently, the market is severely discounting many Chinese companies, based on the fear that the heavy hand of the regulatory state will suppress growth and strand capital. Last month, SEC Chairman Gary Gensler announced that the regulator was applying additional scrutiny to Chinese IPO listings and strengthening disclosure requirements around the risks of government interference. These are significant headwinds, and as a result both Baidu and Alibaba trade at lower multiples to earnings than their US counterparts. The market likes Uber's revenue six times more than that of Chinese ride-share company Didi.

Scott Galloway

My view: This is a rare moment when beachfront property is going on sale. Xi may have rapped the knuckles of Jack Ma and the tech entrepreneur class, but it's difficult to imagine he'll cut off their fingers. Xi needs the engine of economic growth to keep humming, as there are still 300 million people living on less than $5.50 a day in China. This economic miracle is only half complete.

Whatever Xi does, there's the real possibility that the Chinese system, as morally flawed as it is, might produce greater prosperity than the US model. And shareholder returns are a product of opportunity and execution. If China in 2040 is the dominant power and a two-billion-person economic success story, all the regulatory overhang in the world won't cut into the wealth its corporate shareholders will enjoy.

Who can say? My money is still on the US, as I'm hopeful we will look east and learn.

Life is so rich,

Scott

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