Xi puzzled: where are my unicorns?!

An essay about whether "statist economy" is incompatible with innovation

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This week, state media announced a detailed account of last week’s “reform” symposium, in which, one peculiar line quickly grabbed the attention of everyone.

At the symposium, Xi asked around:

“我们的独角兽企业新增数下降的主因是什么？”

“What’s the main reason for the declining number of new tech unicorns from us”?

This question is quite odd in at least 3 ways.

First, this particular question is the only direct quote from Xi about any specific sector from the tightly curated state media account, showing that it occupies some kind of central importance not only in the symposium but possibly in the reform program about to be launched in July’s Plenum.

Second, it is at odds with this stereotype of Xi by many people as this leftist leader who somehow hates private business, and as someone determined to pull China back to a statist, command-control model. Yet, it turns out, that Xi Jinping doesn’t really quite fit this stereotype. In fact, he even loves tech unicorns!

It also disapproves once again a persistent (unfounded) fear among many people, that Chinese leadership has no grasp of the nation’s problems because they are living within information bubbles created by docile sycophants.

Third, Xi seems to be asking a question about a sub-optimal situation that his governing team is at least partially responsible for.

Why it’s harder to raise unicorns on our farm now? One big reason that I can think of is the persistent sense of flippancy in policy-making and policy implementation. This is fully reflected in policy failures such as the 2021 crackdown on after-school tutoring, and the mini-failure in the now-retracted regulation of the video game industry at the end of 2023. Policymakers still seem to operate with an old mindset, in which the economy is treated as a piece of machinery and can be fixed by changing some components here and there. But in reality, society has evolved into a super-interconnected one in terms of the flow of information and capital. A flippant, unsophisticated policymaking process, unable to articulate a long-term vision and to provide coherent expectations would only risk weakening and even destroying business confidence, as showcased in this little tale I wrote last December.

Still, it is a positive sign that the problem is getting recognized. Recognition of a problem is the first step toward any solution.

There are certainly other problems. Geopolitical tension has made US venture capital retreat from China, leaving behind would-be tech unicorns with a sudden loss of some high-quality financial backers (China’s venture capital industry is dying). The economic growth engine has also changed gears. A real estate market in limbo is creating deflationary pressure on economic sentiment, which dampens aggregate demand as well as further limiting the available channels of funding for startups. But, I want to stress again, that none of those problems can’t be healed by the passage of time. It is the internal, systemic problem that is really worth a discussion.

This leads to the question: can China’s system allow itself to be a place where tech unicorns, innovation, and creativity in general, thrive?

Can China’s system allow itself to be a place where innovation and creativity thrive?

Also in this week, there was an article on Foreign Affairs, titled China’s Quixotic Quest to Innovate , by economist George Magnus. Magnus’s key argument is that “a statist economy can’t foster creativity”. In his words:

The CCP’s hope is that placing China at the vanguard of technological and scientific progress will not only cement its aspirations to lead the global economic and political systems but provide new growth momentum and prosperity at home. This outcome is unlikely, however, and not just because the cost of fulfilling the strategy may be prohibitive. Some government outlays will undoubtedly go toward boosting successful enterprises, but China’s top-down style of governance, its statist economic philosophy, and its preponderance of corruption mean that a great deal of the investment is likely to end up in waste and loss. In the case of initiatives for which failure is deemed to be a political embarrassment, officials will likely fail to account for losses properly.

His line of reasoning, representing the dominant thinking in the Western mainstream, sounds quite credible. It’s easy to recognize that there are systemic problems in China that may hinder innovation. After all, this system is not designed to maximize innovation. (It has bigger problems to solve, which I will touch on in the future.)

But if you think carefully, you can find some obvious holes in this line of reasoning.

First of all, he only seems to be attacking a straw man here. Is the characterization of China as a “statist economy” correct at all? If compared with the West, judged by the kind of power the state has in China and the sheer number of state-owned enterprises in China, yes, China is quite “statist”. But how do you square it with the fact that the most valuable businesses in China - Tencent, Huawei, ByteDance, Alibaba, CATL, etc. tend to be private businesses? How about the fact that 80% of the employment is shouldered by private businesses?

China of today can be best described as a state-private hybrid economy. I believe it’s high time that academics of the West should stop grouping China together with the likes of a truly statist economy such as the Soviet Union. It’s a different animal you are looking at here. (Although I can imagine it may be more intellectually comfortable if you think you are simply dealing with another Soviet Union here.)

Second, even if China is “statist”, does statism automatically lead to a lack of innovation? After all, it’s the very statist Soviets who sent Sputnik to space. South Korea’s “Miracle on the Han River” was initiated by military dictator Park Chung-hee. Taiwan joined the ranks of Asian Tigers and sowed the seeds for becoming the chip manufacturing powerhouse during the iron reign of the KMT.

The imagined causal relationship between “statism” and “lack of innovation” is a popular theory, because it matches so well with the ideological orthodoxy of free market capitalism. But it’s far away from a self-evident truth.

On the other hand, it is a misconception that “freedom” automatically begets “innovation”. It may be true that with freedom, innovation is more likely to happen. But just because you have freedom does not mean you automatically can be an innovator. After all, if it is just freedom that you have, you could also be a drug addict. Many countries in the global south are very “free”, but what innovation do they generate? Some level of freedom is at best a necessary, but insufficient condition for innovation.

To crack the code of innovation, we really need to dig in and look at exactly what leads to innovation.

Here, we should forget about high-level notions of “state”, even of “economy”. After all, it’s not the “state”, nor the “economy” who is doing the actual work of innovation. Innovation is never created by those lofty concepts, no matter which country you live in. At the actual, operational level, It’s the many Einsteins, the Edisons, the Fords, the Musks, and the Jobs - specific individuals with sparks of brilliant ideas and perseverance in pursuing those ideas - who are really responsible for innovation. Yes, innovation is done by the people, especially the most talented among the people.

(This is, by the way, also why I think Western ideological dogmas, like all dogmas, can be dangerously misleading: they tend to put things in highly abstract terms but fail to look at the most basic and the most human-level factors at play.)

So what we really should be asking is, will China have more Einsteins and more Musks?

Now my dear reader, let me drag you out of your seat, put yourself in the shoes of an innovator, and ask yourself this simple question: “How would you innovate?”

I imagine you will be baffled for a few seconds, and then the first question you must be asking me will be:

“What do you mean? What do you want me to innovate on?”

“Bingo, my friend! So what do you want to innovate on? What’s the thing around you that continues to bug you that you want to change?”

I hope you get what I mean by now.

Innovation doesn’t happen out of thin air. It always requires a thing to innovate on. At the most basic, individualistic, and operational level, innovation requires a problem to be solved. It’s the problems that breed and propel innovation into being.

The problem could be a lack of horsepower to move around stuff (steam machines were invented for it). The problem could be that our weapons are too slow at killing people (machine guns). The problem could be climate change (solar panels). The problem could be cancer (biotech). The problem could be a fear of total human annihilation (SpaceX’s Mars ambitions). The problem could be as simple as a business choice: China’s 1.4 billion people want to make more money, but the crown jewel of modern industry, the automobile sector, is firmly in the hands of the Western powers. What should we do? (answer: innovate on EVs). Or, the United States is placing a hefty 100% tariff on my EVs, how should I fix it? (Expect more innovation down the road…)

If there are no problems in the world, innovation will stop. Because in a world where there are no problems to be solved, people would be too lazy to do anything about it. It’s as simple as that. And simply because no one can claim a monopoly over problems, no one can have a monopoly over innovation.

(Granted, “having a problem to solve” is also only a necessary, but insufficient condition toward innovation. Another necessary condition I can think of is the “willpower to solve a problem.” This may be a given in Chinese and many Western societies, so we don’t often think about this question. But for many cultures, I don’t think it’s a commonly held assumption. But I will skip this topic for now.)

Now, our question is transformed into this: do Chinese people have enough problems to solve?

Yes, we do, a lot.

Individually, almost all businesses are living through the worst recession we have seen in our careers. We have to innovate really hard, in order to survive through this down cycle and hopefully thrive when the tide comes back.

Collectively, the country has also run into some major uncharted waters. There are deep problems, coming from both internal imbalances and external pressures.

Are we willing to solve those problems? As far as I can tell, YES. At the individual level, I see entrepreneurs devising various ways to solve the problems at hand. At the national level, I also see that problems are being recognized, and a consensus for institutional innovation is being called for to tackle those problems. In the same symposium, Xi explicitly linked the goal of “reform” to “problems”.

Focusing on promoting China's modernization, it is essential to adhere to a combination of target orientation and problem orientation, effectively addressing and eliminating ideological concepts and institutional mechanisms obstructing the progress of China's modernization. Efforts should be made to break through deep-seated institutional barriers and structural contradictions, continuously injecting strong momentum into China's modernization and providing robust institutional support.

…

Economic reform must start with practical needs, addressing the most pressing issues and deepening theoretical and institutional innovations through practical problem-solving.

So, is the China model incompatible with innovation and creativity? My answer will be, first of all, maybe this is the wrong question to ask. Maybe innovation does not have a causal relationship with a specific social-political system at all.

And no, it’s not incompatible, don’t bet on it, because, ironically, we currently have all the problems to necessitate innovation, which, coupled with a strong willingness not to “lie flat” but to pursue a solution, will lead to innovation in technology, innovation in product design, innovation in organizations, innovation in policies, innovation in overall thinking, and innovation in our various systems.

This is a rising nation that not only knows that it has some problems, but is willing to solve those problems. Don’t ever underestimate this kind of power. It would be a dangerous investment to bet your money that we can’t innovate our way out this time.

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Name change announcement

You may have noticed that the name of this newsletter has been changed to “China Translated”. In the last poll, this was the second most popular choice, behind the top choice of keeping the original name “Lost in Translation”. I have still decided on this one, because I really want to set up a unique brand identity for this newsletter, and also because I want new readers to instantly recognize that this is about China.

Still, my personal favorite (also favored by many of you) is “Lost in Nanjing”. Its backstory will always be dear to my heart. It might be the name of some future projects.

Now, dear folks, say farewell to “Lost in Translation”, and say hi to “China Translated”. But what I will do will stay the same: I will “translate” the enigma that is China, for you, to the best of my ability.