China is Not a Socialist Utopia.

0:00 On September 16th, 1989, this grocery store in Webster,

0:04 Texas— now an empty lot across from Burger King— had an unusual visitor:

0:11 the soon-to-be president of Russia.

0:14 Over the previous week, Boris Yeltsin had toured the Statue of Liberty, U.S.

0:19 Capitol, and Houston Space Center.

0:21 But none of that impressed him quite

0:24 like this unscheduled visit to a nondescript supermarket.

0:27 What amazed Yeltsin,

0:29 as he strolled past fully-stocked aisles of frozen peas and spaghetti,

0:33 was just how normal it all was.

0:36 None of the middle-class suburban shoppers he chatted with seemed

0:40 in awe of the store’s abundant selection of thirty-some-thousand items.

0:44 For them, it was just another Saturday.

0:49 He concluded that if his hungry,

0:50 choice-deprived Soviet comrades could see what he saw,

0:54 they’d start a revolution.

0:57 Well… thirty years later, the shoe is now on the other foot.

1:02 The 21st-century equivalent to Yeltsin’s grocery awakening might

1:06 be an American’s first encounter with Chinese high-speed rail.

1:11 Close your eyes and throw two darts on a map of China— a country almost exactly

1:15 the same size as the United States— and odds

1:18 are you can travel between them— in comfort!

1:22 at 200 miles an hour.

1:24 There are now 31,000 miles of high-speed tracks—

1:27 more than the entire rest of the world combined;

1:31 enough to cross the continental United

1:34 States east-to-west nearly twelve times over.

1:37 The trip between Beijing and Shanghai, for instance,

1:40 takes about four and a half hours and you

1:43 don’t have to worry about flight delays or airport security.

1:46 The equivalent journey in America— New York to Chicago— takes 12

1:51 hours by car or, for the truly patient, 20 by train.

1:56 For decades, visitors to China have marvelled

1:59 at its built environment— the lightning-fast trains,

2:02 the futuristic skylines, and shiny, colossal bridges.

2:07 Just recently, there’s been a high-profile wave of these visits as the country

2:11 attempts to accelerate the very slow

2:14 post-pandemic recovery of its tourism industry.

2:17 And as Yeltsin discovered,

2:18 there’s something powerful— even radicalizing— about seeing others take

2:23 for granted what you’ve been told is impractical or even impossible;

2:28 watching your fellow passengers play angry

2:30 birds with complete indifference as if

2:32 they weren’t racing across the vast Tibetan plateau at 200 miles an hour.

2:37 Meanwhile, $15 billion has already been spent connecting LA and San Francisco.

2:43 After 16 years of lawsuits, false-starts, and controversy,

2:47 it’s still unclear whether the project will ever see the light of day.

2:53 China’s success here is undeniable.

2:55 It clearly deserves credit for delivering on such a massive undertaking,

3:00 particularly since the wealthiest nation on earth so conspicuously has not.

3:06 What’s less clear, however,

3:08 is whether it offers a lesson the rest of the world should emulate.

3:13 Just as, for example, America’s incredibly high per capita GDP fails,

3:17 on its own, to capture the trade-offs and weaknesses of its economic model,

3:22 so too does the speed and scale

3:24 of China’s dazzling infrastructure miss some important context:

3:28 the hidden costs absorbed by those who actually live in the country

3:33 and that remain largely invisible to you and I as visitors.

3:37 Sponsored by Nebula, the exclusive home to my brand-new,

3:41 three-part series, “A Grand Theory of Xi Jinping.” Here’s a puzzle:

3:48 How do consumers in China— a “developing country”— spend as much

3:52 on luxury goods as those in America— the richest nation on the planet?

3:58 Now consider that 85% of the Chinese

4:02 population has at most a high school education.

4:07 85%!

4:08 Education, to be fair, is a very crude proxy for wealth.

4:12 Still, it’s hard to believe the non-college-educated

4:15 workforce is buying all these luxury watches,

4:18 Cartier bracelets, or designer handbags.

4:21 The only way to reconcile these two divergent facts is extreme inequality.

4:28 One segment of the population— 15% if we use college as a benchmark—

4:32 is living a life on par with an upper-middle-class New Yorker or Parisian.

4:38 They buy overpriced lattes, live in high-rise apartments with doormen,

4:42 and work in white-collar offices surrounded by bean bags.

4:47 The rest of the country is lucky to finish high school— which in China isn’t

4:52 free— and may never in their lives earn

4:55 even half the minimum wage in West Virginia.

4:58 In the United States, public schools are largely funded by local

5:02 property taxes— meaning wealthier areas have better teachers,

5:07 facilities, and opportunities.

5:08 China has that same unequal system, except it goes one step further:

5:13 virtually all public programs are paid for at the local,

5:17 not national, level— from pensions, to unemployment, healthcare,

5:21 and education— meaning the entire social safety net varies by region.

5:26 Not even the poorest province is subsidized by the richest.

5:31 And you can’t just move.

5:34 These geographic disparities are enshrined in law.

5:38 Fifty years ago, many Chinese workers—

5:40 like their Soviet counterparts— were guaranteed employment,

5:44 pensions, and benefits at state-run companies,

5:46 in a system known as the “Iron Rice Bowl.” Both

5:51 China and Russia suddenly ended this practice in the 90s,

5:55 causing tremendous chaos.

5:56 And both worried these millions of angry,

6:00 unemployed workers could rise up and threaten their grip on power.

6:05 Russia’s solution, pioneered by Vladimir Putin,

6:08 involved striking a deal with elites:

6:11 they’d be allowed to buy all these newly privatized,

6:15 formerly state-owned companies at rock-bottom prices—

6:18 to steal from the public treasury,

6:20 to bribe officials, and even assassinate their competition.

6:24 There was just one red line they couldn’t cross: layoffs.

6:30 A worker might be losing his company money,

6:33 while releasing asbestos into the environment,

6:36 for no discernable purpose, but he should never, ever be fired.

6:42 China took a different approach, opting to rip the band-aid off immediately.

6:47 Its thirty-million-plus laid-off workers were left on their own.

6:51 They had to pack their bags,

6:54 migrate to wherever there were jobs, and (hopefully) figure something out.

6:59 To stop this sudden migrant influx from overwhelming

7:02 the social safety net in the cities they moved

7:05 to, China simply banned these workers— its own citizens—

7:09 from accessing the public services their taxes paid for.

7:13 This had the added benefit of preventing them from putting down roots,

7:17 ensuring a permanent supply of cheap labor— a permanent underclass.

7:23 To this day, Chinese citizens are registered to their place

7:26 of birth in a kind of state-enforced caste system.

7:30 Changing that registration— called “hukou”— is

7:34 nearly impossible for poor, rural workers.

7:37 The professor and Chinese labor scholar Eli Friedman

7:40 calls this an “inverted welfare state.” Workers have

7:43 to prove they’re rich enough that they don’t

7:46 need social services before they can… access social services.

7:49 The rich get these things for free, while the poor pay out of pocket.

7:55 Rural-born mothers and fathers working in cities must choose,

7:59 for example, either to leave their child behind,

8:02 to be raised by their grandparents, or bring them and pay tuition at one

8:07 of the low-performing private schools for migrant children.

8:11 Meanwhile, not only do taxes fail to compensate for this inequality,

8:16 they actively make it worse.

8:18 Because China imposes a minimum social security contribution,

8:21 the lowest earners are taxed at the highest rate.

8:25 Top 1% earners pay about the same rate as those in the bottom 20.

8:30 As a result, personal income taxes make up just 1% of China’s

8:35 GDP— a drop in the bucket— compared to 10% in the U.S.

8:40 And despite most household wealth being tied up in real estate,

8:44 there’s no property or inheritance tax.

8:48 China is one of the most unequal countries on the planet.

8:51 And this is not merely a flaw or oversight,

8:55 it’s an essential component of its economic system.

8:59 You do not get 31,000 miles of high-speed

9:02 rail without this labor exploitation that makes it cost-effective

9:06 to build— this is all part of a single

9:09 economic model that prioritizes construction at the expense of wages.

9:15 Cheap, abundant labor, and massive,

9:18 labor-intensive infrastructure are two sides of the same coin.

9:23 And inequality is not the only cost.

9:26 Chinese citizens— of all incomes and social strata— pay for their shiny

9:31 bridges and lighting-fast trains in many other ways too… Organizing,

9:36 for instance, is effectively illegal.

9:38 The only legal “union,” if you can call

9:41 it that, is The All-China Federation of Trade Unions,

9:45 which answers to the government, not labor.

9:47 When workers at a Honda factory in Guangdong began striking

9:51 in 2010 in response to low pay and dangerous conditions,

9:56 for example, the “union” sided with their employer.

9:59 And where labor laws do exist, they’re rarely enforced.

10:03 The average Chinese worker now clocks in 47

10:07 hours a week— about the same as in 2006,

10:10 more than every OECD nation except Turkey,

10:13 and nearly 80% more than a worker in the Netherlands.

10:18 With such a weak safety net to fall back on, Chinese

10:21 families really have no choice but to save for a rainy day.

10:25 At every level of income,

10:27 Chinese households save more of their wages than others around the world.

10:31 But the gap is largest among the poor— they know that if they lose their jobs,

10:36 suffer a health complication, or get hit by a car, they’re truly on their own.

10:41 This is money, in other words, that they effectively can’t use.

10:46 The economist Michael Pettis sums this up nicely, quote,

10:50 “The high-savings model forces ordinary people

10:52 to spend less so that the government and businesses can spend more.” He calls

10:58 the Chinese government’s philosophy akin to “trickle-down” economics.

11:03 Another way Beijing redistributes wealth from households

11:06 to corporations is with interest rates.

11:08 The return on money deposited in banks is kept artificially low,

11:13 making it cheap for companies to borrow.

11:16 Meanwhile, with so few places to invest their savings,

11:19 families almost universally park their wealth in property,

11:22 to the benefit of large developers and the local governments that sell the land.

11:28 Finally, there’s currency depreciation.

11:30 To keep its exports competitive,

11:32 Beijing has artificially reduced the value of the Renminbi.

11:36 Since its currency is worth less,

11:39 Americans and Brits and Australians can buy more Chinese goods,

11:43 subsidizing its manufacturing industry.

11:45 But this also makes imports to China more expensive,

11:49 driving up the price of its consumer goods.

11:53 The average worker, therefore,

11:54 experiences artificially low wages and artificially high prices.

12:00 In The Communist Manifesto,

12:02 Marx warns of an epidemic of over-production and under-consumption.

12:07 As workers become more exploited,

12:09 their wages go down— which leads to cheap, abundant production.

12:12 Yet as an increasing share of this value is captured by their bosses,

12:17 they can’t afford to buy the very products they’re producing.

12:21 That’s where China finds itself today: Between 1987 and 2023,

12:26 the share of labor compensation relative to economic

12:30 inputs in the real economy— in other words,

12:33 how much of their labor workers actually get

12:36 to keep— has decreased from 21 to 15%.

12:40 If Chinese workers received the same share of their labor as those in Canada,

12:45 or India, or France,

12:47 they’d have billions more to spend on healthcare, education, and consumer goods.

12:53 Instead, and as a direct result of its cheap labor,

12:56 low borrowing costs, and business-friendly environment,

13:00 they get high speed trains.

13:02 Some may consider this a fair trade-off.

13:05 But it certainly comes at a steep cost— one that falls almost entirely

13:10 on those unlucky to be born in the “wrong” part of the country.

13:15 For years, China has been urged to stop repressing

13:18 wages and give workers a more generous social safety net,

13:23 thereby increasing consumption.

13:24 And this criticism has been levied from both political directions.

13:29 Leftist labor activists— both in and outside of the country—

13:33 call on China to live up to its Socialist ideals,

13:37 to shift its economic model from one focused on exploitation

13:41 to one that respects and honors the power of workers.

13:45 Mainstream economists agree, though for different reasons.

13:50 They argue China’s current low-wage model—

13:52 which is designed to maximize manufacturing

13:54 and exports— puts it at odds with countries like the United States,

13:59 which aren’t always willing to absorb all these cheap

14:02 imports at the expense of their own workers.

14:05 A healthier, more balanced economic system would make Chinese

14:08 consumers able to buy more of the things they produce.

14:12 So, why has China so stubbornly resisted, even going so far as to arrest

14:19 Marxist and Maoist activists within its own borders?

14:23 The answer to that question lies in the mind of Xi Jinping,

14:27 who in 2021, warned that, quote,

14:29 “We must resolutely guard against falling into the trap

14:33 of supporting lazy people through welfarism.” Ironically,

14:36 in other words, his resistance to helping workers is

14:39 not in spite of ideology, but because of it.

14:43 But where does that ideology come from?

14:46 If Xi is not a “Socialist” as we typically define it, what does he believe in?

14:52 Today, nearly fifteen years since his rise to power,

14:55 we know strikingly little about Xi— one of, if

14:59 not the most powerful men on the planet.

15:01 And that's why I’m releasing a brand-new,

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15:16 to old, archival interviews from before he became leader— to get

15:21 to the bottom of who he is and how he thinks.

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