Fang Lian Talks: Does China's Economy Still Have a Future? One Video to Understand China's Economy! Who Is Dragging Down China's Economy? How Can Technological Development and Economic Decline Coexist? The K-Shaped Economy and the I-Shaped Economy!
This episode is hosted by Toronto Fang Lian and provides an in-depth analysis of the true full picture of China's economy in 2026. The host points out that China currently does not have a so-called K-shaped divergent economy, but rather presents an i-shaped economy characterized by bottom-tier support and shining high-tech industries. By comparing the profits, capital investments, and financial repression policies of real estate versus new energy and AI industries, the video reveals the cost behind the high-tech boom: ordinary people and the bottom-tier physical economy are implicitly subsidizing and bearing the economic pressure, and it also deduces the future trajectory of China's economy.
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Full transcript:
When talking about the current state and future of China's economy, people can hear two different voices right now. One voice says that China's economy is about to collapse. Look at how terrible consumption has become, how housing prices fall harder every year, how young people are unemployed as soon as they graduate, and how the internet is filled with posts of people sending out one or two hundred resumes only to get a few interviews. Even the official youth unemployment rate from the Chinese Communist Party has reached 18.9%, matching the historical high. If this isn't collapsing, what is it?
Of course, there is another saying right now: collapse? What collapse? You people have been crying out about the China collapse theory for decades, and when have you ever been right? Exports are surging more fiercely every year, having just set a record last year and rising by nearly 20% in the first eight months of this year. China's electric vehicles are sold all over the world, humanoid robots are far ahead, and in AI, only China and the US stand as the dual pillars. China's economy is extremely strong and about to win big.
So which of these two voices is the real one? Where lies the full picture and future of China's economy? Hello everyone, I am Toronto Fang Lian. In this episode, we will discuss the current state of China's economy in 2026 from an overall perspective.
Although you can still see a large amount of propaganda about the bright prospects of the economy within the Great Firewall, the difficult lives of ordinary people have also become an inescapable topic. This state of a rising major power in technology while ordinary people's lives are in dire straits is probably a first in the history of human economics. To explain this awkward situation, people can now frequently hear a term: K-shaped divergence. This term is often used to explain the current economic status quo in China.
What is a K-shaped divergence? Let's take an example, using cars. Data from the China Association of Automobile Manufacturers shows that China's auto export volume in August reached 1.01 million vehicles, a year-on-year increase of 65%. However, while exports surged, domestic car sales were only 1.7 million vehicles, a year-on-year decrease of 24.2%. Overseas sales keep climbing while domestic sales keep dropping; one goes up and the other goes down, which is a typical K-shaped divergence.
Of course, even more extreme are the data for consumption and exports. If we look only at consumption in China's current economy, it has truly cratered. In this year's A-share semi-annual financial reports, the profits of traditional consumer industries declined across a wide area. For example, the food and beverage industry fell by 27% in the second quarter, the automotive industry fell by 20%, wholesale and retail fell by 14%, and the MSCI China Consumer Index fell by 18% in half a year, approaching a 10-year low. A Bloomberg news report on September 27 directly wrote that China's consumer stocks are falling into a lost decade.
On the other hand, external demand, or exports, has hit a new high. In 2025, China's trade surplus reached a staggering $1.19 trillion, the largest in human history; China's trade surplus alone now accounts for nearly 70% of the global total. Naturally, this trend has shown no signs of braking this year. In the first eight months of this year, the trade surplus reached $805.5 billion, an increase of $20 billion over the same period last year. At this rate, the annual trade surplus for this year is very likely to exceed $1.2 trillion, setting another historical record.
Domestic consumption is sluggish while overseas exports are surging, forming a new 'K'. Of course, this 'K' is not limited to automobiles, nor is it limited to exports and consumption; it exists in every aspect. But is China's economy really experiencing a K-shaped divergence? In my view, it is not.
This narrative of K-shaped divergence has been constantly promoted by the CCP recently. It actually has an underlying subtext: if you feel that the Chinese economy is not doing well, you are wrong. The Chinese economy is not bad; it is just that you bet on the wrong horse. You are on the wrong side of history. It is not that there is a problem with the Chinese economy, but that your choices are problematic. If you feel that everything is not good enough now, it is because your own vision is insufficient and you haven't kept up with the times. If some industries are struggling while others are doing well, that is an inevitable product of technological progress. What you need to do now is not to complain about society, but to strive to keep up with the times—hurry up and learn some AI courses.
But is that the reality? Obviously not. The so-called K-shaped divergence narrative is just a large-scale PUA. PUA is used here to transform China's economic downturn into a problem of your personal choices. There is no such thing as a K-shaped divergence in the Chinese economy right now. Do you know what a real K-shaped divergence looks like? It should be that while some are going up, others are going down; some benefit while others suffer. Just like the rise of Taobao and Pinduoduo in the e-commerce era, they formed the upward line of the K. At the same time, physical stores became increasingly withered under the impact of online shops, forming the downward line of the K. This divergence created a group of wealthy Taobao shop owners while also crushing a group of physical store owners. Some are poor and some are rich—that is what a real K-shaped divergence is.
But in today's China, can you find the beneficiaries of a K-shaped divergence? The common people are complaining bitterly, and the wealthy are also suffering under the iron fist of the CCP. In terms of industries, perhaps you can find the upward line of the K, but in reality, you cannot find the beneficiaries of a K-shaped economy. It can be said that if you ask 100 industries, none of them are doing well right now. Why is this? It is because China does not have a so-called K-shaped divergence at all. China's current economy is actually an 'i-shaped' economy—a lowercase 'i'. High technology constitutes the dot on top of the 'i'. This dot is indeed quite shiny, but it relies on the support of the vertical line below it, and it cannot affect that vertical line; it is disconnected from it.
As for why I say there is no K-shaped divergence in China, as Toronto Fang Lian, who talks about data, I will naturally take the most frequently mentioned comparison group in the K-shaped divergence narrative—real estate and new energy—and use data to break them down. New energy vehicles can be said to be the shiniest star among China's various high-tech industries today. Of course, given that real estate developers can now make electric cars, and even those who sell rat poison can make electric cars, is it really a high-tech industry? Perhaps in many cases, this needs to be put in quotation marks, but that is not the point. In some propaganda, it has been treated as the successor to the real estate industry, forming the other pole of the K-shaped economy opposite to real estate. Real estate collapsed and new energy took over, just like online shops took over from physical stores back in the day; it is technological progress.
But the problem is, this 'K' is a fake 'K'. Of course, the reason it is fake lies in the profits. According to data from the National Bureau of Statistics, 2018 was the year when Chinese real estate developers made the most money. That year, the revenue of the national real estate industry was 11.3 trillion yuan, and the profit was 1.85 trillion yuan, a profit margin of over 16%.
But look at the currently hyped-up electric vehicles. The automotive industry also looks like it is in full swing, but according to statistics from Che Dongxi, the combined net profit attributable to the parent company of 14 major car companies in the first half of this year was only 18 billion yuan, with an annualized profit of 36 billion yuan—less than 2% of the profit of real estate companies in 2018. The net profit margin of the 14 largest car companies is only 1.22%; for every 100 yuan of cars sold, they earn 1.2 yuan. In contrast, in 2018, when the real estate market was at its most profitable, Evergrande alone had a book net profit of 72.2 billion yuan, which is twice as much as the combined profits of these 14 car companies. Boss Xu really lived in the best of times.
Of course, vehicle manufacturing is considered the link with the lowest profit margin in the current automotive industry. But even if you include the automotive manufacturing industry and those parts manufacturers, the operating revenue of the automotive industry in the first half of this year was 5.2 trillion yuan, which is about the same as the revenue of the real estate industry in 2018, but the total profit is still only 195.4 billion yuan. The annual estimate is only around 400 billion yuan, less than a quarter of the profit of the real estate industry in 2018.
When you lay out this set of data, do you still think real estate and electric vehicles form a corresponding K-shaped divergence? Looking at sales figures, perhaps real estate and electric vehicles look like a K, but looking at profits, they definitely do not. Of course, someone might say that you cannot calculate it this way, and China's high-tech industry is not just electric vehicles.
That is indeed correct. The high-tech industries currently mentioned by the Chinese Communist Party (CCP) include far more than just electric vehicles. Altogether, there are five major areas: photovoltaics, new energy, biomedicine, integrated circuits, and electric vehicles, which I call the "New Five." Combined upstream and downstream, the current scale of these New Five is massive, even surpassing real estate. According to our team's calculations, by this August, the economic scale of the New Five already accounted for 9.43% of China's GDP, surpassing the real estate sector of 2018.
However, according to data from the National Bureau of Statistics, the combined net profit of these New Five in the first half of the year was only a little over 400 billion RMB, with an annualized profit of 800 billion RMB—less than half of the real estate industry in 2018. Combined, the entire New Five still cannot form a K-shaped divergence in terms of profit with real estate, not to mention that many other industries are currently on a downward slope.
Therefore, China's current economy is by no means a K-shaped divergence economy. The Chinese economy currently has a relatively good point that forms the dot above the lowercase letter "i," but this point only looks good rather than truly creating profits. Of course, because China's GDP calculation method belongs to the production approach, the profits of these New Five are actually far less high than real estate. However, because the quantity and sales of manufactured products are large enough, China's GDP data still looks very good.
Moreover, as an i-type economy, if the dot above the "i" wants to shine and gleam in China, it comes with a cost. Take AI, another shining industry at this dot. While the five major industries of the New Five have at least undergone a period of development and have some profits to speak of, AI is completely out of the question. We often hear a saying nowadays: when it comes to world AI, apart from the United States, there is only China. In terms of model capabilities, Chinese AI is indeed catching up quite closely, and general large models are basically in the second tier. According to the most frequently cited AI model capability rankings at present, Chinese AI is indeed closely following the first tier and catching up fiercely. Models like Xiaomi and Qwen are excellent large models second only to U.S. AI companies.
However, if we jump out of the point of capability alone, it might be an entirely different concept. Companies currently building large models are basically still losing money. Among them, Anthropic, the best performing one, only managed to turn a profit in the second quarter of this year. Therefore, looking at the future of AI enterprises from an industry perspective currently, people generally do not look at profits; instead, they usually look at a data point called ARR, which stands for annualized recurring revenue, roughly estimating the annualized revenue amount.
According to the latest data disclosed by media outlets, OpenAI's annualized revenue is approaching 70 billion US dollars, while Anthropic's annualized estimated revenue has reached 100 billion US dollars. But what about these Chinese AI companies? Zhipu is at 1.6 billion US dollars, Kimi at 300 million US dollars, DeepSeek at 1 billion US dollars, and MiniMax at 800 million US dollars. The two U.S. companies combined now have 170 billion US dollars, while these four Chinese companies combined do not even reach 4 billion US dollars—a gap of nearly 40 times or more, highlighting the phenomenon of generating high praise without commercial sales.
Speaking of which, there is another issue: as we all know now when it comes to AI, developing AI requires a lot of computing power and a lot of money. Recently, whenever AI is brought up, we often hear a saying that there is currently a massive bubble in AI. Indeed, in order to develop AI, the entire U.S. investment in AI computing power has reached an astonishing level. According to relevant scholars' estimates, from 2025 to 2032, the United States will dump an average of 3.6% of its GDP into AI infrastructure every year, marking the largest direct capital investment in U.S. history.
Of course, I am not a promoter of the AI bubble theory, because the revenues of OpenAI and Anthropic are truly there. I believe this investment is worthwhile, and I can personally and viscerally feel the changes AI has brought to my work and life. The money I spend on AI myself every month is almost reaching 1,000 US dollars. Of course, setting aside this bubble theory, where does the money come from for such astronomical capital investment by the United States to develop AI?
In the past, it mainly relied on the cash flows of major tech giants like Microsoft, Google, Amazon, and Meta. But starting this year, that is no longer enough, so they have been financing from the capital market through massive bond issuance, leasing, and private credit. Overall, however, the money for U.S. AI development is provided by the capital market—money willingly invested after the capital market saw the revenues of OpenAI and Anthropic.
As for whether China's AI can catch up recently, computing power will naturally not be in short supply. China's capital expenditure on AI computing power is also very large. In addition to major companies like Alibaba, Tencent, and ByteDance, capital expenditure this year is surging. The Chinese Communist Party (CCP) is also taking the lead in building various computing power centers. According to estimates by relevant institutions, China's AI computing power expenditure this year is between 900 billion and 1.3 trillion yuan, more than double that of last year. Furthermore, given that the CCP is facing chip blockades and must develop its own chips, China's AI-related capital expenditure will not be far behind that of the United States.
So, who is paying for such a huge sum of money? The answer lies in the support from the bottom. The little dot above the 'i' can burn as brightly as a raging fire and emit light, but it is not without a price; in reality, it is the vertical line below that is supporting it.
Of course, this support is a very complex combination of measures. The simplest among them is direct funding. For example, in the case of new energy vehicles, China has had vehicle purchase subsidies and purchase tax exemptions for a long time. According to the Ministry of Finance's own estimates, a total of 520 billion yuan will be reduced in revenue over the four years from 2024 to 2027, averaging 130 billion yuan per year. Moreover, in places we cannot see, technology companies also receive tax breaks. In 2025 alone, tax incentives for technological innovation exceeded 2 trillion yuan. In addition to this, there are also the incalculable costs of cheap land for factories, which I won't go into detail about here.
Of course, besides these indirect methods, there is also direct funding. For instance, in the chip sector, the third phase of the state's dedicated chip investment fund alone has reached 344 billion yuan. The National Artificial Intelligence Industry Investment Fund has another 60 billion yuan, and the National Venture Capital Guidance Fund has another 100 billion yuan. These two are specifically named to invest in chips, biomedicine, and AI—that is, the dot above the 'i'. Even the National Social Security Fund has chipped in tens of billions. Of course, the top-tier entities in the entire system are actually the guidance funds established by various local governments. The total subscribed scale of these funds alone reached over 7 trillion yuan in 2026, and 90% of these funds are industrial funds supporting high-tech industries.
Where does all this money come from? When all is said and done, it comes from ordinary people, from taxes paid by taxpayers, and from the money in state-owned banks. Now, all of this money is being burned by the Chinese Communist Party (CCP) just to keep things going. However, these are only the direct and visible forms of support. Within the entire support system, there is also a less noticeable method, which is financial repression. On May 22 this year, eight departments including the China Securities Regulatory Commission jointly issued a document targeting cross-border brokerages such as Futu, Tiger Brokers, and Changqiao. Following this joint announcement, it means that ordinary Chinese citizens who want to make overseas investments will face comprehensive restrictions. Of course, when these regulations came out, there were various interpretations online. Some said the CCP did this to prevent people from running away, while others said it was to prevent the depreciation of the renminbi. Such explanations certainly make sense, but behind this approach, there is actually a very clever means of exploitation hidden, which is what I call financial repression. Today's China has experienced nearly three years of deflation. Return on investment has been declining all the way, and the things ordinary people can buy basically do not increase in price, while the things available for investment are basically dropping in value as well. Of course, what is even more abstract is that in recent years, deposit interest rates for the renminbi have also been continuously falling. On May 20, 2025, major banks such as the Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank, and Bank of Communications collectively lowered their deposit interest rates one after another. Currently, the posted interest rate for a one-year fixed deposit in China has directly dropped to 0.95%. This is the first time in recorded history in China that it has fallen below 1%. As for demand deposits, it is even more exaggerated, standing at only 0.05%. What kind of concept is this? If you deposit 10,000 yuan into a demand account and leave it there for a whole year, the interest is 5 yuan, which is not even enough to buy a cup of Mixue Ice Cream & Tea to sweeten things up—the interest basically just serves as your companion. But switching to the American side, the USD account demand deposit interest rate for the X Money newly launched by Musk can directly offer 6%. Facing this situation, Chinese people are naturally not stupid, and many have started looking for their own way out. A while ago, quite a few people rushed to Hong Kong to open accounts, preparing to invest in US stocks and make deposits in USD accounts; this is the exact logic behind it. Naturally, this makes the CCP very uncomfortable, because if Chinese banks want to keep holding onto the renminbi in everyone's pockets, logically speaking, they would have to improve their competitiveness. It is unreasonable for US dollar demand deposits to offer 6% overseas while RMB fixed deposits only offer 1% at home. Under normal circumstances, Chinese banks should also raise interest rates to catch up with the Federal Reserve. However, our CCP has always taken an unusual path; its countermeasure is to simply shut the door on the public's money trying to flow outward. As a result, even if Chinese banks only give you a 1% interest rate, you have no choice but to obediently keep your money in Chinese banks. This kind of coercion forms an extremely clever means of exploitation. We can say there is a concept in psychology called loss aversion. Simply put, making you lose 10,000 yuan right out of your hand will make you feel extremely distressed, but making you earn 10,000 yuan less will make you feel that it is not too bad, even though both essentially amount to losing 10,000 yuan. This point is reflected very clearly in interest rates. If the CCP were to directly take 30,000 yuan from your hands, that would be very difficult, and you would resist strongly. Yet by lowering interest rates and making your savings earn 30,000 yuan less, people feel virtually nothing. A savings deposit of 1,000,000 yuan kept with Musk would yield 60,000 yuan in interest per year, but now, through financial repression, you are forced to deposit it in Chinese banks at a 1% interest rate, yielding only 10,000 yuan a year—earning nearly 50,000 yuan less. This is equivalent to taking 50,000 yuan out of your pocket, yet you not only remain completely unaware of it without any resentment, but it also forms a subtle form of exploitation that indirectly extracts a huge sum of money from you every single year while you remain completely oblivious.
So, what does the Chinese Communist Party (CCP) do with all the deposits absorbed through this financial repression? There are two main destinations. The first is to resolve local government debt. Local governments have borrowed a massive amount of money in the past; the statutory local debt acknowledged by the Ministry of Finance alone is 54.8 trillion yuan. If you add the implicit debt borrowed by local government financing vehicles (LGFVs), according to IMF statistics, the total is approximately 120 trillion yuan. For local governments, the biggest headache with this 120 trillion is not the principal—they have always relied on borrowing new debt to pay off the old, and they would be satisfied if the principal simply stopped increasing. What truly keeps them up at night is the interest. Due to the collapse of land finance, they can barely pay the interest on this 120 trillion. If you calculate the interest on 120 trillion at a 5% rate, it amounts to 6 trillion yuan a year, which is more than the entire 4.15 trillion yuan in land sale revenue for 2025. Conversely, if the annualized interest rate can be suppressed to 1%, the annual interest would only be 1.2 trillion yuan, saving 4.8 trillion yuan in interest—enough to cover a year's worth of land finance. Low interest rates are effectively a means of debt resolution. The second benefit of maintaining low interest rates is to sustain that shining dot on the 'i' of the economy. China's recent support for AI and the 'New Five' industries doesn't just rely on direct government subsidies and various tax incentives; it also includes various low-interest loans. I can show you another set of data: China's current new loan data is extremely poor, especially for households, which is now in negative growth—the first time since China began tracking this data. From January to August this year, new household loans even reached negative 1 trillion yuan. However, overall, China's loan scale has still risen by 5%. If new household loans are falling, who is rising? The loan scale for tech enterprises is rising. The loan scale for small and medium-sized tech enterprises rose by 20% this year, and the loan scale for all tech enterprises rose by 18%. Of course, this is also intentional under the guidance of the CCP. The central government has a re-lending policy where the loan interest rate for qualified enterprises is directly reduced to 1.25%. The cost of obtaining this money is extremely low, far lower than for households and normal enterprises, which average 2.7%. But getting these cheap, preferential loans isn't easy; you must belong to the high-tech industries recognized by the CCP. The CCP classifies these into 14 fields, which naturally include the 'New Five' like AI and electric vehicles. The decline in household loan willingness intuitively means that Chinese people are afraid to borrow money to consume. This has been criticized by many economists as a sign that the Chinese economy is losing vitality and a status quo that the CCP needs to change. But to a certain extent, this is exactly what the CCP wants. If households don't consume and instead deposit their money, earning extremely low interest, they are essentially lending money to the industries the CCP wants to develop almost for free. Fully propping up that dot on the 'i' is the result the CCP wants; it is the CCP's fundamental goal. This effectively forms a silent transfer and plunder of assets.
Of course, from the perspective of financial repression, low bank interest is only one channel for blood transfusion; the other main channel is the stock market. After Chinese people are unable to invest in foreign currencies or foreign stock markets, besides fixed deposits, the only investment channel left is the A-share market. You might think you have a choice in which category to invest in within the A-shares, but in reality, you have no choice. For example, starting in 2023, a 'traffic light' warning for Chinese companies listing on the A-share market circulated in the investment banking circle. Consumer goods like Baijiu were given a red light and prohibited from listing; consumer enterprises like food, home appliances, and furniture were given a yellow light and restricted from listing. As for that shining dot on the 'i', such as chips, they were given a green light. In the first half of this year, among the 49 newly accepted companies on the A-share STAR Market, nearly 40% were related to semiconductors and chips. Additionally, two years ago, on September 24, 2024, the CCP launched a round of direct market rescue by the 'national team.' After entering the market, China's A-shares rose significantly, but the national team basically poured all the rescue money into emerging industries, and these were the only sectors that rose. In this situation, as an ordinary retail investor, can you avoid investing in emerging industries? You have no choice. In fact, whenever China's high-tech sector is mentioned, some people always say this is a good thing—electric vehicles, photovoltaics, and AI are all developing, and since I didn't pay for it, it's best if it succeeds, and if it doesn't, it has nothing to do with me. Little do you know, you have long been bled dry by these industries. It's just that the way of bloodletting is very covert and not easily detected. You have long constituted the vertical line under the 'i', becoming the fuel to prop up the dot above.
Of course, speaking of this "i-type" economy, there is another characteristic: the dot above the letter "i" and the vertical line below are disconnected. Returning to the economy, in plain English, it is an "i-type" economy where you sacrifice and burn yourself out to support the dot at the top, yet that dot provides very little feedback or return to the bottom layer. Actually, China has had models similar to the "i-type" economy in the past; past real estate was somewhat like the dot on top of the "i-type" economy. Chinese people used all their family savings, and even their income for the next 30 years, to prop up real estate. However, in the end, real estate did not cause China to develop into an "i-type" economy because real estate did, in fact, solidly give back to and support the Chinese people who propped it up. First, the money you poured into propping up real estate yielded tangible, hard-cash returns; during the good years of real estate, the houses in everyone's hands kept rising in value, which meant everyone's assets were also rising, giving people the illusion of having money and the confidence to consume. Second, local governments indeed used the funds raised from real estate to build highways, high-speed railways, and power grids, and infrastructure drove up China's transportation and industrial efficiency, indirectly promoting China's industrial development. Third, real estate belongs to labor-intensive industries, capable of creating a massive number of jobs, and it truly absorbed a large amount of society's labor force. However, the high technology under this current "i-type" development is completely different. First, it is difficult for ordinary Chinese people to share in the development dividends of high technology. Although Chinese people can also trade stocks to participate in technological development, logically speaking, stock prices should replace housing prices as a way for everyone to share wealth, but the problem is that the stock market is ultimately not the housing market; the stock market relies on financial reports and data. This reliance on data prevents bubbles from growing infinitely. If we compare Anthropic with Zhipu, Anthropic's annualized expected revenue is around 100 billion US dollars, and its corresponding estimated market value is 2 trillion US dollars. This 2 trillion dollar market value has already made many people feel it is utterly absurd, yet that is only 20 times the annualized revenue. Meanwhile, Zhipu's current ARR of 1.6 billion corresponds to a market value of 312.5 billion Hong Kong dollars, or about 398 billion US dollars, which is actually 24 times its ARR, even more absurd than the current valuations of Anthropic and OpenAI. As a second-tier AI with lagging technology and a higher revenue multiple, how can this be justified? Zhipu truly no longer has room to grow, so Zhipu's stock price recently collapsed as well, falling from a peak of over 2,000 Hong Kong dollars to just over 600 Hong Kong dollars now. Of course, sometimes the Chinese stock market also spawns monsters like Unitree, which closed at 845 yuan on its first day of listing, but within a little over a month, it plummeted to 450 yuan, suffering a nearly 50% drop. Robots can do backflips, and stock prices can do backflips too; in the face of financial reports, stock prices are beaten back to their original form. Stocks must submit financial reports every quarter, and whether they make a profit or not cannot be hidden, meaning the bubble is squeezed out very quickly, making it hard to inflate it into a nationwide asset bubble the way real estate was. This results in technological development actually decoupling from the wealth of ordinary citizens.
Of course, this is only the first reason. The second reason is that Chinese enterprises, whether they are the 'new five' industries or AI companies, simply cannot make money. Furthermore, the distribution system with Chinese characteristics makes it difficult for these enterprises to have a radiating effect on the local economy. What should a normal high-tech enterprise look like? Take South Korea's SK Hynix, for example. Recently, due to the AI wave, its stock price has skyrocketed because of its memory chip production, and its profits have also soared. While the number of employees working directly for Hynix in South Korea is naturally small, the surge in Hynix's profits allowed its employees, from security guards to engineers, to receive an average bonus of about 3.26 million RMB. After receiving this money, these people have to eat, play, and consume, which naturally stimulates employment for others in the local area, such as the prosperity of the catering and entertainment industries. Of course, the most typical model for this is the American model. Sometimes people complain about why eating out in the U.S. is so expensive and why labor costs are so high. In fact, it is normal for food and labor to be expensive in the U.S.; it is actually a reflection of the technology industry benefiting the general public—a spillover effect of the tech sector. However, because Chinese tech companies have low profit margins and are unwilling to share profits with employees, China has not seen this spillover effect. If you think about which city has made a huge breakthrough in developing high-tech industries recently, it would have to be Hefei. Hefei has the Chinese listed company with the highest market value, ChangXin Memory Technologies (CXMT), leading electric vehicle companies like NIO, and iFlytek, which specializes in AI voice technology. It previously also invested in BOE, which makes screens. It has always been regarded as a model of Chinese government investment. Driven by this, Hefei's industrial value-added growth rate in the first half of the year reached 25.6%, far exceeding the national average of 5.4%, and its GDP growth rate reached 6.8%, far exceeding the national average of 4.7%. Among cities in China with a GDP exceeding one trillion yuan, both of these growth rates ranked first. However, stripping away the surface glamour, the data that best reflects the living standards of Hefei residents—total retail sales of consumer goods—only grew by 0.6% in the first half of the year, which is not even as good as the national average of 1.3%. GDP is flying in the sky while Hefei residents' consumption is crawling on the ground; this is the current situation in Hefei. The people of Hefei have not enjoyed the spillover effects of technological prosperity, nor have they benefited from the operations of the Hefei government. Hefei is, in fact, a microcosm of China's current technological development.
Beyond this, another characteristic of high-tech industries is that they are technology-intensive enterprises. Simply put, they only need a small number of high-end talents and do not require much basic labor. This forms a sharp contrast with the labor-intensive nature of the real estate industry. This means that if they cannot produce a spillover effect, the effect of high-tech on driving employment is very poor. According to data from the National Bureau of Statistics, in 2018, when the real estate market was at its hottest, it contributed nearly 49 million jobs to China. However, according to our statistics, the economic scale of the 'new five' industries is now larger than that of real estate, but they only directly absorb 7.44 million jobs. Of course, after finishing the advertisement and returning to the Chinese economy itself, this high-tech sector not only fails to give back to ordinary Chinese people but instead drains their blood. This has led to the current state of the Chinese economy: the dot on the 'i' hangs there; it can indeed burn like a torch, attracting everyone's attention and making the Chinese economy look very promising. At the same time, it can create massive GDP, but the cost is the vertical line below it, because it is sucking the blood from below. Most ordinary Chinese people, that is, those of us who are ordinary, face a situation of low income, no money to spend, nowhere to invest, and difficulty in finding employment under this 'i-shaped' economy. The actual feeling of life is far worse than during the Hu-Wen era.
Now, having discussed the current state of China's economy, let's talk about its future. First of all, can this I-shaped economy change on its own? My answer is very direct: no, it cannot. There are two reasons for this. The first is that Xi Jinping's own mindset will not allow him to change this I-shaped economy. Since coming to power, Xi Jinping has had a very clear set of economic ideas. In economics, there is usually a term for this set of ideas: supply-side economics, which, to put it bluntly, is Marxist economics, specifically the theory of productive forces. Marxist economics, I believe, is all too familiar to Chinese people. Its core can be summed up in a single sentence: productive forces determine relations of production. According to this logic, as long as the level of productive forces rises and science and technology develop well, living standards will naturally improve. As long as AI is developed, consumer issues will naturally resolve themselves. Even the superstructure, such as the political system, is determined by the level of science and technology in Marxist economics. Under this logic, Xi Jinping has always believed that as long as science and technology are handled well, no other problems are problems. This is at polar opposites with current Western economic theories dominated by consumption. At the same time, not only because of this economic theory, but recently because AI touches upon national security and the ruling security of the Chinese Communist Party (CCP), this has further deepened Xi Jinping's obsession with developing science and technology. In China today, Xi Jinping already has absolute rule, and everyone in the country must listen to him. Since he does not want to change this I-shaped economy, there is simply no way it will change.
Of course, what is even more critical is that after these years of the "Great Leap Forward" in technology, the Chinese government has become deeply bound to technological development—or rather, to the tech bubble—and the current deflation. Although the "dot" on top of the "i" (high-end tech) has not benefited ordinary people, and the "vertical line" below (the general public) has become disconnected from it, it has indeed converged toward the government. In recent years, state-owned capital has poured vast amounts of money into the "New Five" industries and high-tech sectors. Some of these investments have resulted in losses, such as Hozon Auto, which went bankrupt last year. In April of this year, "Focus Report" (Jiaodian Fangtan) aired a program specifically reporting on Hozon Auto; from 2021 to 2023, Hozon Auto lost 18.3 billion yuan over three years, with state-owned capital from Yichun, Jiangxi, and Nanning, Guangxi, alone investing over 4 billion yuan, which is essentially unrecoverable. On the other hand, there are profitable ones. For example, if we look at a single enterprise, ChangXin Memory Technologies (CXMT) is a typical example of profitability. As I record this program, CXMT's market capitalization at the close of September 30 was approximately 3.72 trillion yuan, making it the largest listed company in China by market value, surpassing both Tencent and the Industrial and Commercial Bank of China. With such a high market cap, who benefits after it goes public? We need to look at its shareholders. The largest shareholder of CXMT is Hefei Qinghui Jidian, holding 19.21%. Although the legal representative of Qinghui Jidian is the boss of CXMT, 99.9% of its shares are controlled by the Hefei government, held respectively by the Hefei State-owned Assets Supervision and Administration Commission (SASAC) and the Hefei Economic and Technological Development Zone SASAC. The second-largest shareholder is Hefei Changxin Integrated Circuit, holding 10.38%; this company is 100% controlled by the Hefei SASAC. The third-largest shareholder is the Big Fund Phase II, holding 7.74%—needless to say, this is the "national team." The fourth place is the employee stock ownership platform, Hefei Jixin, jointly held by the boss and employees of CXMT, accounting for 7.42%. By the fifth place, it becomes the Anhui Provincial Investment Group, which is 100% controlled by the Anhui provincial state-owned assets, accounting for 7.01%. Among the top five shareholders, four are state-owned. If we add up all the state-owned capital—including the Hefei government, the Anhui government, the Big Fund, central state-owned enterprises, social security funds, state-owned insurance companies, and state-owned banks—these various state-owned capitals hold a total of 56.67% of CXMT's equity. Based on the closing price on September 30, this portion of the market value is worth about 2.1 trillion yuan. These shares have created massive wealth for the Hefei government and for China's state-owned assets and enterprises. However, these shares cannot be sold right now; according to the lock-up commitment at the time of listing, these shares cannot be released until July 27, 2029. Therefore, if the stock price of CXMT plummets during this period, or if the Chinese AI bubble and tech bubble burst, these governments will suffer huge losses. Of course, CXMT is not an isolated case. Unitree Robotics is held by various state-owned capitals such as the Beijing Robotics Fund, the China Internet Investment Fund, and China Mobile. Before going public, it also temporarily introduced social security funds, and central enterprises like PetroChina, China Southern Power Grid, and China Telecom—highlighting the principle of "spreading the rain and dew" (distributing benefits widely). Moonshot AI, also known as Kimi, is currently preparing for an IPO, and before its listing, it has once again introduced nine state-owned capital and industrial funds. Of course, in addition to these direct equity investments, due to long-term policy guidance, Chinese banks also have about 7 to 8 trillion yuan in direct debt tied up in these enterprises. Have you ever thought about what would happen to these local governments and these banks if one day CXMT, Unitree Robotics, or some tech enterprise heavily invested in by state capital or heavily indebted to banks completely collapses and becomes the next Hozon Auto? China's fiscal system will face its second shock. And what was the last shock? It was the bursting of the real estate bubble. The entire high-tech sector and the "New Five" have also become things that cannot be allowed to burst.
After discussing these points, we see China's true current economic reality. Under the transformation by Xi Jinping, China's economic structure has long deviated from the market-oriented economic model of the Reform and Opening-up era, entering a whole-nation system similar to that of the Soviet Union. However, there is one thing even more fatal than the Soviet Union: the finances of the Chinese Communist Party (CCP) itself are deeply bound to the entire whole-nation system. When the Soviet Union attempted a moon landing and its N1 rocket exploded four times in a row, the project could essentially be halted overnight; but the CCP cannot stop now. Once the tech bubble bursts, many banks and even local governments will go bankrupt along with it. We hope the CCP will voluntarily return to the moderate development seen during the Hu-Jintao and Wen-Jiabao era and enter a secondary reform and opening-up, but judging from the current economic structure, that is simply impossible. If it is impossible to follow this trend, what will be the final outcome of this i-type economic model? Let us first discuss the best-case scenario. Xi Jinping is certainly not a fool; he knows that continuing this way is no solution. People can only endure hardship up to a point, and people always need hope—it's just that Xi Jinping's hope seems unlikely to materialize. Under Xi Jinping's ideal, what should the subsequent trajectory of China's development look like? It would be for China to truly replicate the United States, establishing a cycle where technology drives economic development. Of course, this involves several steps. The first step is for Chinese technology to genuinely catch up with or even surpass the United States, entering the front tier of global technological development. The second step is that after Chinese technology catches up, enterprises must also catch up in terms of profits, learning to make money and generate profits just like American enterprises. The third step is that these profits ultimately translate into rising stock prices, higher employee wages, and enhanced consumption power, thereby thoroughly revitalizing China's economic lifeblood, making rising stock prices and wages the foundation of economic growth. But I believe this is basically an impossible path. Generally speaking, among these three steps, people might think the first step is the hardest—achieving technological catch-up has difficulties. But my view is precisely the opposite; I think this step is the least difficult. I believe that under the whole-nation system, with so much money poured in, coupled with the cleverness of the Chinese people, AI will exist in China's future, photolithography machines will exist, and chips will exist. The truly difficult part to learn here is actually how to make money and how to share the money earned. Enterprises spawned under the whole-nation system struggle to maintain normal profitability, and with labor rights so low and the CCP terrified of labor unions, it is also difficult to smoothly optimize labor-management relations in China. These are all things the CCP cannot learn.
Of course, even if the first two steps are successfully navigated, the third step is mathematically an unrealizable ledger. To promote consumption through technological development, it is actually necessary to increase the wealth of Chinese residents, which must achieve growth. If the stock market is relied upon as the next primary source of wealth growth for the Chinese people, just how high must the Chinese stock market rise? It would have to surge to 90% or more of the total market value of the U.S. stock market. In recent years, although a real estate bubble did not cause China's per-capita GDP to plummet drastically, the wealth of the Chinese people has drastically shrunk due to falling housing prices. How much has the wealth of the Chinese people shrunk from the peak of the real estate market to the present? There are various estimates; the conservative figures suggest over 40 trillion, while higher estimates range from 120 to 130 trillion. Similarly, according to our team's own calculations, we estimate the evaporated value to be around 100 trillion. If one wants to make up for this wealth using the stock market as a new wealth-creation machine—while the current market value of the A-share market is around 110 trillion—simply letting A-shares rise to 210 trillion is not enough. This is because ordinary people only hold about 30 percent of the current stock market. To make up for the 100 trillion in assets lost from the real estate collapse through stock trading, current stock prices would need to surge by another 300-plus trillion, bringing the total market value of A-shares to around 450 trillion—roughly four times its current level. The Shanghai Composite Index would have to rise to 16,000 points, which is almost catching up with the entire market value of the U.S. stock market. The total market value of U.S. stocks is currently around 76 trillion USD, which translates to only about 510 trillion RMB. And if one wanted to generate additional consumption power on top of that, it would have to soar to 20,000 points, requiring a total market value that surpasses the U.S. stock market. This is basically an impossible feat. However, if any CCP supporters see this and feel that I am talking nonsense and deliberately smearing China's economy, then I will repeat what I said before: believe in the national fortune, go all-in on A-shares. The A-share market is the next real estate under Xi Jinping's layout; how could you miss this opportunity to get rich? Of course, this is certainly a joke. I could never recommend my followers to invest in A-shares, and I believe this i-type economy will ultimately not turn out the way Xi Jinping wants it to.
Since it cannot proceed in the way Xi Jinping wants, what will it turn into? I believe the end of the "i-shaped" economy will most likely be the breaking of the vertical line under the "i". The "i-shaped" economy is a propped-up economy, so where do the Chinese people get the confidence to prop up the dot above? It seems that it currently relies on exports—the trade surplus that China sees rising every day, and the foreign exchange and tax revenue generated by the export of cheap products. However, looking at the current situation, how long this export can last is a big question. From January to August this year, China's trade surplus in US dollars hit a new high, but this trade surplus has also made countries around the world increasingly unable to tolerate it. This has led to more containment against China this year than last year. Needless to say, the US-China tariff war is ongoing. Don't be fooled by Xi Jinping's visit to the US or Trump's previous visit to China, where both sides seemed friendly; in reality, bilateral trade between the US and China has seen the largest decline among major US trading partners recently. Furthermore, Mexico raised its auto tariffs on China from 20% to 50% in one go this year, and the EU has also raised its out-of-quota tariffs on Chinese steel to 50%. A China-EU trade war is also on the verge of breaking out. Of course, besides this, China's "good brothers" like Brazil and India have also been intensively filing anti-dumping cases and imposing tariffs on Chinese goods recently. The situation for China's foreign trade is getting worse and worse. Of course, it hasn't reached a certain level of severity yet, partly because the CCP made some compromises this year. This compromise is allowing the RMB to appreciate slowly. RMB appreciation is often touted as a sign of a rising great power, but in reality, it reduces the competitiveness of Chinese products and increases costs for Chinese enterprises. Some American economists believe that the RMB should appreciate to 4.5 or 5 to be reasonable, so as to balance the trade surplus. Of course, the pressure on Chinese exports does not only come from the outside; RMB appreciation also has a cost. This cost is that the profits of Chinese enterprises are further suppressed. Although the trade surplus hit a new high this year, among the 8 major export industries, except for the electronics industry, which is seeing rising profits due to the AI dividend, profits in the other 7 major export industries are all declining. The worst is furniture, where profits have directly fallen by half. For every 100 yuan worth of furniture sold, the profit is now only 2.2 yuan. Working hard and struggling, the profit margin is less than 2.5%, which is not as good as exchanging it for US dollars and depositing it with Musk. For years, Chinese enterprises have been using lower profit margins and squeezing workers to exchange for an increase in export value—that is, lowering prices to survive. But as profit margins gradually drop to a critical value, and the endurance of Chinese laborers gradually drops to a critical value, coupled with external containment, how long exports can persist is a question. And after the collapse of exports, the dot above the "i-shaped" economy, which is high-tech, will actually be finished once it loses the pillar underneath. This is what I believe is the inevitable outcome that China's "i-shaped" economy will face. The collapse of China's "i-shaped" economy may not lie in China's inability to develop new high-tech products, but in the fact that after exports collapse, China will have no money to support these enterprises to continue researching and developing new high-tech products.
However, sometimes in my view, this failure is not a bad thing, and sometimes it is even better if it comes earlier. Under the "i-shaped" economy, the Chinese people are actually not living happily; one could even say they are in pain. The current "i-shaped" economy really only has a superficial shine. The "i-shaped" economy is also a bit like the Great Leap Forward. From the very beginning, the Great Leap Forward was a development model destined to have no future. It was only because of Mao Zedong's personal will and the rigid bureaucratic system of the CCP that this policy was pushed to the end despite knowing it was wrong, until it was corrected only after the "three years of natural disasters" (Great Famine) broke out. The current economic model is actually the same. The "i-shaped" economy propping up high technology is destined to have no way out, but because of Xi Jinping's personal ideas and the rigidity of the system, a policy that makes 1.4 billion Chinese people miserable can still be maintained. Facing this destined failure, we might as well look forward to the failure coming sooner. After all, only a huge and thorough failure can possibly force Xi Jinping to change China's economic strategy, and only then will the Chinese economy have a real possibility of turning around and getting better. It's just that when the time comes to turn around, whether Xi Jinping can turn the head in the right direction is hard to say. This is what I believe is the full picture of the Chinese economy. Finally, thank you all for watching today's program. I am Toronto Fang Lian. I hope you will like and support my videos, which can increase the weight of YouTube's recommendations for me. See you in the next episode.