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Losing American knowledge marks huge blow to China

Aug 21, 2023

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President Joe Biden has signed an executive order that limits how much venture capital and private equity firms can invest in high-tech industries in China. These rules aim to stop American expertise and money from going into China and also ensure China’s military cannot get its hands on the latest technology.

Straight Arrow News contributor Peter Zeihan highlights what the loss of American tech and knowledge will mean for China.

Excerpted from Peter’s Aug. 18 “Zeihan on Geopolitics” newsletter:

The Biden administration has issued its first wave of investment bans on the Chinese tech space – things like AI or tech with military applications. However, money isn’t the problem for the Chinese; the real kicker is losing access to American know-how.

This is only the first wave of capital restrictions placed on the Chinese, but they won’t be hurting for cash. For the last 30 years, the Chinese have restricted capital from flowing abroad, ensuring a bottomless supply of money at home. That’s why China has seen explosive growth over the past few decades.

The one thing they do lack is ACCESS. Without the know-how and connections American investment gave them, all those doors will slam shut in their face. Innovation will be stifled, and economic growth will come to a halt.

This is only the first wave of capital restrictions placed on the Chinese, but the long-term effects will be devastating. And to kick Xi while he’s down, he’ll just have to sit back and watch the tech sectors of the countries around him surge to the top.

Hey everybody, Peter Zion here coming to you from Colorado’s Front Range foothills. And today we’re going to talk about the new investment restrictions on Chinese tech. Specifically, last week, the Biden administration put a number of investment bars on private equity firms and venture capital firms, in order to constrain capital flows to the Chinese tech space, specifically, anything that might have a military application, or involved in artificial intelligence. And they made it pretty clear that this is only the first of a series of restrictions that will get steadily deeper and wider as we move forward. Now, this is crazy important, although probably not immediately, for the reasons that seem obvious. China’s problem isn’t money. The trainees basically, limit investment options, prevent money from flowing abroad, prevented from even to a certain degree getting their own stock markets, in order to super saturate the capital environment for Chinese firms, especially state owned firms. Basically, the then uses captured capital, a thrill bottomless supply of capital, whatever industry, they think needs to have it. That’s how they maintain full employment. That’s how they built all those roads. That’s how they’ve had the explosive growth for the last 30 years, it’s investment driven, not necessarily smart, investment driven, Chinese returns on capital are some of the worst in the world. And a lot of the more recent data that’s come out in the last three years, you don’t COVID, who knows for sure, but suggest that a lot of that rate of return might be negative. That’s not good. Anyway, bottom line is if the Chinese want to throw money, a lot of money at AI, they can do that without any help from the outside. For those of you who have a hard time, kind of wrapping your mind around that, think of it this way, we know talking to the Bitcoiners and gold bugs and all the fiscal conservatives, we know that the US government spends too much money. That’s obvious. And one of the many ways that the United States tries to square that circle is it expands the money supply, it prints currency to buy up government debt, to keep it off the market and keep the whole thing from going wobbly. Well take a look here at the money supply for the Big Four dummies, you’ll notice that the Chinese surpassed us a long time ago, and the Chinese money supply is now roughly double that of the United States. In fact, the US money supply has been shrinking for the last year. In the case of China, it has not significantly traded internationally. And most of what is traded internationally is done. So in Hong Kong. So you know, this is all domestic. So everything that all the people say about the US Federal Reserve doing things wrong, there may be some truth to that. But it’s an order of magnitude worse in the People’s Republic. Anyway, bottom line, China, money is not the problem. The problem is what’s next. The reason that the Chinese really like American venture capital, and especially private equity, is it opens doors, it gives access to American firms, and ultimately, the American market. The Chinese are not doing a huge amount of cutting edge technical development, they don’t have it, they certainly don’t have the workforce to take any unique ideas they have and transfer it into a manufacturing system. They need the Americans for that. And what the Biden administration is doing is basically slamming that door in their face, saying that, you know, you can you can do this yourself. If you can, that’s fine. But you’re not going to be able to tap American capital above all American know how in connections in order to then displace Americans in the wider market. Now you can make the argument that this should have been done 1020 years ago, there’s a fair argument to be made. But what we’re seeing is only the most recent, and an increasingly strict series of restrictions by this administration, on all things Chinese, the Chinese with over a trillion dollars of subsidies still haven’t been able to move into mid to high end semiconductors. Now, they never can fact it’s an open question with these sort of restrictions, where they can hold the place where they are right now. Because now a lot of the doors that allow them to operationalize things are simply closed. And this still a year to the Biden administration’s tech sanctions on the Chinese, this is still just the beginning. Remember that at the end of the day, the US consumer market has over tripled the size of that of the Chinese. And without that they don’t have the flows that are necessary to maintain their employment system, much less their tech system. And now at the top, they’re gonna have a really hard time moving forward. Because when it comes to the tech sanctions, the Japanese the Dutch and the Brits are already on board. They are by far the most three most important, the Taiwanese and the Koreans are basically in the process of crossing some T’s and dotting some eyes in order to come along as well. And that’s it that’s all of it. That’s all I got you guys. Take care.

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