# Why Hasn't China Collapsed? Maxinomics · 2025-06-03 Leland Miller of China Beige Book joins Maxinomics to explain how Xi Jinping's CCP keeps China predictable by controlling what's made, where people move and who enters. State-owned enterprises—9 trillion of China's 16-trillion stock market—let the party pick winners, steering cheap state credit into solar, EVs, batteries and shipbuilding. Hukou rules grew Shenzhen from 30,000 people in 1980 to 18 million, while the Great Firewall and the scrapped Ant IPO after Jack Ma called Chinese banks pawn shops cap speech and business. At 0.07% immigrants and under 2,000 new citizens a year, China stays closed yet gave Tesla a fully owned Shanghai factory to trigger the catfish effect that seeded its EV industry. Miller rejects collapse predictions: the non-commercial financial system doesn't fail like the West's. ## Questions this episode answers ### Why did China give Tesla special privileges for its Shanghai factory? Speaker 1 explains it was a textbook example of the catfish effect: Tesla, the only carmaker allowed full ownership of its China arm, got free land and special treatment so it would push Chinese suppliers and automakers to innovate, like a catfish in a tank of sardines, birthing China's EV industry. [16:57](https://maxinomics.podhood.com/93096d7f-ccf9-4de9-b4f3-986211fdfe75?t=1017000) ### What happened to Jack Ma after he criticized China's banks? Speaker 1 recounts that Ma called Chinese banks pawn shops in a Shanghai speech three days before Ant Financial's IPO, the largest ever at a $300 billion valuation. Xi Jinping personally ended the IPO, rolled Ant into the state-owned People's Bank of China, and Ma disappeared for three months. [11:20](https://maxinomics.podhood.com/93096d7f-ccf9-4de9-b4f3-986211fdfe75?t=680000) ### What is the hukou system in China? Speaker 2 describes hukou as a migration system deciding where Chinese people can live, like a passport. Hukou holders get good housing, schools, and health care, while others get dorms and migrant schools, letting the CCP direct migration, such as funneling people into special economic zones like Shenzhen. [8:01](https://maxinomics.podhood.com/93096d7f-ccf9-4de9-b4f3-986211fdfe75?t=481000) ### How much of China's economy do state-owned enterprises control? Speaker 1 says SOEs made up 100% of companies under Mao, dipped under 40% after him, and are back up to 60% and climbing under Xi. Listed SOEs represent about 9 trillion of China's roughly 16 trillion stock market, with unlisted SOEs accounting for at least another 9 trillion. [3:55](https://maxinomics.podhood.com/93096d7f-ccf9-4de9-b4f3-986211fdfe75?t=235000) ## Key moments - **[0:00] Intro** - [0:00] No country has ever grown as fast as China — not postwar America, not peak Britain - **[0:42] Who has power** - [2:16] China's civil war ended in 1949 with the CCP winning and the losing party fleeing to Taiwan — the origin of the Taiwan tension - **[3:18] What it makes** - [3:39] Mao's famine killed tens of millions, so the CCP set term limits — until Xi Jinping abolished them in 2018 - [5:18] China's state-owned enterprises are openly government-owned: the equivalent of Washington owning every bank, oil and defense company - **[5:45] The lending playbook** - [7:01] State-owned firms make up about 18 trillion of China's economy, letting the CCP pick which companies win - **[7:53] The Huku system** - [9:05] How CCP-ordered cheap bank loans let Chinese solar firms undercut US rivals by 8–10% on price - **[10:17] Censored speech** - **[11:20] Jack Ma** - **[12:55] History repeats** - [13:21] China's hukou system decides where people may live, with holders getting housing, schools and healthcare that migrants are denied - **[14:03] The Canton system** - [15:12] Shenzhen grew from 30,000 people in 1980 to 18 million as the CCP dangled factory jobs and relaxed hukou rules - **[16:42] The catfish effect** - [18:40] Jack Ma called Chinese banks pawn shops in a 2021 speech; Xi personally killed Ant's $300 billion IPO within hours - **[19:02] Outro** - [19:15] Leland Miller: China is not a day away from collapse — its non-commercial financial system doesn't work like the West's ## Speakers - **Leland Miller** (guest) ## Topics China's Playbook, Industry Economics ## Mentioned Alibaba (company), Aluminum Corporation of China Limited (company), Baidu (company), China Beige Book (company), Google (company), People's Bank of China (company), State Grid Corporation of China (company), Tesla (company), Firewall Cafe (product) ## Transcript ### Intro **Host** [0:00] This has never happened before. No country has ever grown as fast as China. Not the U.S. after World War II, not England during its days of peak power. China's population has been warring with each other for over 1,000 years. Warring, splitting, unifying; warring, splitting, unifying; arriving today. Led by one man, at the head of one party, that has the sole intention of making sure that outcomes in the country are not random. That there are no surprises. That is the trademark of how China works. Understand the path that power flows, how decisions are made, and China stops being a puzzle; it becomes a map. That's what we're going to explore: the big strokes of how China works. Who has control, what gets made, what the people can do, how it interacts with the rest of the world. ### Who has power **Host** [0:43] One. Who controls the country? Despite being 4,000 miles wide and taking up 5 international time zones, China has 1 time zone. Everywhere in China, clocks are pinned to what time it is in Beijing. Where the Chinese Communist Party operates from—Xi Jinping lives there; emperors used to live there—it is the epicenter of China. And that one word, it is a critical one, Mandarin, the official language of China. This is the Mandarin for China, but to those in China, these symbols mean "middle kingdom." But the cultural meaning of that word "middle" in China means "most important." Not stacked in between others. No, no, no, no, no. The middle kingdom is the most important kingdom of the world, the center of the universe. Giving a picture of how China, certainly the leaders of China, see themselves. With that accepted as the national identity, the leader of the center of the universe naturally is granted complete and total control. Soright after World War II, in 1945, China resumed the bloody civil war it paused on to deal with the world war that arrived on its shores. Four years after unpausing, the Chinese Communist Party, commonly referred to as the CCP, had won, installing itself as the one and only political party in China, forcing the group it defeated to flee to Taiwan. This is where the Taiwan-Mainland-China tension comes from. Taiwan is the other party, the party that lost to the CCP in the civil war. They wanted China to be a democracy for the next 30 years. Mao Zedong, chairman now, ran the country with an absolute iron fist. It's almost all bad. When he toured the country, crops were literally ripped out of the ground in one area and placed around the path of his train to give an appearance of things going well. People were terrified of this guy. Tens of millions died due to bad policy. Political opponents were killed. It's classic bad dictator stuff. So shortly after his death, the CCP established a practice of limiting rulers to 25-year terms. As soon as Mao Zedong has left the building, Xi Jinping starts rising up through the ranks of the CCP. Born to a senior member of the party, he gets the political game. Like, he really gets it. Climbing until he launches himself from governor of Shanghai into what is arguably the ultimate leader role in the world. I mean, there's no other person on the planet that has this kind of control over this number of people. This is power. And he doesn't want that to change. So in 2018, he moves to abolish term limits. Things are going really well in China, so the CCP gives it to him, establishing Xi Jinping as ruler for life, with total control over everything that happens in China, starting with what the country makes, what it builds, what comes out of its factories. Two. What the country makes. It is a jarring difference from how the West works. Completely different. All of these companies are directly owned and controlled by the Chinese Communist Party, completely and openly. It's not like it's shadowy, behind-the-scenes government ownership. ### What it makes **Host** [3:32] They're called state-owned enterprises, or SOEs, and they carry immense weight and power in China. Oil companies, mining companies, agriculture, shipbuilding, defense, banking, all owned by the state. It's like if the U.S. government owned JP Morgan, plus all the other banks, Lockheed Martin, plus all the other defense companies, ExxonMobil, plus all of the other oil companies, and a giant heap of other critical companies. Under Mao, 100% of all companies of everything made in the country was controlled by the CCP. That dipped to under 40% after Mao, but it's now back up to 60% and climbing under Xi. But what are we talking about in terms of size? Like, how much of China's economy do these state-owned enterprises actually represent? The entire value of China's stock market is about 16 trillion. Some of the state-owned companies are listed on the Chinese stock market. You can buy shares in them. They make up about 9 trillion of the entire Chinese stock market. But the whole swath of SOEs that aren't listed, those account for at least another 9 trillion. Completely dwarfing regular and generally smaller businesses, and completely and totally controlled by the CCP, allowing them to pick and choose winners. Because when you control that scale and that variety of companies, and all the way these companies interact with one another, it is not hard to make sure the companies they want to win do win. Is that how you see it, Leilan? **Leland Miller** [4:51] Well, state-owned enterprises have been around since the beginning. You know, you have a state-run economy. That's the way Soviets ran their economy. It's the way the Chinese and other communist parties run their country. But it hasn't always worked the way it has under Xi Jinping. **Host** [5:03] This is Leilan Miller of China Beige Book. You might remember him from the last video. Oh, he's back and he's always ahead of everyone else on China, in large part because the company he founded collects an enormous amount of data on China from people that are in China. **Leland Miller** [5:17] That's exactlyright. So China Beige Book is the largest private data collection operation in the world focused on the Chinese economy. What we were doing is putting out an alternative to Chinese national statistics. And we were saying, look at their statistics, listen to what they're saying, but listen to us too, because we can see the problems coming that the government doesn't really want to acknowledge most of the time. Under Xi Jinping, it's really gone in one direction, which is towards centralization, towards making sure control is centralized under state-owned enterprises. **Host** [5:45] And then once those companies do win at home, expand them to dominate their industry everywhere else in the world. It works like this. The CCP controls six of the biggest banks in the world. There is a line of communication between the CCP and the executives of those banks. ### The lending playbook **Host** [5:59] In fact, the executives are usually CCP party members. Other CCP members sit on the board of directors. Sometimes the entire board of major SOEs are members of the Chinese Communist Party. So when Xi Jinping says, we want our solar industry to dominate everywhere around the world, the banks get the message. The message to them is lend money, lots of it, to Chinese companies in the solar industry at extremely low interest rates. Interest rates way below what other sectors or companies will get. Compare this to the U.S., where if a solar company wants to build out a new factory, they'll also have to take out loans. But the banks in the U.S. who don't answer to the U.S. government will lend an amount to the company they feel comfortable with at an interest rate they feel comfortable with, probably 8% to 10% for a younger company. So the Chinese solar company getting all those cheap loans can immediately price its panels 8% to 10% lower than the company in the U.S. without doing anything different as a company. And that's just the banks. State Grid Corporation of China, owned by the state and controlling 80% of the country's entire electric grid, will give favorable treatment to the new solar factory when it's ready to be hooked up. The aluminum company, Aluminum Corporation of China Limited, will make sure they get the aluminum they need before filling other orders, all on down the line. Stacking cards heavily in favor of Chinese solar companies compared to every other non-Chinese solar company that has to play by normal market rules, by free market rules. This is how the Chinese solar industry came to dominate. The shipbuilding industry came to dominate. Battery industry, EV industry, steel industry. This is the exact playbook for how China dominates global industries. **Leland Miller** [7:34] What they're doingright now is they're saying there are parts of the economy that we're going to be designated as important. It's advanced manufacturing. It's advanced technology. We are going to get them the credit they need because this is important from a national security priority. But all these other areas of the economy, particularly in the aftermath of the great financial crisis that were sprayed with endless amounts of loans, that's over. That is done. ### The Huku system **Host** [7:54] But you also need workers for these industries. Ships are not going to build themselves. Three. What the people can do. **Leland Miller** [8:01] For a very long time, where you were born in China is where you lived out your life. With very few exceptions, people are not free to just pick up and change where they live. There's a migration system in China called Huku that decides where people can move from and to. This is what a Huku book looks like. It's a lot like a passport. Because the system, it's not that different from traveling between countries where you have to pass through customs and show a passport or visa that says you're allowed to be there for longer than, say, a month. Strict rules of this system make moving from rural China to a city like Beijing and acquiring Huku for Beijing almost impossible without some type of very special skill or connection. A person can pick up and just go to Beijing. But Huku, those with Huku get housing. Good housing. Those without get dorms. Maybe factory housing. They get the good schools. Everyone else gets migrant public schools. They get health care, cash or private insurance for everybody else. And the Huku holders avoid what is a very real social stigma that comes when you don't have it. It's very unpleasant to live in any area of China if you don't have Huku in that area, which it turns out is very useful if you want to direct the flow of migration into certain areas. This next part still blows my mind. In the 1980s, the CCP set up these special economic zones around the country and granted land rights in the zones to companies that wanted to build out factories and manufacturing. One of these areas is Shenzhen. At the start of this all, in 1980, it was a tiny village on the Chinese coast. Population? 30,000. Today, 40 years later, your iPhone or TV is probably made in Shenzhen, put together by what is now one of 18 million residents. Because the CCP funneled its people from rural areas to where it wanted them to go. These areas where they wanted to build up industries. 18 million. That's growth of 17,970,000 people. That's more than two New Yorks' worth of people. And the offer to get them there was very relaxed rules on Huku. It was a draw so high that between factory jobs and a semi-Huku status, 18 million people went to Shenzhen, another 100 million to a handful of other areas under similar conditions. They weren't forced. They were shown a carrot that was better than the alternative, and they took it. Thisright here, this is where we should insert a VPN ad. Because just as migration is controlled in China, so is speech. ### Censored speech **Leland Miller** [10:17] The millions of people who have moved to these cities might enjoy the anonymity of walking around a big city, anonymity at least to the people they're walking past, not the security cameras watching them, but they cannot enjoy the pleasure of an online burner account or the ability to freely browse the web. Perhaps this is what really kicked off that trend. The most famous example, Tiananmen Square. This was the end of what free speech there was in China. Students wanted it. The CCP did not. The Great Firewall went up in 1998, blocking the entire Chinese internet network off from the rest of the global internet. There's this cool tool called Firewall Cafe. If you type in one thing, it'll show you the image search results of Google next to Baidu, the Chinese search engine. Back in the 2010s, someone created an unflattering meme comparing Winnie the Pooh to Xi Jinping. And so the Chinese internet was scrubbed of images of Winnie the Pooh. One pops up and it's just the back of Winnie the Pooh. That is the only image of Winnie the Pooh on the Chinese internet. If you search Tiananmen Square, obviously on Google, you're going to get the guy standing in front of a tank. You will never see anything like that on the Chinese internet anywhere. ### Jack Ma **Host** [11:20] But then the banishment of Jack Ma in 2021, founder of Alibaba, after criticizing China's banking system, that was the exclamation point for all of the world to see. And I quote, Chinese banks operate like pawn shops, only giving loans to those who have assets to pledge, not to those with good ideas or potential. What we have is a bunch of banks and financial institutions, not a system that supports the future. He said this in Shanghai during a big speech three days before his company and financial was supposed to IPO. This was not some little company. It was worth $300 billion and about to be the largest IPO of all time. Not just China, not just the U.S., but globally. The CCP took it as a direct challenge to their power. Within hours of the speech, Xi Jinping had personally picked up the phone and put an end to the anti-IPO and obviously Jack Ma's influence. But not just postponing the IPO, canceling it and rolling and financial into the state-owned People's Bank of China. We'll take that. And Jack Ma wasn't seen again for three months. One of the top 20 richest people in the world, the richest man in China disappeared, all because he said the bank should serve the purpose of business and ideas, not the party. **Leland Miller** [12:34] I mean, everybody knows Jack Ma and what happened with Alibaba and financial, but there's many examples of companies that were sort of doing the wrong thing. These companies were cut down to size. They weren't allowed to raise capital. A lot of these leaders disappear. So Beijing has very direct and indirect ways of influencing the way these companies act. And if they misbehave, then there is a price to be paid. **Host** [12:55] But let's take a step back for one second. Let's zoom out to 30,000 feet. ### History repeats **Host** [13:01] We've seen all of this before. This was the dream of the Soviet Union, Imperial Japan, the playbook of ultimate centralized control. It's been tried. It has failed spectacularly each time, often with devastating consequences for the world. Mr. Gorbachev, tear down this wall. **Host** [13:19] But since Mao, the Chinese Communist Party has done so far what all the communist, socialist, authoritarian countries have wanted to do. By traditional metrics like GDP, China is a smashing success story. It's worked all while shunning the values of the West completely. But the ultimate, the true core difference between these two systems is the release vow. The economy gets bad in the U.S., the elected party gets voted out. The vote removes pressure from the system. Under an authoritarian system, the release vow tends to be extremely unpleasant, violent, a shattering of the prevailing system. So it is imperative to the CCP that the idea that something better is out there doesn't take hold. Four, how to interact with the rest of the world. This is another thing that blows my mind every single time I come across it. ### The Canton system **Host** [14:08] Of 192 countries measured, China has the second fewest immigrants by percent of population at 0.07%. Less than 2,000 people are made Chinese citizens each year. The U.S., on the other hand, has the most total immigrants. 50 million Americans that currently live in the U.S. were not born in the country. China is a country that looks inward intentionally, and this is not a new development. This is Guangzhou today, a few miles upriver from Hong Kong. It used to be called Canton. Back in the 1700s, it was the only port on the entire Chinese coast where foreign ships were allowed to enter China. This area in the harbor was the only place in Canton where foreign boats could anchor. And this area in Canton was the only land in all of China where foreigners could trade and interact with China's citizens. This, what was called the Canton system, remained in effect for almost 100 years, specifically as a way to keep foreign influence out of China. Eventually, it broke. England, who was doing a lot of trading through this system, became fed up with the terms of trade between its merchants and China. War ensued. This is the Opium Wars. England won. Allowing England to write a treaty that forced China to open five additional ports on its coast to foreigners, hand over Hong Kong to England, and be more relaxed towards foreigners. The year the treaty was signed, 1842, kicked off what has become known as the century of humiliation that the Chinese, particularly the CCP, reference. We're talking multiple civil wars. We've gone over some of this, some based on converting to democracy. They were invaded by Japan, had to be rescued by the U.S. during World War II. It was humiliating. The whole time, Britain owned a key piece of the country, Hong Kong. But then the country gets it together a little bit. The civil war ended, and once Mao was out of the way, the old Canton system basically went back up. These special economic zones today are just the modern day Canton system, the only place where foreign companies are allowed to operate with any degree of freedom. The Great Firewall around the internet is like the wall put up around Canton, and it prevents foreign ideas from circulating. If China could get away without interacting with the rest of the world, it would. This is acknowledged. It is not a secret, but they simply cannot. And it's for two reasons. They don't have the resources to maintain their population. Farmland, oil, natural gas. They do not possess the critical elements, sand, quartz, to make things like semiconductors. And technology is the most critical thing of all. Fall behind on technology, and you're prone to being bullied by stronger militaries. This is how England won the Opium Wars. They had better ships. Why Japan was so easily able to invade China during World War II? Better artillery. ### The catfish effect **Host** [16:42] China learned this technology lesson the very, very hard way. Some must be let in to make sure that most can be kept out. Why else would China give special privileges to Tesla when it set up its first ever overseas factory in Shanghai? Like really special privileges. China was begging Tesla to come to China. Free land and most importantly, Tesla China was allowed to remain completely owned by Tesla. Exactly zero other car companies that have set up a factory in China have gotten to retain full control of the China arm of their business. Usually, when you set up a factory in China, a Chinese business partner gets 50 or 51% ownership of the Chinese side of the business. Making this Tesla deal a textbook example of the catfish effect. Have you heard of the catfish effect? Tesla was pushing American car companies very hard, making them innovate, threatening their survival like dropping a catfish in a tank of sardines. The sardines swim harder and faster, trying to stay alive, making them last longer after they're caught and ultimately taste better, some say at least. Well, China wanted that effect for its car companies. Tesla was the catfish for China's electric vehicle industry. They show up, set up shop, and boom, start selling EVs to the Chinese left andright. It quickly became their second biggest market. The stock price reacted. What did Chinese automakers do? Almost immediately started copying techniques that Tesla pioneered: gigacasting, camera-based autopilot, battery cells. Not because they just took it from Tesla, but also because Tesla had to start sourcing parts for this stuff from Chinese suppliers. The Chinese suppliers weren't making what Tesla needed. They didn't know these techniques at all until Tesla showed up. They had no reason to. But the Tesla catfish dropped in the tank, chased them around, demanding cutting-edge parts. Once they were making them for Tesla, they could sell them to anyone, particularly their local car companies. And voilà, it worked. The Chinese electric vehicle market was born off the back of Tesla. And now Tesla is way down the ranks of EV purchases in China. Some people and companies must be let in so that China is exposed to new technology so they can use that technology to stay up to date and make sure that most people, militaries, can be kept out. ### Outro **Host** [19:02] And that, ladies and gentlemen, is how China works in broad strokes. Tight top-down control over what gets made, where people can move, and who and what is allowed into the country. The Soviet Union and others have tried it. Is China going to pull it off in the long run? I don't know. The historical odds are stacked against it, but I tend to agree with Leland. **Leland Miller** [19:22] But you move it to now, and you've got a lot of people over the last five years who've been saying China's going to collapse. China's always a day away from collapsing. Everything's going to fall apart. Europe had its financial crisis. America had its financial crisis. China's up next, and the entire Chinese system is going to fall apart. That is not going to happen. And it's very important to understand why that's not going to happen. It is a non-commercial financial system, which means it doesn't work the way that the West does. **Host** [19:45] Everyone say goodbye to Leland and follow them all on Twitter at China Beige Book. I do recommend. Also, we've got a mountain of great stuff coming out in the next few months, so make sure to hit that subscribe button. And I will see you all in the next video. See you. --- This library is powered by PodHood (https://podhood.com), the podcast website platform.