China’s AI Paradox: More Innovation, More Pressure on Jobs

SPEAKER_1 (0:00)

Always lovely to see you. So China's economy continues to be lopsided. We've got these phenomenal export numbers that we just got yesterday. We've obviously got the AI story, which continues to catch up in this race, whatever the race is. But we do have a confidence deficit in the economy. I'm wondering as far as the transmission mechanism, when we will start to see that strong industrial momentum that we're seeing at the factories, which has been very much supported by the high-tech goods that a lot of these factories are making, start to feed in to the jobs picture, then income, and then more consumer confidence.

Sam Radwan (0:39)

Well, unfortunately, it's going to be a while. It's going to be a long time. We don't see this as a cyclical recovery. We see this as an L recovery. This is long-term. The consumer has reset.

You'll appreciate this, Sam. When I first started the company in 2008, retail sales were at 22% growth. Right this year, we're looking at barely 1% growth. And next year, we're looking for somewhere in the neighborhood of sub 1% to a little bit over 1%.

Now, specifically to your questions about where's the trickle-down effect, we're not seeing it. For example, we've spoken to private financial services companies, and they're looking to reduce their IT workforce by 40% thanks to AI. Right? So we're kind of seeing the opposite effect. And really, the market is still a consumer market. You know, over 40% of it is, you know, the consumer market and the real estate market. And it's doubtful that this industrial bifurcation is going to trickle down to the average consumer.

SPEAKER_3 (1:48)

And so, Sam, what has to change for the Chinese consumer to regain momentum?

Sam Radwan (1:54)

They have to find the bottom in the real estate market. You have to start seeing jobs being created again because of the tremendous ecosystem that the real estate market has created. So, for example, youth unemployment is a very important measure to take a look at. And the Bureau of Statistics has revised that number, right? It's still trickling downwards, right?

You're not going to see that consumer confidence that you're looking for, probably all the way to 2030, 2035, right? This is truly something that is structural and is not something that's going to come anytime soon.

SPEAKER_1 (2:33)

Sam, as far as some of our guests are concerned, we had a guest on the other day who feels as if the Chinese trade is somewhat undervalued right now, given the sell-off we've seen in some of those names.

This is a bet on China's AI progress, given what we've heard from CXMT this week, I mean, another deep seek moment, if you will, rather than a bet on the Chinese economy. Yes, those two things go hand in hand to some degree, but this is more about the fact that these Chinese tech stocks come at significantly steep discounts to their US peers, and we are starting to see some of that monetization proof. How is that going down in China right now, when you have a government that obviously is quite worried about the potential of an AI bubble?

Sam Radwan (3:23)

Well, it's a mixed picture, right? So for example, if you're talking about where the value is, or areas that are undervalued, you've got Changxin, who's CXMT, I believe, yeah?

That are doing well and will continue to do well. So the semiconductor side is doing fairly well, right? But then you come to the LLM side, and it's a fierce battle there, right? You have in the US basically, Chad GPT and Anthropic as the two major players. In China, you have five major players in that space, pure play LLMs, not to count what Alibaba, Quinn and all the other ones, right, have to contribute. You've got six other emerging pure play LLMs, and maybe as we're speaking right now, right, there's going to be another one that's going to emerge for anytime soon, right? So what that's creating, it's creating a very cutthroat type of competition, which may have an effect on the US market to some degree. But it is amazing to me how every month, one player comes out on top from the other player. So one month, it's Quinn that everybody's after and looking to use. This month, I believe it's Dolbao, that's owned by ByteDance, the TikTok company, right? So the competition is very fierce, and then you had two IPOs of Jipoo and Minimax, right? So you had a look into the financials of a pure play LLM.

If you take a look at the margins, there is no doubt about it that their margins are getting squeezed from all this competition.