Xi Jinping’s paranoid approach to AGI, debt crisis, & Politburo politics — Victor Shih

**Dwarkesh Patel** (0:00)
Today, I'm talking with Victor Shih, who is the Director of the 21st Century China Center at UC San Diego. China is obviously the most important economic and geopolitical issue over time, and doubly so if you believe what I believe about AI. I was especially keen to talk to you because you have deep expertise, not only in Chinese elite politics, but also its economic system, its fiscal banking policies. We'll get into all of that before we get into the AI topics. Is China actually a more decentralized system than America? If you look at government spending by provincial governments versus the national government in China, it's like 85% local per provincial, 15% national. In the US, it's actually, if you look at state and local, it's 50% national, federal government is 50%.
When you think of an authoritarian system, you often think of it as like very top down, the center controls everything. But if you look at these numbers, it just seems like it's quite decentralized. Or is that the wrong way to look at the numbers?

**Victor Shih** (0:54)
I think for a while China was quite decentralized. So this is kind of in from the mid 1970s all the way until the mid 1990s. China was very decentralized where local governments generated a lot of revenue, but they also spent a lot of money. And it incentivized them to do, you know, kind of basically good things, such as trying to attract as much FDI as possible, trying to attract as much local investment as possible, give tax breaks and so on and so forth.
So I think, you know, China had a very good period of mainly sort of private sector driven growth because of this fiscal decentralization. And that's the understanding of, I think, most economists. But then there was a tax centralization in 1994, basically, where the central government basically said, okay, this is ridiculous. We don't want to end up like the Soviet Union, you know, and fall into different pieces. We need to control fiscal income. So, then they grabbed the most lucrative source of taxation at that time. And it continues to be the case, which is the value added tax. And so, the collection of value added taxes, and then also, in subsequent decades, pretty much all other tax categories are now collected by the central government. Then they reimburse part of the money to the provinces. And then supposedly, they say, okay, now you can spend the money as you wish, but in reality, that's not the case. So in reality, it's kind of like, well, if you do this thing, then I'll give you a little bit of money. But you have to do the thing that I want you to do to get this money, to get this grant, basically. So then the fiscal autonomy, I would say, has been falling since 1994 I mean, there are different periods. Sometimes, there's a little bit more autonomy. So from 2000 until recently, until 2020, the localities gained more autonomy vis-a-vis land sales. So that's when the real estate market was going very well. Even though they couldn't control the tax revenue, they could control the land revenue. But then the central government basically killed the land market in 2022 And now, I think, localities in China are highly dependent on the central government.

**Dwarkesh Patel** (3:15)
Let's start at the very top.
If you look at the members, first, I want to understand the personal. If you look at the members of the Politburo and you look at their past, a lot of them will be provincial leaders and then some local thing before that. But in many cases, they'll have stints, as you said, as they were the head of this chemical engineering SOE, or they studied... Xi Jinping himself has a PhD in chemical engineering, right?

**Victor Shih** (3:44)
Some things, some kind of. Well, but I...

**Dwarkesh Patel** (3:47)
Yeah, so that's what you want to ask about. If you just look through the list, a lot of them are like PhD economist, PhD industrial engineer, et cetera, et cetera. I mean, some of them, when you look, it's like, oh, they have a PhD in Marxist theory or something.

**Victor Shih** (3:59)
Leninist, yeah, Marxist thought, too.

**Dwarkesh Patel** (4:01)
Which that seems fake. But are they actual technocrats? If you look at their degrees, they seem quite impressive. Or is this just like fake made up credentialism? If there's a PhD economist in the Politburo, should I be impressed and be like, oh, they probably really understand economics? Or should I just think, this is kind of a fake degree?

**Victor Shih** (4:20)
So the former premier of China, Li Keqiang, his undergraduate degree, I think, was economics. And he studied under one of the best economists in China.