Category Archives: Reflections

News Comments, Reflections

Democracy Worked, Lessons Learned

Three years ago, I mused that I would one day write a post on Western liberal democracy and its functioning. With Donald Trump reclaiming the presidency with an even stronger mandate than in 2016, there’s no better time than today to dive into this topic in the current American political landscape.

Critics often argue that Trump supporters, in their loyalty, are acting against their own best interests. This critique usually drips with a mix of disbelief and condescension—how could so many people rally behind such a controversial figure? But reducing Trump voters to caricatures misses the point entirely. For many, voting isn’t just about immediate self-interest; it’s also about the future they envision for their country.

The choice transcends standard ideological labels. It stems from a deep distrust of a political elite and establishment seen as out of touch, self-serving and unaccountable. Much of this frustration is directed at the current Democratic Party, which has moved further away from its working-class roots and is increasingly influenced—or even captured—by a “progressive” left wing.

In 2020, Joe Biden was elected not because of overwhelming enthusiasm, but as a way back to “normalcy”. But the party has taken its narrow majority as a sweeping mandate, using the nation’s need for stability to push through broad top-down initiatives and social agendas that are driven by ideology and divorced from reality. This misreading of public sentiment has further eroded confidence in Democratic leadership.

Trumpism therefore goes beyond a cult of personality or conservative populist rhetoric; it resonates with Americans who feel that certain ways of life, such as economic opportunities, freedom of speech, and protection from government overreach, are under siege. Voting for Trump thus becomes a symbolic middle finger to the Democratic Party. His appeal lies in his role as a disruptor, a challenge to both the complacency of the establishment and the ideological excesses of the Democratic Party. For many, accepting Trump’s many flaws is a price they’re willing to pay because they believe he offers the best counterbalance to the political elite and the “progressive” left’s erosion of their country’s future.

Against this backdrop of disillusionment and defiance, the democratic process has worked just as expected. There is no hidden cabal pulling the strings; every citizen gets a vote, and those votes add up to shape the collective will of the nation. Democracy functions as a source of political truth. This election underscored that fundamental truth, no matter how much it may defy the conventional narrative.

If the Democratic Party wants to reverse this trend, it must first own up to its mistakes. The party must acknowledge it has ignored and deviated from the values of the everyday Americans it purports to represent. Without a real course correction and a sincere attempt to reconnect with these voters, Trumpism will remain a potent force in American politics for years to come. But that is a feature of American democracy, not a bug.

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Economic Analysis, News Comments, Reflections

The Curious Case of the “Chinese Spy Balloon”

In February 2023, the world was abuzz with the now-infamous “Chinese spy balloon” incident, which quickly dominated the news cycle. At the time, I lightly remarked on one of my social platforms that this might be more spectacle than substance. I even half-jokingly came up with an economic model where one player had the option to “spy” or “not spy” and the other had the option to “shoot” or “not shoot”. Both the Nash equilibrium in the static game and the subgame perfect equilibrium in the sequential game pointed to the outcome “not spy, shoot”.

Fast forward seven months to a recent revelation by Gen. Mark Milley, the chairman of the Joint Chiefs of Staff. Speaking to CBS News, Milley explained that the balloon was unintentionally diverted from its original route by winds and ended up drifting over the continental United States. The device, it turns out, did not collect any intelligence or transmit any data to the PRC.

Regular readers of this blog are well aware of my views on China. While I’ve always maintained a nuanced perspective on the challenges posed by the PRC to the U.S. and the Western world at large, this balloon episode stands out as an interesting example of how narratives, once established, can overshadow reality. Ironically, the media’s uncritical role in the entire scenario bears a striking resemblance to China’s state-sanctioned propaganda within the Great Firewall.

The “Chinese spy balloon” downfall (pun intended) serves as a stark reminder of two things: the importance of evidence-based judgment and the need for cool heads to shape our perceptions. As people navigate this complex geopolitical landscape in this era of constant (mis)information, they should remain discerning and deliberate in their responses. When the stakes are so high, clear-headedness is not only a virtue, it’s a necessity.

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Economic Analysis, News Comments, Reflections

Foreign Investment in China

This post is not intended to discuss the general topic of foreigners investing in China but rather to provide my thoughts on the recent news report that billionaire investor Mark Mobius was unable to take his money out of China. While the PRC has long restricted the free exchange of foreign currencies for its citizens, the repatriation of profits for foreign investors has typically not been a big issue when the Chinese economy is strong.

In light of this incident, I think it might be helpful to use a simple economic model to explore the factors that influence a foreign investor’s decision to invest in China, as well as how the PRC government would respond to such investment in different economic scenarios.

The Model

First, consider an outside rate of return, denoted as \(r_{0}>0\), such as that offered by Treasuries. Within the country, there are two rates of return: one under weak economic conditions, denoted as \(r_{1}>0\), and another under strong economic conditions, denoted as \(r_{2}>0\). The government levies taxes on the return earned by the investor at a rate of \(t\in(0,1)\). A one-shot strategic interaction between a foreign investor and the country’s government can be modeled using the simple Bayesian game below.

Nature moves first, with probability \(p\in(0,1)\) of a weak economy and probability \(1-p\) of a strong economy. The government is faced with two possible courses of action: “exploit” or “support.” “Exploit” involves taking over the entire investment and return of the foreign investor. This is relevant in the context mentioned above, as extreme measures to prevent foreign investors from withdrawing their money from the country can be seen as a form of nationalization. “Support,” on the other hand, involves allowing the foreign investor to retain full control over their investment and continue their business as usual. When the government observes a strong economy, it only opts for “support,” which can help establish a positive reputation and attract more foreign investment. However, when the government observes a weak economy, it may consider “exploit” instead of “support” for corporate control, revenue maintenance, and the control of capital outflows.

The foreign investor does not know the actual state of the economy—due, for example, to delayed reporting and/or the outright suppression and manipulation of data—or the government’s action beforehand. However, the investor has access to other information that is common knowledge, including the probability of a strong vs. weak economy, the returns under each scenario, the tax rate, and the potential payoffs. The investor moves simultaneously with the government and has two options: “in” or “out.” Choosing “in” signifies the foreign investor’s decision to invest in the country, while opting for “out” means staying out of the country and earning the external return \(r_{0}\).

Without loss of generality, suppose the foreign investor’s initial capital is one. The structure of the game and the payoffs are shown in the graph below.

Observations

Consider the foreign investor’s options and the government’s best responses. If they play “in,” then the government has a higher payoff by playing \(E^{W}S^{S}\) (“exploit” when the economy is weak; “support” when the economy is strong). If they play “out,” then the government is indifferent regarding its strategies. Hence, the strategy profile \((In, E^{W}S^{S})\) can be a unique pure-strategy Bayesian Nash equilibrium if and only if the investor’s expected payoff of playing “in” is larger than their expected payoff of playing “out”: \(-p+(1-p)(1-t)r_{2}>r_{0}\), which implies \(r_{2}>\frac{r_{0}+p}{(1-p)(1-t)}\). That the right-hand side is increasing in \(p\) suggests that as the risk of a weak economy increases, the investor demands a higher return when the economy is strong, or else they will walk away.

Perhaps the most interesting observation, given my simple model, is that playing “in” at the equilibrium point has nothing to do with the rate of return when the economy is weak. The foreign investor already takes into account the contingency that the government will “exploit” if the economy turns out to be weak. This may provide a partial explanation for why there are far fewer “bears” relative to “bulls” among Wall Street professionals who talk about projects in China (see, for example, here), as it is not \(r_{1}\), but \(r_{2}\) that really matters when it comes to making investment decisions. It remains to be seen how the absolute number of those “China bulls” will change as the longer-term growth outlook in the PRC turns dimmer and more uncertain (i.e., an adequate \(r_{2}\) becomes harder to find).

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News Comments, Reflections

True Democracy?

As I alluded to several times in my previous posts, China has something called “democracy with Chinese characteristics.” On the one hand, for those who grew up in the PRC and went through “patriotic education,” the phrase has always been there, but its meaning has never been apparent. On the other hand, a shadow of a doubt—or should I say, conspiracy—has constantly been cast on the version of democracy that is without Chinese characteristics whenever an average Chinese person wants to learn something about the latter from party-approved sources, which are virtually all they can get if they do not speak another language or use a VPN.

Most recently, this phenomenon has been manifest in the curious effort by the CCP leadership to “redefine” democracy. For instance, and I quote the always-loyal party tabloid the Global Times (环球时报):

Jiang Jinquan, director of the Policy Research Office of the Communist Party of China Central Committee, made the remarks at Friday’s press conference on the sixth plenary session of the 19th Central Committee of the Communist Party of China.

He said democracy is not a patent of the West, nor can it be defined by the West. Western democracy is a democracy dominated by capital, a democracy of the rich, not true democracy.

…

Color revolutions in recent years have resulted in disasters to local people, which the people of the world have become increasingly aware of, Jiang said in response to a question on comparison between China’s whole-process people’s democracy and Western democracy.

Usually, I am sort of cagey when it comes to domestic politics in the US. Still, as someone who spent his first two decades of life in the PRC and who unavoidably had his perception of the world geared toward the possibility of a “Western conspiracy,” I do have an interest in giving my two cents on the issue of “true democracy.”

The “stupid wokeness,” or “‘defund the police’ lunacy,” as Democratic strategist James Carville calls it, seems to show that “Western democracy” is real and extends beyond the “bourgeoisie.” I tend to view “wokeness” as not being “stupid” or “lunatic,” but as the rise—within the democratic system—of a radical and powerful ideology and political movement, as well as a way of “brainwashing” the next generation, that is arguably revolutionary/destructive to the very foundation and upkeep of the prevailing social contract in the world’s most successful capitalist society.

As reflected in the latest election results, the current backlash against “wokeness” and “critical race theory” appears to be part of the re-adjustment process and negative feedback loop that is also a typical feature of “Western democracy.” But can those in the PRC say in any meaningful way that their “whole-process democracy” has the same level of openness and tolerance toward endogenous changes in political and social institutions (regardless of the direction of change) and even the “overthrow” thereof?

All in all, despite my pre-existing bias, “Western democracy” feels very true to me. To what extent it “works” is a topic for another day.

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News Comments, Reflections

Is China Playing Go?

The recent crackdown by Chinese authorities on their largely foreign-listed education and tech companies has caused much chaos among Western investors.

As I hinted last year, the CCP leadership’s vision for China’s future appears to be a sophisticated version of high-tech big-data authoritarianism that advances the interest of the party-state. While “authoritarianism” and “big data” are the inherent political and demographic characteristics of China, “high tech” is, to a great extent, an imported good. Given that foreign investment and know-how in technology are still relatively scarce, it is indeed puzzling to see the PRC killing the goose that lays the golden eggs at such an early stage of its “technology struggle,” to the point where it appeared to be helping its adversaries in achieving their goals.

Unless “we must have missed something”—as the “conventional wisdom” goes when it comes to the “mysterious ancient nation that reads Sun Tzu and plays Go”—

Unsurprisingly, the “usual suspects” in the U.S. quickly came to the PRC’s rescue, arguing that “investors have misconstrued China” and it “could ultimately be a good thing.”

So is China playing Go? I don’t know. What I do know is that an enormous bet is being placed: if successful, it could make George Orwell blush for his lack of imagination, but if it goes south, one can only hope that things would end up peacefully.

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