---

Huang Yasheng, who teaches at M.I.T.’s Sloan School of Management, is one of the world’s leading authorities on China’s political economy and its financial markets.¹ For another excellent interview with Huang, listen to Neysun Mahboubi’s podcast here https://cscc.sas.upenn.edu/podcasts/2019/04/12/ep-17-diagnosing-chinas-state-led-capitalism-yasheng-huang His books, Selling China: Foreign Direct Investment During the Reform Era (2002) and Capitalism with Chinese Characteristics: Entrepreneurship and the State (2008), were landmark studies in how money flowed into China, and how the state often represses entrepreneurship. At M.I.T., Huang heads the China Lab and the India Lab, two efforts to understand entrepreneurship and business activities in those countries. He has a B.A. and Ph.D. from Harvard, and has taught at the University of Michigan and Harvard Business School. His work has been published in The New York Times, The Wall Street Journal and Foreign Policy. What follows is a lightly edited Q&A.

Q: We will soon have President Joe Biden presiding over America’s China policy. But what’s your assessment of that policy under President Trump?

A: It seems quite obvious to me that the Trump approach has been all wrong. While Russia doesn’t have the same level of economic relationship with the United States, I would argue that Russia is a bigger threat to the United States than China. Just look at the hacking and interference with the U.S. election in 2016. They essentially appointed the American president for the last four years. The direct report of Trump is Putin. It’s not the case that economics is a necessary component in a rival situation between the United States and another country. There are potential threats from China but most of them are regional issues. The South China Sea, the new national security law in Hong Kong, Taiwan. We can agree that those are threats to the international system. Or we can disagree. The Chinese themselves will say, ‘Oh, this is all internal. It’s not a threat to the international system.’ Many people would disagree with that. I would. But Russia is a direct threat to the United States, to democracy. I just have trouble with an administration that goes all the way against China, and doesn’t do anything about Russia. That’s just wrong. And it doesn’t solve anything because it’s really a philosophical issue: Whether an all out effort to contain China is necessarily the best way to go, given the complexity of the relationships between U.S. and China. The relationship with Russia is much more straightforward. It is pure rivalry. Trump’s approach has failed to recognize the complexity of our relationship with China.

If Trump’s hardline approach to China is wrong, what should the U.S. be doing? Should it return to the policy of engagement that existed prior to Trump coming into office?

Well, there’s no way for the Biden administration to go back to the policy [of engagement that the U.S. had] before Trump. We have to be realistic. The issue is whether you continue with Trump’s policy or you go even further in the same direction. I would argue that the U.S. should not do that. It should have a calibrated approach. Let me give you an analogy. After the Jeffrey Epstein scandal, MIT convened an investigation and came up with a process and new guidelines on how MIT is going to conduct the vetting of gifts to MIT. The easy way to do it would be to just reject all the gifts. Or they could accept all the gifts. But usually a rational organization doesn’t do that. You just have to come down in between these two extremes. And for China, it’s the same approach. And if we get the approach, right, which is a risk management approach, then we can talk about the specifics.

You were recently a member of a “Meeting the China Challenge” task force that came up with recommendations for the U.S. government, but also how universities and scientific institutions ought to deal with challenges related to China rise, including intellectual property theft and influence and theft from universities. Is that right?

Yes. UCSD [the University of California, San Diego] and the Asia Society created this study group on science and technology, and I was a member working specifically on the part of the report dealing with university collaborations. And the report laid out some thoughtful principles. Of course, how to implement them is always a tricky thing, but at least the principles are thoughtful and nuanced. And there’s a few things that need to be understood. First, American universities are among the best in the world in terms of research and education; our doors are open. The first principle requires being repeated all the time: we’re open and this is why we are excellent. So whatever universities do with or without Chinese, sooner or later the research will be published. If you’re a Chinese scientist, you can come to MIT, or you can just subscribe to scientific publications. A lot of people don’t quite get this, and it’s important to emphasize that much of the research a university does will end up in the public domain. Seminars are open. If there’s a seminar, they don’t even check your ID. You can just show up. Every university works like this. Second, very few American universities do classified research. There are only two universities that conduct classified research. One is MIT. They do it at a place called Lincoln Lab. You need security clearance to go into Lincoln Lab. Even though I’m an MIT professor, I can’t go there. And third, the U.S. has under invested in its own research and development. If you look at basic research spending by the federal government, it is pretty much flat relative to GDP. We gave tax breaks to the rich people and big corporations and during the Trump era the U.S. even began to tax some of the universities. Part of the reason why collaboration becomes necessary is because of a shortage of funding. There are other reasons as well, but that’s one reason. To fix the problem, you don’t need to stop the collaboration, at least in terms of funding, you can increase U.S. spending on scientific research.

The FBI and the Justice Department have brought a number of cases in the past year, and sounded the alarm about Chinese spies on US campuses. The moves, some say, are long overdue; others insist they are racist and antithetical to the spirit of an open university. What do you say?

American universities need to acknowledge that there are problems. There are some faculty who say, “Oh, this is all racist.” No it’s not. Some of my colleagues even think what’s happening in the U.S. now is like China’s Cultural Revolution, with the persecution of intellectuals. But that’s not the case either. There are legitimate concerns about the transfer of knowledge. If it’s Japan; if it’s Germany or the UK, then it doesn’t rise up to the national security level. It could just be that we’re losing competitiveness. But there are legitimate national security concerns. And to the extent that knowledge and technology are a key part of national security, then if I were in the U.S. government, I would be looking into these issues as well. There are threats to the national security interests of the United States and we have to be honest about that. There are also potential threats to democracy. Hong Kong, for example, enjoyed more freedom of speech and the rule of law than it does today. So you’re talking about China possibly changing the political nature of regions that already have some democracy and rights. During the Cold War, I don’t think U.S. universities would have been able to launch a big, joint research program on nuclear energy with the Soviet Union. In fact, during the Cold War, there was a policy document issued by the National Security Council, known as NSDD-189, which has been renewed by all the subsequent administrations. The document affirms openness and academic freedom but it also imposes some restrictions. The academic freedom that we enjoy has always been somewhat circumscribed so it is not enough simply to argue that restricting collaboration with China violates academic freedom. The issue is always balancing the costs and benefits of these restrictions rather than defending or abandoning collaborations on absolutist grounds. We can debate the current policies on China relative to NSDD-189 and argue that the current approach exceeds or does not live up to NSDD-189. But the principle remains, which is that yes, there are areas that we don’t collaborate with a country that has an explicit goal of military competition with the United States and yes some academic freedom may have to yield to that policy goal.

Huang compared China and India’s economic models in his 2011 TED Talk, “Does democracy stifle economic growth?”

So there are legitimate reasons for the U.S. government, and even universities, to be concerned about collaborating with the Chinese on scientific research. And it seems that you agree that some of this should be the focus of the U.S. Justice department. But you’ve also taken issue with the nature or procedures or results of some of those federal investigations. Am I correct?

That’s right. There are several problems with the U.S. approach. One, they can be very heavy handed and as a result of their heavy handedness, they are actually wrong in a number of prominent cases [involving Chinese scientists]. The FBI doesn’t really understand science. They don’t understand the things I was talking about — how a university is about openness. A lot of this knowledge is already in the public domain. They would go after Chinese professors who possess knowledge that is already in the public domain. It’s like getting arrested for carrying a copy of The New York Times. They see a formula or technical jargon and they think it’s a secret. It’s not a secret. It’s already in the public domain. They have committed horrendous mistakes and those mistakes are costly in terms of undermining the legitimacy of safeguarding the national security interests of the United States. In the end, these actions may undermine U.S. national security interests.

Of course, the FBI has probably done some cases right but they don’t explain exactly what’s going on. The most famous case is the one at Harvard. In that case, all we know is that Charles Lieber failed to make certain disclosures. If true, that is wrong. But is that enough to send you to jail? If that’s all there is to it, explain it. The FBI handcuffed the professor and locked him up. Maybe he had done more than what is disclosed and maybe the things he did that were not disclosed are truly problematic. But we do not know that. Universities do require faculty to disclose funding sources, and grant-giving institutions also require disclosures. In that regard, the National Institutes of Health has done a study of Chinese-American scientists that were caught in the act.²Note: The NIH has done several reports on the issue, such as this one here And what they found is that there are Chinese-American scientists who received funding from the NIH but they didn’t disclose to the NIH that they had also received funding from China. But how did they find this out? They found out because the Chinese academics published papers and they disclosed their fundings there. Now, there could be something nefarious about this but you have to recognize that NIH used the disclosures made by these scientists to go after these scientists on the grounds they did not disclose. For me, I would first want to understand this discrepancy before I draw any firm conclusions. Is it intentional? Is it negligence? One explanation I do not quite see is that this is evidence of some spying. I am not a spy but if I were, wouldn’t I cover all my tracks rather than just some of them? I am not in a position to draw any conclusions but I think the right methodology is to rule out innocent conclusions before you settle on the grave ones. It’s not that I am naive. I know the Chinese government is out to get information and all that. But the U.S. government just needs to make a more compelling case, and they haven’t done that.

What’s at the heart of the issue? Is it some fear in the U.S. that China is gaining technology and know-how and using that to not just to unfairly compete with American companies but to build up an authoritarian, surveillance state, and to expand its military and cyber warfare capabilities. Isn’t that the fear?

Yes. There’s this fear that the Chinese are taking over. And there’s this fear that the U.S. is educating people who are going to perform that act of taking over. I’m not saying that fear is totally wrong. I should think that fear is legitimate. But the issue is: how far are you willing to go to address that fear at the expense of innovation and creative activities at universities? That’s a way to frame the discussion. Are you willing to go so far as to destroy yourself? Because that very openness is precisely why the U.S. universities are the leading edge research institutions in the world and Chinese universities are not. It’s very important to put the issue that way and then think about the policies. Suppose you don’t put on any restrictions? Or, you go to the other extreme and say, ‘We shouldn’t allow any of them here’ and you close the university system. The taskforce report I participated in calls for a risk management approach. It is similar to purchasing health insurance. There are risks. Openness comes with risks. There’s no question about it. You can reduce that risk to near zero by complete closure. Or you just open and allow that risk to go wild. Neither of these two options is the right one. What I hope is that the Biden administration would have a more nuanced perspective. My criticism of the current approach is that it is all about risks, rather than a calibrated approach that recognizes that there are risks but there are benefits as well. One of the benefits is access. We talk about labor in China, but more important is accessing Chinese data, Chinese research capabilities and Chinese talents. If you look at Microsoft, at least a few years ago, the second biggest location for Microsoft patents was China. The biggest was Seattle. A blanket ban on U.S. universities and American companies collaborating with Chinese would lead to a loss of these accesses. This is detrimental to the United States.

What are the solutions? How do we maintain first-rate universities that are open to the best and bright students from around the world, but deal with the growing national security concerns?

First, universities should do more, rather than surrendering this issue to the federal government, which doesn’t appreciate some of the complexity here. It is true, for instance, that universities are open and that we publish. But there are things that you don’t publish. And that’s not nefarious, by the way. You may publish research findings but you typically don’t publish how you go about and produce the research; or how you organize the lab and sequence steps in an experiment; or how you coordinate with industry; and many other things that require intangible knowhow. Tacit knowledge is usually not published or even verbalized and you acquire it by doing an activity. It’s learning by doing. It’s not necessarily a secret and it is a secret only because you use it and apply it but it is not really the goal of your research. You could make an argument that a country that is hostile to the United States can get knowledge about science in the public domain, like now with the research on AI and big data. Much of that is published in open source journals and you don’t even need money to access the knowledge. But how do you produce that algorithm? What are the steps? Those are the things that you can only learn by doing. So once you have concerns about the Chinese military or national security issues, you will be concerned about the transfer of that tacit knowledge as well. And you will be concerned about what kinds of students you’re training. And there’s a difference between training a student from a military academy and one from a civilian university. (By the way, I believe the vast majority of Chinese students are totally on their own. They come to the U.S. on their own.) But this is a risk rather than an existential threat. And we need to increase the risk management tools to manage that. The federal government can do more in terms of visa application screening, and things like that. Universities should also do more to educate foreign students, not just Chinese students, about disclosure and norms on intellectual property rights and sensitivity to national security issues. Universities could also screen collaboration projects with Chinese institutions. Now, MIT has established a very thorough vetting system. And the system has become even more rigorous in the recent months after the Jeff Epstein debacle. We have university-wide committees coming up with recommendations on how to improve our process of vetting gifts and donations. Foreign donations are obviously part of that. And then we should tell the federal government that we are doing more, and please delegate that part of the risk management to universities, because we have the knowledge and the domain expertise. But notice a built-in requirement of that approach: Universities and the federal government have to trust each other and have to agree on the larger goals that both parties view as important. 

The federal government should step back from some of these activities?

It is more likely to have mistakes when the federal government gets involved. But it is also likely to make mistakes in the other direction if only universities are doing the policing. Mistakes of either direction will undermine the legitimacy of the entire effort. I am not saying it is easy; it is actually extremely hard. But I would argue that mistakes made by a blunt approach are more costly than mistakes made with a more nuanced approach. It is not going to be error-free; there are going to be mistakes. I think as a starter the federal government should get involved in the most serious cases, when the evidence is rock solid and scientific opinion is rock solid. So it would be good to have discussions with the Biden administration about exactly what the federal government should be involved in and which areas the university should take the lead. The point I was making before is that we’ve got to get the universities and the faculty to think more like this, before the federal government takes over the whole thing. Not many people, for instance, know about this NSC document. Universities have an obligation to convene discussions and meetings to talk about this. One thing I find fascinating about university life is that we convene seminars and meetings to talk about all sorts of topics but seldom do we convene discussions about ourselves.

I would single out Wall Street for not having an overall good impact on China. If you buy the argument that you should not encourage investments that strengthen the power of the state, I would argue that Wall Street belongs to that category. If you look at the investments, and the services they have provided, the beneficiaries are state-owned enterprises.

Let me shift to another area of your expertise: foreign investment. About two decades ago, the U.S. decided to decouple human rights and an insistence on some type of democratic minded reform from economic engagement with China. The Clinton and George W. Bush administrations helped China enter the World Trade Organization and promoted the notion that as China grew wealthy and prospered, it would integrate into the rules based global order, reform its authoritarian system and improve its human rights record. How did that bet go?

I will distinguish between two types of decoupling. One is to decouple economics from human rights altogether; the other is to decouple the two issues in timing, i.e., today’s economics can lead to tomorrow’s human rights improvements. The two issues are still coupled. The bet on that timing for coupling was wrong, at least so far. And I put myself in that naive camp. In the debates in the 1990s, people often cited the political experience of East Asia. South Korea and Taiwan could be China tomorrow. That was the claim. But if you look at the evidence, you will realize that their transitions were not automatic. First of all, they started out more diverse than China. For example, South Korea had Christians, something like 30 percent of the population. Even under an authoritarian system, South Korea had labor and student unions. China didn’t and still does not have any of that. The U.S. was actually quite involved in that transition. So it was not all because of economics. To begin a serious discussion again on engagement we need to get the facts right. It is economics in combination with many other things that did the trick in East Asia. I also think that the U.S. has not framed its human rights discussions with the Chinese correctly. 

What do you mean?

The fundamental approach of the U.S. is to view human rights as the rights of minority groups. The U.S. tends to frame human rights as the rights of dissidents, Tibetans, minorities from Xinjiang. I’m not saying this is the wrong way of looking at human rights but in terms of a smart approach towards China, that doesn’t work. I wrote about this nine years ago in a Foreign Policy article, “The key to bringing democracy to China.” The smart approach should be emphasizing the human rights of the majority of the Chinese population. What about the Chinese peasants who were dispossessed of their land? I would also argue that Chinese elites need rights too. Look at how Bo Xilai was treated after he fell from the power struggle. Look at how some of the elitists of the economic and cultural elites in Beijing whose houses were demolished this winter. Human rights are a majoritarian right as well. The U.S. framing of the human rights issue is driving a wedge between the U.S. and the mainstream Chinese population.

Do you mean the human rights approach isn’t effective because Beijing’s leaders view it as an effort to carve up and weaken China?

Yes. The Chinese government doesn’t think the U.S. takes human rights seriously. They say, ‘You’re just using this to break us up.’ A majoritarian approach would allow you, for example, to link investments with the rights of labor, because that’s the majority of people. It’s the people working in those factories. And it allows you to link investments with environmental issues because environmental issues damage the health of the average Chinese population. Whether you want to call that human rights or not, I mean we can use a different language, such as issues of labor and environment. And there is a natural connection to investments, unlike connecting investments with a dissident. Chinese government sees rights in terms of development. Then okay. Labor, environment and public health issues are developmental issues and we can have a conversation with the Chinese. (By the way, we should also be open to discussing many of the human rights problems in our own country, with Chinese and others. The importance of having that conversation is acknowledging human rights to be a legitimate topic of conversation.) In this country, we talk about corporate social responsibility. I don’t see anything wrong with extending that language. Corporations have responsibilities beyond their shareholders, right? If you operate in China, you should take some of these issues that don’t have a lot to do with the shareholder returns into account. The right to privacy. Digital companies, if they operate in China, the United States has a right to expect them to respect privacy. Yes, China has a different set of laws, but if you fundamentally disagree with these laws you should not go to China. Once you go, we can craft a legislation that continues to hold you responsible for observing privacy, even if you operate outside of the U.S. I would prefer to do those things, rather than cutting off the relationship with China altogether.

We are where we are with China, over Hong Kong, Xinjiang and now engaged in a fierce strategic rivalry. And yet Beijing is granting Wall Street and global financial firms greater access to their market. What should they do?

I would single out Wall Street for not having an overall good impact on China. If you buy the argument that you should not encourage investments that strengthen the power of the state, I would argue that Wall Street belongs to that category. If you look at the investments, and the services they have provided, the beneficiaries are state owned enterprises. They also have invested in smaller companies and entrepreneurial companies, but most of their deals are about helping big firms and big firms tend to be state owned or state connected. And Wall Street has used corrupt methods, not just in China, but also in Malaysia and in other countries to gain access. The auditing and the due diligence are quite problematic. The auditing industry is a big problem. Because they don’t issue auditor reports centrally, they get away with fairly sloppy work. They create this distance between the auditor reports issued locally and their global brand to manufacture plausible deniability in case a report is proven false. A lot of investors see Price Waterhouse, and they think that it’s the whole company that stands behind the auditor report. In fact, it’s just maybe a few people in Shanghai, you know, in a small office of Price Waterhouse that issues the auditor report. Manufacturing companies are doing things that directly benefit the average Chinese. Companies like Apple and Tesla employ millions of people in their supply chains. I would protect these companies from any U.S. policies restricting investments with China. I don’t want the regular Chinese workers to be hurt. Textile factories and garment factories that employ women in China, and rural workers and migrant workers. Now, even if those investments don’t necessarily improve the politics of the country, at least they bring tangible benefits to ordinary Chinese people in the way that Wall Street has not. 

Why exactly was Wall Street’s backing of the state so unfortunate?

Wall Street has empowered a state-led growth model. The listing of the SOEs, hiring the children of officials; helping build up big equity stakes in large state connected firms are a part of the state led growth model. Whereas I view labor intensive industries, employing tens of millions of the Chinese immigrant workers, as more of an organic, entrepreneurial growth model, like what you have in Guangdong [Province]. The other model is represented by Shanghai, a favorite city of Wall Street. I lay out the differences in my book, Capitalism with Chinese Characteristics. The mistake is that people see China in the same lens. They see a homogeneous model, either just a totally liberal model, no difference between Shanghai and Guangdong, or a homogeneous model in the other direction, the state model. The nuance is that there’s part of China that is very state led, and there’s also a part of China that is entrepreneurial. Under Xi Jinping, the balance of power is definitely shifting toward the state led part of the picture. That’s why we should be extra careful about investments that mostly benefit the state led part of the country. The issue now is how do you devise a set of principles that would encourage certain investments over other investments? This state led model can serve as a dividing line. You make a judgment whether or not this is part of the state led model. If it is, I’m not saying you shouldn’t make an investment but you should perform more due diligence.

Hasn’t Wall Street also fueled the growth of all these Chinese tech startups, which has been the real driver of growth in China for the past two decades?

Yes, and that’s the entrepreneurial side of China. And I would support Goldman Sachs making early stage investments, as Goldman Sachs did in the case of Alibaba, rather than making a huge investment in a state owned bank. That could be a way to differentiate competing investment ideas. They may be similar in terms of the size and all of that, but their effect can be different. And from a global perspective, there are investments that would help us deal with global warming. Whether or not they are state led or not, I would encourage those investments in, for instance, sustainable energy. They can be state led, but that becomes secondary because responding to global warming is urgent. So whether it’s from Wall Street or somewhere else, we should welcome those investments that will help us deal with global warming. It’s feasible to devise a set of principles and criteria, and the devil is in the detail for sure. The devil is always in the detail, but without principles it’s more difficult to implement anything with consistency. So I would hope that we work on these principles and then work on the implementation. I would prioritize manufacturing investments that hire Chinese migrant workers, and then use all these investments to advance the global warming and public health agenda, to advance the protection of the environment, and workers welfare. I’m not sure whether or not China would accept that but at least you’re not cutting off China completely, as the current administration is trying to do.

This brings us back to one of your sharpest critiques of China’s growth model, that it has been state led for far too long, and is inefficient and empowers an elite group. But I don’t recall you singling out the role of Wall Street in promoting or collaborating in the buildup of a state-led system. Can you say more?

Yes. I would argue that Wall Street has played an extremely destructive intellectual role, not just financially intermediating the state led industrialization, but intellectualizing the role of the state led industrialization drive. The political narrative in China is that the Chinese economy took off because of state led industrialization, even though the evidence suggests that’s entirely not the case. Wall Street can be quite schizophrenic. In the U.S., they are arch defenders of low taxes and de-regulations. In China, they often sing the praises of a state-led growth model. Their praise is often preceded by or followed with praise of leaders. There are many political and economic elites in the West who are envious of Chinese leaders. In 2018, I spoke at Aspen Ideas Festival in Abu Dhabi. I talked about entrepreneurial growth, and then, after our panel, the former president of France, [Nicholas] Sarkozy gave the keynote speech. And he said, ‘China’s success is all about its leadership. It’s all about smart, command and control.’ I have heard similar lines from Wall Street people. They fed this idea to China’s political and policy elites. It is now the mainstream view in Beijing. It is truly extraordinary to compare how Deng Xiaoping explained Chinese growth and how current leaders explain it. Deng assigned most of the credits to market and to the Chinese entrepreneurs. I believe that evidence supports Deng. But the current view is: ‘We don’t really need the private sector. We can just build airports and highways and high speed rails.’ And while the result is debt that is 300 percent of GDP, that somehow gets lost. China has the highest capital ratio per each unit of output generated. It consumes about four times as much capital as the United States. Total factor productivity growth has collapsed. It is an extremely wasteful way of growing the economy. A few years ago, there was a panel at Harvard’s Fairbanks Center on the Chongqing Model, and some at the conference praised the Chongqing Model at that time. This was before [the Chongqing Party boss and Politburo member] Bo Xilai fell [in a murder and corruption scandal]. [At the conference], I asked a simple question: ‘How many employment opportunities did the Chongqing Model generate for the rest of the country?’ The answer was probably not zero, but something close to zero. If you look at Guangdong, it has generated tens of millions of employment opportunities for the rest of the country. It has been a huge benefit to the entire economy. So that’s the thing we should look at. Wall Street has not done a service in advancing that particular intellectual model. If in the future we have a policy of prioritizing U.S. investments in China, I would rank Wall Street last. I would also prioritize tech companies ahead of Wall Street. They have their faults but all things being equal tech firms are a net positive for China. They could open up information more and I believe that if Google had stayed in China, there would still be censorship but it would not have been this watertight when you just have one Chinese search engine left. The problem with Silicon Valley is that they do not have a powerful patron to speak up for them in China. Big corporates have Commerce Department; Wall Street has Treasury. I am not sure who speaks up for Silicon Valley.

---