Transcript | Lizzi Lee on Involution, Overcapacity, and China's Economic Model

Below is a complete transcript of the episode. Thanks to CadreScripts for their great work, and to Zhou Keya for the image! Listen in the embedded player above.

Kaiser Kuo: Welcome to the Sinica Podcast, a weekly discussion of current affairs in China. In this program, we’ll look at books, ideas, new research, intellectual currents and cultural trends that can help us better understand what’s happening in China’s politics, foreign relations, economics, and society. Join me each week for in-depth conversations that shed more light and bring less heat to how we think and talk about China.

I’m Kaiser Kuo, coming to you this week from my home in Chapel Hill, North Carolina.

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And of course, you will enjoy the knowledge, the frisson of morality, knowing that you are helping me do what I honestly believe is very important work. So, do check out the page, see all that is on offer, and consider helping out. We are a couple of weeks out from the conclusion of the 4th Plenary Session of the 20th Party Congress, where the outlines of China’s 15th Five-Year Plan, which is set to begin in 2026, were previewed in quite a bit of detail. We will see the actual plan in March, but the contours of it are now fairly clear. There’s not likely to be too much change between now and then. And while going through all of that would be a plateful already for any conversation, we’ve also just seen the ignition of the U.S.-China trade war, followed, of course, by a lot of back-and-forth raises in this now familiar poker game.

Threats by Trump to cancel a meeting in South Korea at the APEC meeting in Busan. And then, to the great relief of many, the actual meeting, which went forward, and which Trump and Xi appeared to have stopped the bleeding for now with a ceasefire. Oh, God, I’m mixing metaphors. But who is better to discuss all of this than my guest today? No one! Lizzi Lee is someone I’ve long admired, and I am always delighted to talk to. Lizzi is a fellow on the Chinese economy at the Asia Society Policy Institute and, of course, a former colleague of mine back in The China Project days. She holds a PhD in economics from MIT. And for my money, she is right up there among the very, very best China analysts working today.

Lizzi has been following all this very closely. She’s also the author of a recent piece in Foreign Affairs titled “China’s Fatal Flaw,” although, as we’re going to get into later, that title maybe wasn’t her first choice and doesn’t really capture the nuance of her argument. I’ve actually given Foreign Affairs enough love in recent weeks on recent episodes that I think I can say that and get away with it anyway. Lizzi, welcome back to Sinica. Are you ready to nerd out?

Lizzi Lee: Absolutely. Ready to go. Thank you so much, Kaiser.

Kaiser: Yeah. It’s great to see you, as always. Let’s get started with the plenum itself. For many foreign observers, the big takeaway was continuity. Another round of high-quality growth, modernization, all the familiar formulations. But you’ve pointed out that this year’s communique actually included some important shifts that went largely unnoticed. There are some people who’ve zeroed in on this, but especially the quite strong emphasis on domestic demand, on household consumption and what you are calling this anti-evolution push. Can you walk us through what stood out to you in the plenum documents, and what you think Western reporting, maybe some of it anyway, missed?

Lizzi: Yeah, absolutely. As you pointed out, a lot of analysts, their main takeaway is, “Oh, this is just another round of even further industrial and tech upgrade.” Right? Doubling down on advanced manufacturing, AI semiconductor — there are six frontier areas that are highlighted and all that. And that’s not wrong. But I think what’s equally important, I believe, is this deeper recalibration in how China thinks about innovation in advanced manufacturing itself. So, it’s not a shift in direction. I don’t think that’s happening. But I think it’s a growing awareness that innovation, advanced manufacturing, they don’t just come from the factory floor — the lab or the supply chain China’s so successfully built out over the past few decades.

It’s actually an ecosystem problem. And, as you know, in innovation, in high-tech manufacturing ecosystem observes, you know, we call the law of the shortest plank, right? So, if we think of innovation tech as a wooden bucket, what are China’s long planks? Well, manufacturing base, robust STEM talent pipeline, engineering scale rate, the ability to start something and scale it up and do it over time. Well, China is already world-class over those areas. But when it comes to short plank, when to it’s comes to financial system, when it comes to domestic demand, which still does not compare with its investment abilities, its manufacturing prowess, by the way, I find a little misleading to accuse Chinese domestic demand is abnormally low.

Kaiser: Right.

Lizzi: Well, first if you look at the history of demand in almost every single other industrialized country, including United States, including European countries, went through a similar path of building up the supply side, the investment side first before pivoting to demand or consumption at a later, a more mature state of development. But the fact is China’s investment growth was so fast and China is so large. So, that kind of made this imbalance more salient. So, I think we need to have some perspective on that. But I think, equally important, and I think policymakers in China are increasingly aware of the imbalance as a fact, not as a mistake in of itself. And currently the lack of robust domestic healthy demand is actually constraining the growth of its tech and manufacturing sector.