Part Two Lu Feng: "Industrial Socialism vs. Financial Capitalism"

Part Two:

It has been more than 10 years since the policy of "switching old and new kinetic energy" was officially proposed, how has it progressed? The data from Figure 1 can be clearly presented by the National Bureau of Statistics.

Figure 1: Proportion of high-tech and traditional industries in the added value of industries above designated size.

In the 12 years from 2011 to 2023, the proportion of high-tech industries in the added value of all industries above designated size has increased from 9.1% to 15.7%, despite the vigorous suppression of traditional industries. In absolute terms, the industrial added value increased by 4.44 trillion yuan, while the added value of industrial enterprises above designated size in 2023 will be as high as 39.22 trillion yuan. In other words, the neglected and suppressed traditional industries are irreplaceable and remain the main force of China's economic growth.

Why, then, can't the proportion of high-tech industries increase as quickly as the subjective will be? Because the industrial system is an industrial economy composed of multiple industrial sectors, its fundamental feature is the interconnectedness of the division of labor and complementarity between different sectors in terms of technology, and the interconnectedness of demand and supply in the economy. Therefore, there is a certain proportional relationship between the various parts of the industrial system, and the development of each industry depends on the development of the others, so no industry can be as much as possible.

For example, chips are intermediate products, so the size of the integrated circuit industry depends on the needs of those industries that need chips. Without the use of chips in the terminal industry, chips have no use value; If the industry that produces the end product shrinks, the semiconductor industry will immediately become "overcapacity". Obviously, high-tech industries will not replace traditional industries, because the latter's economy (as a proportion of GDP) is much larger than the former, and high-tech industries also depend on the development of traditional industries. Of course, the development of high-tech industries, in turn, will support the technological progress of traditional industries.

In this case, the main reason for China's economic downturn can only be the suppression of traditional industries. As I mentioned in the 2023 and 2024 articles of "Observer.com", the "de-capacity" and production restriction system has closed a large number of enterprises that are considered "low-end", and private enterprises have borne the brunt. This time, I will give another example of a central enterprise to illustrate the harm of the production restriction system.

Beijing Yanshan Petrochemical Co., Ltd., a subsidiary of Sinopec, is a state-owned enterprise founded in the late 1960s (when Daqing Petroleum was used). It was the first large-scale ethylene production enterprise in China (300,000 tons of ethylene plant was imported from Japan in the 1970s, and later increased to 800,000 tons per year after transformation), and is capable of producing many high-end chemical products. It is particularly worth mentioning that when the new crown epidemic broke out suddenly in 2020, Yanshan Petrochemical was the first backbone enterprise in China to urgently switch production and mass-produce meltblown cloth (the key material for masks), making outstanding contributions to the national epidemic prevention and control.

However, in recent years, the local government has tried to keep only its refining part (to supply Beijing's fuel oil market) and close the chemical part (which accounts for the majority of the output value), starting with ethylene. Why? The superficial reason is that the chemical plant is dangerous, the equipment is outdated, and it is not conducive to environmental protection, but the deeper reason is that it is afraid of taking responsibility. In any case, the reason why officials are able to think and act this way is because under the popular "dichotomy" thinking, they can see the petrochemical industry as an unimportant traditional industry, and think that such a large industrial enterprise can be replaced by the development of "smart health pension", "giant panda park" or other service industries.

Yanshan Petrochemical Co., Ltd. is located in Yanshan District (adjacent to Hebei) in Fangshan District (formerly Fangshan County, which was transferred from Hebei Province to Beijing City in 1958) in the southwest corner of Beijing. The desertified land in that place was not suitable for agricultural cultivation, so it used to be poor. Thanks to the construction of the petrochemical industrial base, it is today a green water and an urbanized "enclave" (still surrounded by rural areas).

In fact, industrialization is a necessary condition for improving the level of environmental protection, because only by using industrialized energy, the people will not destroy vegetation in order to survive, and more importantly, the government and society have the economic strength to improve the environment. In fact, Yanshan Petrochemical has invested heavily in environmental protection equipment to increase its factories in recent years, and the low level of emissions in its production process has scared the visiting Europeans into disbelief.

Therefore, if China retreats to pre-industrialization, it will not be able to maintain its clear waters and green mountains. As an old enterprise, Yanshan Petrochemical's equipment is indeed outdated, but this is a good opportunity to implement technological transformation. According to today's domestic equipment level, a comprehensive renewal of equipment in the original factory site (no need to expand the land) can double Yanshan Petrochemical's ethylene output - this is the original meaning of "connotation development".

The example of the Chinese shipbuilding industry is also worth mentioning. The industry was listed as "overcapacity" in 2013 by the red-headed document, and was subsequently subjected to a series of discriminatory policies (such as tightening loans). However, after a period of difficulty, China's shipbuilding industry has re-emerged through technological progress. In recent years, in the face of the brilliant achievements of the shipbuilding industry but the lack of production capacity, the disadvantages of the "de-capacity" policy and the production restriction system are not worthy of reflection by relevant departments? Even so, the production restriction system has left a "wound" on China's shipbuilding industry (see Figure 2).

Figure 2: Three major indicators of China's shipbuilding from 2002 to 2024

Source: China Shipbuilding Industry Association, February 8, 2025, https://www.cansi.org.cn/cms/document/10854.html

As can be seen from Figure 2, by the end of 2024, the number of hand-held orders (representing unfinished ships in the orders received from customers) in China's shipbuilding industry was 208.72 million dwt, compared with 48.18 million dwt completed in that year, indicating that the number of orders received by Chinese enterprises exceeded the four-year construction volume of existing capacity.

Therefore, a report in the Japanese media pointed out that while the Chinese shipbuilding industry remains the first in the world, the current problem is insufficient production capacity. [6] In fact, domestic media have reported that some shipbuilders are no longer afraid to take orders, and the reasons for this are still the discriminatory lending policies they have received after being blacklisted as "overcapacity". The persistence of these discriminatory policies proves that China's shipbuilding industry has not been formally rehabilitated.

In the trade war launched by the United States against China, it is precisely the traditional industries that have really resisted the first wave of China's shock and hurt the United States, and they have bought time for the breakthrough of China's high-tech industry.

Take this tariff war as an example, half of the low-cost furniture, nearly 80% of Christmas toys, 70% of the photo frames in American households, etc., are made in China, from clothing, textiles to mobile phones, electronic products and other consumer goods, to industrial equipment and parts, are all industrial fields that can cause "pain" in the United States.

On April 18, 2022, a report in the Wall Street Journal quoted the vice president of Gartner, a well-known consulting firm, as saying: "It is undeniable that China is the single largest market for a wide variety of components, from basic components to complex components. You can't rebuild that ecosystem in any other country in the world. [7] In fact, more than 65 percent of the products that the United States imports from China are intermediate goods (such as parts and components) and capital goods (production equipment and tools), and less than 35 percent are consumer goods. These products are all produced in traditional industries.

All of the above-mentioned industries are the focus of the "concern" of the production restriction system. In the name of environmental protection, a county in Hebei Province once tried to "uproot" the only local furniture industry with competitive advantages to the outside world (mainly in North China); A city in Jiangsu is the birthplace of China's modern cotton textile industry, but the textile industry there was once regarded as a "low-end industry", and enterprises were forced to leave; The United States has long been the largest producer of oil refining and ethylene, but China's petrochemical industry has been limited as soon as it catches up with the United States, and Yanshan Petrochemical's ethylene and its downstream will be shut down.

According to the official figures released by Shandong Province in 2022, in those years, Shandong Province has shut down more than 110,000 "scattered and polluted" enterprises and more than 2,300 chemical enterprises, reduced the number of chemical parks from 199 to 84, and reduced steel production capacity by 18.4 million tons, oil refining capacity by 22.01 million tons, and electrolytic aluminum production capacity by 3.21 million tons. 【8】

More than 110,000 enterprises are "scattered and polluted" enterprises? Of course, I can't see it all for myself, but what I have seen with my own eyes is that steel mills that produce and sell well-end steel plants that meet the national ultra-low emission standards have been forcibly closed. Two or three years ago, a chief engineer of a Taiyuan company that produces seamless steel pipe rolling equipment told me that although China's foundry industry is the largest in the world, he could not find a foundry in the entire northern region (including North China, Northeast China and Shandong Province in East China) that could deliver on time because of production restrictions. By the way, two years ago, the equipment company began to design and build two technologically advanced production lines for Russian enterprises, and now it should be at least in trial production.

In recent years, some of the industrial enterprises that have been restricted or closed down for various reasons have come back to life, some have been forced to relocate, and some have been permanently closed, which is sad.

3.2 China's industrial development can no longer tie its own hands: the hype of "overcapacity" is nothing more than the wind of outsiders

Observer.com: The mainstream economists believe that "supply-side reform" aims to adjust the economic structure to achieve optimal allocation of factors, and that energy conservation and emission reduction are also in line with the long-term interests of growth. But at the implementation level, these measures are indeed a double-edged sword. In your opinion, why is this kind of thinking able to influence policy?

Lu Feng: There's an international element here as well. In a speech in 2005, Federal Reserve Chairman Ben Bernanke blamed the "saving glut" of countries outside the United States for the rapid expansion of the U.S. balance of payments deficit, without mentioning that the U.S. was waging costly wars in the Middle East and Afghanistan. Although Sino-US relations were good at that time, it was clear who he was referring to, because China had replaced Japan as the largest superpower against the United States at the beginning of this century.

After the 2008 global financial crisis, the United States blamed China's "overcapacity" as the main cause of the global economic imbalance (meaning that China is to blame for the financial crisis). However, these words have been transmitted to China and reinterpreted by some people, and they are expressed in the policy language, such as economic imbalances, market clearance, zombie enterprises, and so on, which are actually all concepts from abroad.

In the later part of the Biden administration, the United States adopted the method of suppressing China with one hand and persuading it to "commit suicide" with the other, once again making up the old tune of "China's industrial overcapacity". Only this time the Party Central Committee was unmoved, and China was not fooled.

The question arises, is China's development agenda determined by itself or by outsiders? For example, in June 2020, Klaus Schwab, President of the World Economic Forum in Davos, posted on the forum's official website,

"The world must act together to rapidly transform all aspects of our socio-economic system...... Every industry, whether it's the U.S. or China, whether it's oil, gas, or high-tech, must be transformed. ”【9】

The key fact is that China's industry is now larger than the United States, the European Union, and Japan combined, so it is self-evident that Schwab's sceptical-sounding remark is directed. In the article, he added: "We must build a completely new foundation for our economic and social systems. ”

That is to say, when China develops to the current level, when Chinese industry develops a global competitive advantage, the Western elite wants that all of China's achievements will not count, and wants to break the "foundation" for these achievements and start all over again. If what the West did in the past was mainly to persuade China to "commit suicide", then after Trump withdrew from the Paris Agreement as soon as he took office, and after European countries postponed carbon reduction under the pretext of the energy crisis, all of us Chinese are witnessing today: Trump is shattering the existing foundations of the global economic and social system with the aim of "making America great again."

No matter what the international and domestic factors are, when the "dichotomy" thinking and the wind of production restriction begin to pervade, it is the day of China's economic downturn; The slowdown in China's economic growth will continue for as long as the production restriction system lasts, because it forces the process of deindustrialization in China, which has not yet completed industrialization. We use data from all five national economic census bulletins of the National Bureau of Statistics to illustrate this trend.

Figure 3: China's "de-industrialization" trend

Note: (1) The five years selected are the data sampling years of the previous national economic census bulletins; (2) The statistical caliber of the industrial sector is the sum of mining, manufacturing, and the production and supply of electricity, gas and water; (3) The statistical caliber of the number of employed persons is the number of employees in the unit; The proportion of industrial assets refers to the proportion of the assets of industrial enterprises in the total assets of enterprises in the secondary and tertiary industries; The proportion of GDP refers to the proportion of industrial added value in the gross national product.

Figure 3 shows that China's industrial employment peaked at about 140 million in 2013, at the end of the high-growth phase, in 2018 it was about 115 million, a sharp decline of more than 25 million in five years, and in 2023 it was 114 million people, and the decline has stabilized. Overall, during the period 2013-2023, the share of industrial employment in China to total employment decreased from 36.83% to 30.30%.

So, is the decline in employment due to higher industrial productivity? This is not possible, because the share of secondary (industrial) assets in the total assets of the secondary and tertiary industries fell sharply from 22.5 per cent to 14 per cent during the same period, proving that productivity gains are not the main reason for the decline in industrial employment, but that the share of the industrial sector has been absolutely compressed. In addition, the share of industrial added value in GDP has declined significantly, further proving the trend towards deindustrialization.

It is particularly distressing that the per capita productivity of industry remains by far the highest, not only higher than in agriculture but also higher than in the service sector. In other words, if the production restriction system replaces inefficient economic activities and assets with inefficient economic activities and assets, how can the economic growth rate not decline?

Observer.com: You've been mentioning the example of China's 100 million tonnes of steel production capacity. In the past few years, the steel industry has been difficult: prices have fallen, corporate profit margins have fallen, many people believe that the reason is overcapacity, and remember that the steel industry has been "de-capacity" for many years, why is it still "overcapacity"?

Lu Feng: From the perspective of 2024, China's steel industry has had a very difficult year. Faced with this situation, it is inevitable that some people think that it is because its output (1 billion tons/year) is too large and "overcapacity". However, the absolute output or capacity of any industry cannot be used as a basis for judging whether the industry is in surplus, because the demand for the products of that industry comes from other industries or other fields.

The reason for the steel industry's difficulties last year was the sluggish market demand caused by the economic downturn, and not just because of its large production capacity. I'll give you an example. In 1998, when China's crude steel output was only more than 100 million tons, it encountered the problem of "overproduction". At that time, the Asian financial crisis, deflation, nationwide floods, and the release of state-owned enterprises from difficulties caused the economic downturn. It was also in that year that the state adopted a proactive macroeconomic policy and gradually reversed the downward trend of the economy.

In the subsequent period of high economic growth, China's steel production has been rising year after year, reaching 820 million tons by 2014. Although the government has been implementing a policy of "de-capacity" and production restrictions on the steel industry since then, China's steel production stubbornly exceeded 1 billion tons in 2020 because of the market demand.

It would be a fundamental mistake to focus only on the absolute output of one or more industries, while ignoring the linkages between the various industrial sectors in the industrial system. For example, when the "de-capacity" policy was implemented for traditional industries, especially basic industries, some people pinned their hopes for economic growth on the development of "a handful" of high-tech industries, such as "Internet +" and other emerging industries. However, in the past two years, "layoffs in large factories" have become a buzzword. Why?

Because traditional industries are the main customers of Internet companies, if traditional industries are suppressed, it is impossible for high-tech industries as suppliers to develop their ambitions. On the contrary, practice has proven that by "strangling" customers, suppliers can only shrink, and layoffs are inevitable.

For the high-tech industry, the traditional industry is not only its biggest customer, but also the biggest force to support its development. Therefore, without traditional industries, high-tech industries will not be able to develop. If we do not abandon the production restriction system and do not revive growth, there will be a surplus not only in the steel industry, but also in all industries, including high-tech industries. Therefore, the production restriction system is the biggest obstacle to the expansion of China's domestic demand.

3.3 China's industrial development can no longer be self-defeating: DeepSeek's example shows that the stronger the traditional industrial system, the faster the progress of technological innovation

Observer.com: You mentioned that the overcapacity of traditional industries such as steel is the result of the economic downturn. However, everyone has also seen that our technological innovation is constantly making breakthroughs, for example, during the Spring Festival this year, China's artificial intelligence model DeepSeek suddenly appeared and swept the world. In addition, in recent years, the development of new energy vehicles in China has grown by leaps and bounds, driving China's automobile exports to become the world's first. But our economic growth rate has not stopped falling and rebounding, and this problem has been bothering us for a long time, can you talk more about it?

Lu Feng: When DeepSeek came out, I felt that it would have at least as much of a domestic impact as it had of a foreign impact.

I'll start with foreign countries. DeepSeek's biggest impact on the world is not the technology itself, but the fact that it has broken the development model of artificial intelligence (AI) that the United States thinks it can monopolize with a simpler, lower-cost open-source model. The U.S. model is to increase computing power and increase the number of advanced chips used to maintain the technological superiority of the general-purpose large model, which is beyond the reach of all countries, including China. But at the same time, huge sums of money need to be invested, and there is a need for an ever-increasing supply of electricity, so much so that several major technology companies are planning to build nuclear power plants.

Before DeepSeek, AI models in the U.S. were proprietary (i.e., closed) and had to be used by users for a fee, but until AI actually found large-scale applications, that fee was far less than the investment in large models. In this way, there is a question of how to recover the cost.

The U.S. AI development model does not rely on a return on investment from the application market, but on the valuation of AI companies' stocks in the capital market. AI represents the latest technological frontier, and the market has high expectations for its future growth potential (including the effects of the hype), and if U.S. technology companies can maintain a position in this field that is so far ahead that it is difficult for catch-ups to match, the U.S. capital market can continue to support the computing power race of AI development model.

Despite the huge investment costs of this model and the fact that no one can say exactly how AI will affect the economy in the future, because today's U.S. economic growth is largely supported by a handful of large technology companies (such as Amazon, Microsoft, Apple, Tesla, Google's parent company Alphabet, Meta, Nvidia) on stock market prices, the U.S. has spared no effort to "defend" the lead brought by this model. Therefore, the US AI development model relies on financial capitalism and hegemony.

At this time, DeepSeek suddenly appeared, and it reached the advanced level of AI with less computing power and chips. Its impact on the United States is not in the technology itself, but in bursting the "bubble" caused by the American AI development model in the capital market, which not only makes the US stock market fall, but also makes it a big suspense for US companies to recover the huge investment costs of developing AI.

In the wake of DeepSeek's breakthrough, major Chinese internet companies, including Alibaba, Baidu, and Tencent, have launched increasingly powerful AI models on the market, also in an open-source model that can be freely downloaded, modified, and integrated. As a result, DeepSeek and other Chinese companies that are quickly following it have opened up a new "ecosystem" for AI development, in addition to the closed model of the United States that is "far ahead" through the race for computing power and investment, which can enable users and developers around the world, including American companies, to join this ecosystem for free and develop AI together. As a result, some have called DeepSeek's innovation a "democratization" of AI technology. If I were Trump, I would panic about it, too.

However, this raises a very interesting question: Are Chinese AI companies making money from large models? Not really, including DeepSeek, although they can be funded, although large Internet companies can improve their existing businesses by developing AI. Think about it, can an open-source model that is free for everyone to use make money?

So, how can the much-hyped AI technology impact economic growth? This starts with a general law. In the long run, the source of economic growth is productivity growth, so any technological innovation or breakthrough can only have an effect on economic growth if it can affect productivity changes. So, how can technology affect productivity? First, the technology must take the form of a product; Second, and more importantly, technology can diffuse in the industrial system through demand-supply linkages between industrial sectors – for example, the use of computers in various industries plays a much greater role in total productivity than the output value of computer industry.

As I said in last year's Observer article, the complementarity of industrial systems is the key mechanism by which technological progress affects productivity improvement and economic growth, that is, innovation in one industrial sector leads to technological progress in other industrial sectors, and the diffusion and continuous improvement of new technologies in many industrial sectors will make their economic effects fully realized.

AI is the latest development of digital computing technology, and like all phases of computing technology, it must be applied through the real economy if it can affect productivity. AI is still an "enabler" technology, which cannot replace the existing industry, but depends on the application innovation of the industry to continue to develop. Therefore, among all the countries that are actively involved in the research and development of AI technology, the larger the scale of industry and the more types of industry in a country, the greater the economic benefits that AI technology can generate.

In addition, when the current general large model training has approached exhausting the existing data on the Internet, industrial data is a necessary condition for the future development of AI, and China is the country with the most industrial data. Once an application scales up, AI companies that today can only rely on financing will be able to make money, but it will take longer than many people think, and it may require working with the application to develop small, proprietary models for a variety of specific scenarios.

Let me tell you an example from a recent visit to a manufacturing company, Company I. One of the workshops of Company I produces NFC components for mobile phones (Near Field Communication Technology, Company I's products are mainly used for wireless charging), which seems to be just a combination of several sets of coils and metal materials, but has extremely high precision requirements, so the entire production process is automated (only loading and unloading is done manually).

According to the person in charge of the workshop, in automated mass production, identifying the causes of defective products and improving them is a key issue to ensure product yield. So, they used the software developed for them by T, a major domestic Internet manufacturer. They favored Company T because of the latter's computing power in developing AI general-purpose models. However, Company T was not able to develop the software that Company I needed directly from its own large model, because it was impossible to rely on publicly available data from the Internet to train such specialized capabilities.

The actual process is as follows: 1) the production workshop of Company I takes pictures of the defective products detected, and then "feeds" the picture data to the model of Company T; 2) Company T trained its own AI model to develop useful software algorithms based on the constantly updated inferior product feature markers of Company I; 3) Company T delivers the software in the form of a product to Company I, who uses it for the control of the automated production line (to avoid the recurrence of defective products), and pays the former, and keeps paying for the continuous updates. In fact, there is only one person in Company T who connects with Company I, and the whole process can be realized through online transmission.

This practical example illustrates the symbiotic relationship between high-tech industry and traditional industry very vividly and clearly. Given that both China and the United States are sparing no effort to develop AI technology, the key question we discuss is who will be the first to profit from AI productivity gains (not from stock trading), because this question will determine the final outcome of the AI competition.

As we can see from the above example, the AI software delivered by Company T to Company I is actually a dedicated model with industrial specificity. These software or models cannot be easily imitated and used by other companies, because Company I's automated production line was originally developed by itself, which contains too much exclusive experience, skills and "culture", and it is impossible to "transfer" it to other countries, not to mention developing countries such as India and Vietnam, Japan, South Korea or developed countries in Europe.

The industrial connection shown by this example is very clear: Company T is competing to develop large AI models to maintain its own technological level, but it profits from AI by serving industrial companies represented by Company I, which can be all industrial enterprises from textiles, clothing, furniture, toys to machinery and equipment, petrochemicals, pharmaceuticals, etc., no matter how you disparage these industries as "low-end".

Therefore, when the countries participating in the AI competition are almost equal in technology for a while, the key variable that determines the outcome of the long-term competition depends on who has a larger manufacturing industry and a wider range of categories. Just from the cooperation between Company I and Company T, we can see that the situation of high-tech and traditional industry can bring China an unparalleled competitive advantage, and it has been proven by recent events.

When the Trump administration imposed high tariffs on China, Company I offered to stop supplying unless Apple covered the full cost of the tariffs. So, is it possible for Apple to move its supply chain to other countries? No, it faces the prospect of either making the iPhone disappear from the face of the earth or turning it into a low-quality brand.

The relationship that has been formed between the two sides is that Apple comes up with great ideas, and I helps it realize them. For example, the idea of wireless charging for mobile phones was proposed by Apple, but the key patent for the manufacture of wireless chargers was exclusively enjoyed by Company I worldwide, because it was the one who technically invented the device (only to avoid Apple falling into a monopoly supplier situation that it authorized a few other suppliers to produce it, but Company I maintained an overwhelming advantage). When Company I's competitive advantage comes not only from its own efforts, but also from the support of the entire Chinese industrial system, you know that it is irreplaceable.

Sure enough, on April 11, three days after the Trump administration announced on April 9, 2025 (U.S. time) that tariffs on imports of Chinese goods would be increased to 125% (with a total rate of 145%), it dramatically announced the exemption of so-called "reciprocal tariffs" on smartphones, laptops, chips and other electronic products. The wonderful story behind this is left to the reader's imagination. What does it mean to be "irreplaceable"? It's the power that makes the opponent unable to hold out for even a week.

The development of AI will once again prove an irrefutable truth: the larger the scale of an industry, the faster its technological progress; The larger and more diverse a country's industrial system is, the faster the country's technological progress and the greater the possibility of generating new industries from technological innovation. On the contrary, the "dichotomous" thinking and the system of limiting production that can replace traditional industries with new technologies will inevitably lead to an economic downturn, regardless of whether those "high-tech industries" can develop or not.

Let's talk about the impact of DeepSeek on the country. Its emergence has made everyone from society to the leadership suddenly realize that the real technological breakthrough is not as claimed by China's "science and technology system", and the state must first allocate a large amount of money to scientific research institutes, and the scientific research institutes will develop "results" and then transfer the "results" to enterprises. In fact, this kind of "scientific and technological system" contains some content that cheats money, and always revolves around the "intermediate state" that cannot solve real problems, and its "achievements" can not always be judged as success or failure, and when they are in the intermediate state, they are divided into three or six or nine categories -- wearing various "hats" and determining their qualifications or awards for applying for the subject according to their rank.

In fact, this science and technology innovation system often just follows others - what Americans do and how to do it, they do what they do. The emergence of DeepSeek has shattered the "myth" of this system about scientific and technological development, and it has also negated a basic reason for the "dichotomous" thinking and the production restriction system - there is no scientific and technological progress in the world that can be separated from industrial development.

After the emergence of DeepSeek, which caused a global sensation and the attention of the Chinese leadership, many local government leaders had "anxiety disorders" and "reflected" why innovations like DeepSeek did not come out of my "turf"? In fact, the problem is not anxiety about the development of science and technology, but anxiety about political performance. There is also a lively discussion in the media about why new technology companies such as DeepSeek are located in Hangzhou.

I would like to point out a key fact that has been overlooked in all these discussions: everyone knows that Zhejiang is a wealthy province, but its wealth base has developed from traditional industries, and its economy is still traditional industry, not high-tech industry.

According to the data of the Zhejiang Provincial Bureau of Statistics, the total export value of Zhejiang Province will reach 3.57 trillion yuan in 2023, an increase of 3.9% over the previous year. Among them, the province's exports of mechanical and electrical products were 1.63 trillion yuan, labor-intensive products were 1.11 trillion yuan, and high-tech products were 319.76 billion yuan, accounting for 45.6%, 31.2%, and 8.97% of the province's total export value, respectively. Mechanical and electrical products and labor-intensive products are all traditional industries, accounting for more than 76% of the province's exports.

In fact, the fundamental reason why Zhejiang has become a wealthy province is not how many high-tech industries there are, but that there is a higher degree of industrialization and the people's participation in industrialization is more extensive. If, like many other places, Zhejiang believes that high-quality development or industrial upgrading is to replace traditional industries with the development of high-tech industries, or even eliminate traditional industries, then Zhejiang will definitely "return to poverty".

Zhejiang's level of industrialization at the beginning of the reform and opening up was lower than that of many provinces, because it was located on the front line of the Taiwan Strait, and the state had previously deliberately not placed large industrial projects and investments there. However, with the creativity and hard-working spirit of the local people, Zhejiang became rich through the development of various industries after the reform and opening up. More important than affluence is the formation of a better relationship between government and enterprises and a business environment, and when there was a bad trend of law enforcement in other places last year, the first local government to stand up and stop such behavior and provide protection for entrepreneurs was the Zhejiang government. When the investment ability, industrial foundation, and friendly business environment are in place, coupled with universities, those young scientific and technological elites from all over the world have gathered in Zhejiang to start a business, and many cutting-edge technology enterprises that can only rely on financing and cannot rely on sales in the early days live in Zhejiang.

Of course, China wants to develop high-tech industries, not only artificial intelligence, but all other high-tech industries. As the example of artificial intelligence demonstrates, maintaining exploratory efforts at the frontier of high technology plays a key role in the technological progress and "value preservation and appreciation" of China's industrial system. Therefore, the relationship between high-tech industries and traditional industries is mutually reinforcing, interdependent, and integrated, and there is absolutely no possibility of replacing each other.

Think about it, if an economy eliminates traditional industries and "specializes" in robots, not to mention that it can't afford to invest money, even if it produces robots, it can't sell them. It is a fundamental mistake of the "dichotomy" thinking to believe that high and new technology can replace traditional industries, and the inhibition of traditional industries by the production restriction system is the main reason for the sustained downturn in China's economy and sluggish domestic demand.

4. Who will win the showdown between industrial socialism and financial capitalism?

4.1 Industrial Socialism Vs. Financial Capitalism: Breaking the self-imposed limits of industry is the greatest expansion of domestic demand

Observer.com: Therefore, your position is that we should liberalize and support the development of all industries, which you call "comprehensive industrial upgrading", how do you understand it?

Lu Feng: Trump's tariff war has fully demonstrated his long-term goal: although the United States has imposed "reciprocal tariffs" on all countries in a dominant position in the world, it has become its primary goal to attack China, especially when China has taken the lead in countering US bullying, and will continue to increase tariffs on China. The current focus of the "conflict" is on tariffs, and I think it will expand to other areas in the future.

My position is that when the United States opens up a posture to confront China, of course, China cannot surrender and must accompany it to the end. Two key questions need to be answered: First, what is China's main source of strength for the "showdown"? Second, if China "accompanies to the end", will it be able to win? Whether it can be "won" means: can China become stronger after this war?

On the first question. The main source of strength for China to meet the "showdown" is the Chinese industrial system, behind which is the entire Chinese people. The production capacity of China's industrial system is China's largest strategic asset. The so-called "strategic assets" refer to "assets" that are difficult to replicate and imitate, such as the US dollar hegemony and Russia's oil and gas.

China is currently the only country in the world with a complete range of industrial categories, the world's largest industrial producer, and the largest supplier of manufactured products to the world market. Almost all countries in the world rely on China's low-cost and flexible large-scale manufacturing system. At the same time, this industrial system and its production capacity are difficult to replicate and imitate, as evidenced by the fact that Trump launched his first trade war against China in 2018. Therefore, today's Chinese industrial system and its production capacity are the greatest guarantee that China will stand tall in the world economy and cannot be excluded. The more powerful this strategic asset is, the less likely it is that any country or coalition of countries will "decouple" from China.

In recent years, some of China's mainstream economists, including some government officials, have had an erroneous concept, that is, after 40 years of rapid growth after reform and opening up, China's economy has become the second largest in the world, the output of several hundred kinds of industrial products has accounted for the world's first, and industrialization has basically been completed, so China's economy can no longer grow as before, and a downward trend in economic growth is inevitable, and it is inevitable to experience an economic recession.

In fact, this misconception is a self-prophecy of the "dichotomy" mentality and the system of limiting production. Historically, this kind of thinking began to be disseminated by liberal economists during the period of high growth, and it was only after the implementation of policies influenced by this thinking, that is, after the formation of a system of limiting production, that China's economic growth continued to decline. Therefore, China's economic downturn is the fulfillment of the self-prophecy of the "dichotomous" thinking and the production restriction system, not because of some fatal obstacle in the Chinese economy. The reason why I am a staunch "China's economic brightness" is because I insist that the reason for China's continued economic slowdown is inappropriate policies.

From the perspective of the history of world industrialization, the development stage that China has experienced at the end of high growth (2013-2014) is similar to the development stage of the United States from the 70s of the 19th century to the first world war.

According to this logic, I will deduce a fable: by the end of that stage, the United States had become the world's largest industrial and agricultural producer, and the world's largest economic aggregate. However, at that time, the United States also appeared or faced many problems, such as the rapid concentration of wealth, the disappearance of the "demographic dividend" (at that time the United States tightened its immigration policy), environmental damage, and so on; At the same time, scientific research in the United States lagged behind that of Europe (until the 30s of the 20th century, only doctorates obtained in Europe were taken seriously in the United States). In addition, the political center of the world at that time was Europe, the British Empire was the world hegemon, and the British pound was the world's reserve currency, although British industry had begun to lag behind; On the European continent, Germany is on the rise, with an astonishing rate of industrialization, a leader in scientific research, a growing military, and so on. Under these circumstances, US policymakers have judged that it is no longer possible for the US economy to maintain a high growth rate after 40 years of rapid growth, and that US industry is "big but not strong" and "overcapacity," and it is highly dependent on Europe for scientific research. As a result, the US policy authorities decided that the United States would no longer pursue the rate of economic growth, and in order to maintain economic balance, it would implement a large-scale "de-capacity" policy and a production restriction system for US industry; of course, it would strengthen research on science and technology, and at the same time see if it could develop some "high-tech" technology industries with the help of European inventions.

If this fable is true, then the subsequent world history will not have the global hegemony of the United States: there will be no "democratic arsenal" that accounted for more than half of the world's industrial capacity in World War II (the good thing is that there will be no Great Depression), and it is difficult to say whether the United States can even guarantee the security of the homeland; The post-war new technological revolution led by the United States will not take place, and the possibility of another doubling of the total economic output will be completely lost; There will be no Marshall Plan, and neither will the US-dominated liberal world economic order; Even if a group of European scientists fled to the United States due to the war, the shrinking of the industrial system did not help the emergence of new industries—computing technology was industrialized by companies like IBM, which was born as an office machine, and semiconductors were invented by Bell Labs of the American Telegraph and Telephone Company, and then industrialized by other enterprises; Moreover, if there were only scientists from Europe, but without the American industrial system, the atomic bomb would not have been built; If there were no atomic bombs that changed the nature of war, there would have been no Cold War – because there was no nuclear deterrence that guaranteed mutual destruction, and the two sides would have "punched and kicked" (hot war) without looking at each other.

Of course, the "reindustrialization" movement that the United States is thinking about today may have happened decades ago.

Here we must pay attention to a historical fact. According to the U.S. Bureau of Economic Analysis, the average GDP growth rate in the United States from 1949 to 1959 was 6.7%. [10] In other words, by the beginning of the 50s of the 20th century, the size of the American economy had nearly doubled in the following decade, even though it had been 50 years since the United States industrialized and became the world's largest economy, and although the United States had accounted for half of the world's industrial output after World War II. Some Chinese economists say that after 40 years of rapid growth after reform and opening up, today's Chinese economy can only grow at a low rate, which is an irresponsible policy that misleads the country.

The above fable has been invented according to the logic of mainstream economists, but the truth it reflects can be proven by history to be true and profound: the technological progress and structural changes of the industrial system are endless, and its future is not predictable by today's "smart people". There is no scientific reason to assert that China's economic growth potential has been eroded when nominal GDP per capita is only about one-sixth of that of the United States.

Today, China's industrial system is stronger than any other country, and although there is a gap in income levels with leading countries and "shortcomings" that need to be filled, it shows that the demand elasticity of China's industrial system still exists. Therefore, the "golden age" of China's economic growth is still ahead of us, not behind.

In the face of a "showdown" unleashed by the United States, whether in the form of tariff wars, trade wars, technology wars, or military threats, China must abandon the "dichotomy" mentality and reassert the notion that the industrial system is China's greatest source of strength. China's economic or industrial strength is determined by the production system as a whole, not just by a "handful" of high-tech industries or "emerging strategic industries", not to mention that the development of these industries still requires huge investment and the support and support of the industrial system.

In the face of the U.S. trade war, technology war, and tariff war, the CPC Central Committee has firmly stated that China is "not afraid of any unreasonable suppression." Under this political premise, the only correct way for China to meet the "showdown" with the United States is to let go of the shackles of "the transformation of old and new kinetic energy" and the "self-imposed limits" that divide industries into three, six, nine and so on, so as to unleash all the potential for economic growth. The greatest significance of abandoning the "production restriction system" is to enable China's industrial system to once again play an incremental remuneration mechanism, that is, technological progress or breakthroughs in one field will lead to technological progress in other fields, and an increase in demand in one field will lead to an increase in demand in other fields.

Relying on the overall strength of China's industrial system is to fully rely on the strength of the Chinese people, because "the line produces the champion". Highly educated people can design and develop chips, robots, and artificial intelligence, but they make up only a small fraction of China's workforce. China also has hundreds of millions of intelligent, hard-working workers with little education, and each of them needs to find a job. Only when all the working population is useful, can China take the road of "common prosperity".

At a time when the productivity of the employed people in agriculture is less than a quarter of that of the employed people in industry and services, the production and operation of any legitimate product and service that is considered "low-end" by the intellectual "elite" in an industrial and commercial manner is a contribution to the country's economic growth. If there are thousands of enterprises in hundreds of industries and their thousands of subdivisions to find and tap the market, and thousands of enterprises to innovate and improve productivity, then the lack of demand that has been plagued in recent years will reverse the rise; Once the income of most ordinary households increases, consumption will rise; Once the economy grows strongly again, most of today's headaches will be solved.

Therefore, the initiative and creativity of the people are the source of strength to defeat all strong enemies.

As long as there is market demand, what if China's steel industry accounts for 80% or more of the world's production capacity (currently only 50%-60% of global capacity)? If the world's oil and gas drilling rigs and steel pipes (China already accounts for two-thirds of the world's seamless steel pipe production) are the only ones made in China that are the most cost-effective, why not? Other examples can be infinitely so analogous.

If other industrialized countries block China with high tariffs, they will also isolate themselves from the rest of the world, and their protected industries will no longer be able to enter the international market, and all their industries will have to use more expensive materials, equipment and components, and their cost of living will be higher. Therefore, although China's industrial system is large, no industry is superfluous, and any industry - whether it is all industries from making shoes, socks, processing parts to semiconductors, large aircraft and artificial intelligence services - should be valued and should be opened up for development.

Once more and more Chinese industry has formed an overwhelming advantage, no one will be able to stop the process of the great rejuvenation of the Chinese nation, Trump's America may have to let go of arrogance, and his vice president, Vance, will become a real hillbilly.

4.2 Industrial Socialism vs. Financial Capitalism: Inclusive finance helps industrial enterprises to avoid going astray into economic financialization

Observer.com: It is understandable to give full play to the advantages of China's industrial system. In the showdown of the century, you mentioned that "industrial socialism" will inevitably defeat "financial capitalism", so how can our industrial field reflect the superiority of socialism?

Lu Feng: The concept of "industrial socialism vs. financial capitalism" was coined by me, but this is the first time I have spoken it publicly. It is a problematic consciousness that arises through comparison: if today's American financial capitalism is in contrast with its historical industrial capitalism (longitudinal comparison), then what is the "position" of China in this historical context (the question of horizontal comparison)? So, five years ago, I thought of the expression of Chinese industrial socialism versus American financial capitalism.

Once the concept of industrial socialism is placed in the context of the transformation of industrial capitalism into financial capitalism and the suppression of China's rise by US hegemony, its significance of the times is immediately revealed, a bit like suddenly defining China's position in the "blank" of world historical evolution.

In the concept of industrial socialism, the meaning of industrialism means that economic growth and social progress are based on continuous improvement of productivity, because productivity improvement is a phenomenon of the real economy dominated by industry; The meaning of socialism means that only socialism can ensure that China adheres to the path of industrialization and the real economy. History proves that under capitalism, industrialism must take the road of financialism, especially for hegemonic countries. The British Empire, the Netherlands before the rise of Britain, and the hegemony of the United States today have not escaped this historical "law". In fact, under the dominance of US hegemony, all developed countries are going through the process of financialization of the economy.

The structural characteristics of China's basic socialist system conducive to industrial development are reflected in many aspects, such as the leadership of the Communist Party, public ownership of land and natural resources, and so on, but today I will only talk about one aspect: the basic socialist system enables the state to control the channel of financial inflow into the real economy and to coordinate the relationship between finance and industry. Thus, as long as the policy is not wrong, China can avoid financialization of the economy.

For example, China once had a unique system of loans for technological transformation. In the early days of reform and opening up, it was created to improve the shortcomings of the planning system that only focused on infrastructure ("paving"). After the development of the technological transformation policy, it supported the technological transformation of state-owned enterprises in the form of credits (rather than grants) to carry out technological transformation, including equipment renewal.

When China completed the transition to a socialist market economy, the main players in the market became more private enterprises, but because technological transformation loans have a formal status and channels in the national investment system, and the National Bureau of Statistics also retains the category of "reconstruction and technological transformation" investment, any private enterprise that is willing to carry out technological transformation can obtain technological transformation loans from the banking system that bears this responsibility. Therefore, the continuation of the technological transformation policy has become one of the important reasons for China's high economic growth, and its far-reaching significance lies in the fact that it has become an effective financial channel for the state to invest in industry in the form of credit.

However, this proven policy disappeared about 10 years ago, and the "bane" was the "dichotomous" mentality and the system of limiting production. Remember the "no investment, no stimulus" policy? The premise of this policy is that China's high economic growth is widely developed, investment-driven, and overcapacity, so at the national level, it has given up control over financial flows in the direction of the real economy, abolished the responsibility of banks to provide loans for industrial fixed assets, and tried to let the free market solve the problem of industrial investment.

As a result, there was a chaotic situation in Internet finance, and industrial enterprises, especially private enterprises, generally had no way to borrow and fell into a liquidity crisis. Therefore, the "dichotomous" thinking and the production restriction system are the main drivers of the emergence of financialization in China's economy.

In September 2022, the People's Bank of China (PBoC) re-established a special re-loan for equipment renovation after many years, indicating that the country's leadership has realized this problem. After the meeting of the Political Bureau of the CPC Central Committee on September 26, 2024, the state began to promote the policy of ultra-long-term special treasury bonds and equipment renovation. The current problem is that ultra-long-term special treasury bonds need to be limited in scope (such as "double") and cannot be used for local government "debt", otherwise it will cause inflation; The "trade-in" policy for consumer goods does not directly support the production field and does not fall within the scope of technological transformation policies.

Therefore, it is necessary to intensify the implementation of the policy of technological transformation. In doing so, we must break the shackles of the "dichotomy" thinking and the production restriction system, because the technological transformation loan must be inclusive, and the loan object is an enterprise that can meet any of the conditions such as improving productivity, reducing costs, or saving energy and reducing emissions, regardless of ownership, industry, or size, otherwise the effect of the policy will be greatly reduced.

Industrial socialism is built on the basis of the socialist market economy, which supports the private economy and private enterprises, protects the property rights of enterprises and individuals, and encourages the people to participate extensively in the process of economic development and industrialization. Its socialist nature lies in the fact that the state retains the dominant power over economic development, so that capital cannot influence the direction of the country's economic development.

As far as the issues we are concerned about today are concerned, as long as China maintains the financial channel through which the state directly intervenes in the real economy (including the state-led establishment of venture funds, direct investment in infrastructure, and the implementation of technological transformation policies), we will be able to prevent China's economy from falling into the trap of financialization, and we will be able to ensure that China will adhere to the path of focusing on the real economy and industrialization for a long time, and achieve common prosperity.

China's industrial development has broken a historical law of capitalist industrialization: as labor costs rise, capitalist enterprises with the sole goal of maximizing profits will withdraw from those labor-intensive industries, while the financialization of the US economy has caused even capital-intensive and high-tech industries to gradually withdraw from the manufacturing sector that is considered to be of lower added value.

At present, China is the only industrial power in the world that has labor-intensive industries, capital-intensive industries, and high-tech industries at the same time. This is a huge advantage of China's economic development, because the new technological revolution will gradually break the traditional classification of industry - is an automated, intelligent unmanned textile factory a labor-intensive industry or a traditional industry or a high-tech industry? And such factories are emerging in China's textile industry, as well as in a growing number of traditional industries. The continued existence and development of all types of industries will enable China to maintain a foundation of knowledge, skills, and experience in all industrial fields, and create new industries, new investment opportunities, and new growth engines through the deepening of the industrial division of labor. Therefore, ensuring the integrity of China's industrial system should be a basic national policy.

Observer.com: So, can China's industrial socialism win in the "confrontation"?

Lu Feng: Trump and the US political elite have also seen that unless the US can "deindustrialize" China, it will be difficult for the US to succeed in "re-industrialization".

Ever since the Industrial Revolution, spearheaded by Britain, took place in the West, industrialization in the form of capitalism has become a decisive source of power for Western powers to dominate the world, because industrial power determines military power, which can forcibly seize colonies and open the door to otherwise self-sufficient countries like China. However, the stage of industrial capitalism has given way to the stage of financial capitalism. Although financial capitalism helped the United States maintain its hegemony in the world and also helped the capitalists make more money, it eventually hollowed out the foundations of hegemony and tore apart society.

Today, Trump is trying to use US hegemony to promote reindustrialization. But as long as China sticks to the path of industrialization, "broad-based" industrial upgrading, and a socialist system in which the state guarantees financial support for the real economy, Trump will face an unsolvable "paradox". Maintaining hegemony and re-industrialization is a zero-sum game: if you want hegemony, you don't want to re-industrialize, and if you want re-industrialize, you have to give up hegemony. It is precisely because he can only rely on the means of financial capitalism (such as the tariff war premised on the hegemony of the dollar) to promote re-industrialization that he cannot change the "fate" of the United States in the end.

Therefore, the tariff war, trade war, technology war, and so on that we are experiencing today are the "showdown" between American financial capitalism and Chinese industrial socialism, which will affect the direction of the world pattern throughout the 21st century.

So, who will win in this series of "confrontations" (including economic, political and military confrontations) in this "showdown of the century"? We don't have to go into a long story. Here I borrow the judgment of an American political scientist, James Kurth. Although he is not well known in China and has always stood on the side of the United States, I appreciate his profound, concise, and wise writings on American foreign policy. His epilogue in an article published in 2011 (at a time when China's economy was booming):

Who will win when the newly rising Chinese industrial and naval powers are pitted against the United States and the U.S. Navy in the Western Pacific? You can insist on imagining that the old financial power that only has an army (and a downsized navy) to fight a small war can win, and can win without fighting a long and terrible war. But, imagining this outcome, you have to believe that "this time is different", as is often done in the financial industry. Never before in history has a financial power been challenged by an industrial power to achieve such an outcome. 【11】

Of course, China did not take the initiative to "challenge" the United States. Therefore, with the humility that Chinese culture has taught me, I stand on the Chinese standpoint, and revise his words to express his substantive conclusion—that is, my conclusion today:

500 years of world history proves that an industrial power never loses when it comes to the challenge of a financial power, whether that financial power is a world hegemon at the time or not. [Bolded Italics My Emphasis]

Exegesis:

[1] Mearsheimer, who is more familiar to Chinese readers, advocates an "offshore checks and balances" strategy, but the supreme strategy advocates "deep involvement". Although both want to maintain American hegemony, Mearsheimer is a fringe element because of the dominance of the supreme strategy.

[2] For a more straightforward and comprehensive article than what I have said here, see the article of an American scholar: Patrick Porter, "Why America's grand strategy has not changed: power, habit, and the U.S. foreign policy establishment," International Security, vol. 42, no. 4 ( 2018), pp. 9-46.]

【3】 Barry Bluestone and Bennett Harrison, The Deindustrilization of America: Plant Closings, Community Abandonment, and the Dismantling of Basic Industry. New York: Basic Books, 1982.

[4] "Yannis Varoufakis: Trump tries to replicate Nixon shock, but success or failure depends on this," Observer.com, April 5, 2025, https://www.guancha.cn/YanisVaroufakis/2025_04_05_771024_s.shtml. ]

【5】 Alice Amsden, The Rise of “the Rest”: Challenges to the West from Late-Industrializing Economies, New York: Oxford University Press, 2003.

[6] "China's shipbuilding industry consolidates its first place, but capacity is insufficient," Nikkei Chinese, January 23, 2025, https://mp.weixin.qq.com/s/_-_xle79MKtoaoGJNiN9Mg

[7] U.S. media: China is the world's largest parts market, and other places can't replicate it", Observer.com, April 19, 2022, https://www.guancha.cn/internation/2022_04_19_635701.shtml.

[8] "Shandong: More than 110,000 Enterprises Shut Down and Treat 'Scattered and Polluted' Enterprises", China Industry Network, October 1, 2022, https://baijiahao.baidu.com/s?id=1745413915467828402&wfr=spider&for=pc.

【9】Klaus Schwab, Founder and Chairman of the Board of Trustees, World Economic Forum, “Now is the time for a 'great reset',” Jun 3, 2020, https://www.weforum.org/stories/2020/06/now-is-the-time-for-a-great-reset/

【10】U.S. Bureau of Economic Analysis, "Table 1.5.5. Gross Domestic Product, Expanded Detail" (accessed Wednesday, April 16, 2025), https://www.bea.gov/itable/national-gdp-and-personal-income

【11】James Kurth, “The foreign policy of plutocracies,” The American Interest, Vol. 7, No. 2 (November/December, 2011), pp. 5-17.

It appears China made a mistake of trying to appease the Outlaw US Empire by slowing its industrial processes which it now understands to have been a mistake. The recent double-crossing by the Empire over the trade /tariff talks in Geneva further teaches China there’s no way to alter US elite thinking. Add to that Hegseth’s verbal attacks at the Shangri Lai conference in Singapore last week for icing on the cake. The Chinese would like to engage in commerce with the Outlaw US Empire and supply its market with the goods it generates. However, to continue its success, China doesn’t need to supply the US market if the US shows it doesn’t want China’s products or will continue to hinder China’s development, while continuing to interfere illegally in China’s internal affairs by making a lie out of its stated One-China Policy. And none of the above touches on China’s financial policies which lie at the heart of the Empire’s concerns, although they aren’t spoken of publicly.

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