Li Lu, Founder of Himalaya Capital: China's Economy Should First Look at Goals
Li Lu, founder of Himalaya Capital, stated at the 36th Graham & Dodd Annual Forum at Columbia Business School that analyzing the Chinese economy should first consider national goals, then the costs, and asked, "Do you think you are the goal or the cost?"
He pointed out that China addresses the middle-income trap with ten-year plans, with "Made in China 2025" pushing manufacturing from mid-low to mid-high end, and since 2021, there has been an increased focus on technological independence, with most goals achieved ahead of schedule; however, achieving goals does not equal overall success, as costs are reflected in the balance sheets of middle-class families.
Li Lu noted that after peaking in 2021, housing prices have continued to decline, with typical middle-class families having about 70% of their net assets tied up in leveraged homes, and an average drop of about 40% in housing prices has led to a significant reduction in wealth; families have consequently reduced consumption, increased savings, and accelerated debt repayment, bringing domestic demand growth close to zero.
On the other hand, breakthroughs in manufacturing have been achieved, with mature process chips being largely self-sufficient and advanced processes continuously approaching maturity; he believes that U.S.-led technology sanctions have become a "gift" for China's chip industry, as cutting off external supplies has created a huge domestic replacement demand, forming a flywheel of income and R&D.
He reviewed the past 50 years since the end of the Cultural Revolution in 1976, presenting a clear ten-year cycle model: a cycle of goals and costs, with goals and costs alternating, where the goals of this decade may become the costs of the next; a significant decline in new home sales and the flow of hot money into manufacturing reflect a reallocation of resources.
This framework juxtaposes national industrial upgrade goals with the costs on residents' balance sheets, as capital flows from real estate to manufacturing and technological independence under event-driven circumstances; manufacturing enterprises and supply chains benefit from order replacements and policy resources, while families and related industries that rely on property appreciation and consumption expansion are under pressure, leading to a continuous rebalancing of domestic demand and export structures.
Li Lu also emphasized that AI should be a tool rather than a replacement for humans, and recursive self-improvement must keep humans in the loop, noting the high interdependence in global advanced chip manufacturing regions.
Source: Public Information
ABAB AI Insight
Li Lu, a participant in the 1989 student movement who later moved to the U.S., obtained degrees in economics, law, and an MBA from Columbia University, founded Himalaya Capital in 1997, received funding from Charlie Munger's family, and brought BYD into Berkshire's view; his long-term practice applies the value investment framework to Chinese and global markets.
On the capital path, he observes that the state reallocates resources from old targets like real estate to manufacturing upgrades and technological independence through ten-year plans, with sanctions creating replacement demand that shifts orders originally destined for external markets to domestic chip companies; the motivation is to break through the middle-income trap and achieve autonomy in key areas while accepting the shrinkage of middle-class wealth and slowing domestic demand as a temporary cost.
Similar cases include South Korea and Taiwan achieving leaps through export orientation and technological learning during industrial upgrades, as well as Japan's path of real estate adjustment and manufacturing transformation after the Plaza Accord; China is currently transitioning from mid-low-end assembly to mid-high-end manufacturing and partial autonomous supply chains.
Essentially, this involves the reconstruction of industrial chains and the transfer of pricing power: national goals shift resources from residents' balance sheets and consumption areas to industrial and technological sectors, with sanctions accelerating the formation of domestic replacement markets, enabling mature processes to achieve self-sufficiency and advanced processes to continue catching up, while the adjustment costs are borne by household wealth and domestic demand growth.
ABAB News · Cognitive Laws
- While national goals are being achieved, someone is often paying the price.
- The breakthrough goals of this round often become the costs to be digested in the next round.
- First ask yourself if you are the goal or the cost, then judge where the opportunities lie.