Podcast Summary

Podcast: Excess Returns

Episode: The Real Estate Bust Was the Plan | Louis-Vincent Gave on China's Brute Force Growth Strategy
Date: November 26, 2025
Guest: Louis-Vincent Gave, Gavekal Research
Hosts: Matt Zeigler, Jack Forehand

Overview

This episode features Louis-Vincent Gave, co-founder of Gavekal Research, who joins the hosts to break down China’s economic transformation, focusing on the deliberate real estate bust, China’s brute force pivot to industrial growth, macroeconomic misperceptions in the West, and the evolving landscape of global competition in AI, manufacturing, and capital flows. Gave delivers a nuanced and granular view of Chinese economic strategy, its global repercussions, and opportunities it creates for investors—challenging conventional Western wisdom about both the risks and opportunities in China.

Key Discussion Points and Insights

1. Western Misunderstandings About China (02:00–06:10)

• Misconceptions of Command Economy:
  • Western observers see “Chinese Communist Party” and assume total command control, but “the story of the past 40–50 years has been one of gradual deregulation,” now even deregulating capital.
  • “Competition is ferocious at all levels, especially between local governments. That’s how you get 100 EV makers—because every province is subsidizing its own. It’s cutthroat for producers, great for consumers.” (04:00)
• Unique Competitive Capitalism:
  • Describes Chinese capitalism as “full-contact, Hunger Games capitalism”: intense, locally driven competition, not just central planning.

2. The Real Estate Bust Was Intentional—The Industrial Pivot (06:12–17:42)

• US Semiconductor Embargo and China’s Reaction (06:19–14:00):
  • The 2018 US tech embargo marked the start of “economic war.”
  • China’s leadership saw the need to “de-westernize supply chains” and “cushion the economy against US attacks.”
  • Lending policy shifted: No more loans for real estate/consumption—all capital pushed into industry.
• Unprecedented Scale and Speed of Upgrading Industry:
  • “Money absolutely poured into industry. BYD has 120,000 R&D engineers. Tesla has 85,000 total workers. China produces 12 million university grads a year, half in STEM.” (13:30)
  • Over seven years, China leapfrogged up the value chain in manufacturing, exports, and now dominates in sectors like cars, ships, turbines, energy storage, and more.
• Twin Deflationary Shock:
  • The real estate bust and overcapacity in manufacturing caused global deflation—“everyone thought this was Japan 2.0, but in China, lending simply shifted to industry instead of dying.”

3. Global Power Shift—China “Got Jacked” (14:00–17:42)

• The analogy: “2018, the US punches China; China takes the punch and then spends seven years in the gym. By 2025, they’re ready for rematch—US punches but China’s fit, resilient, prepared.”
• China now has “the world’s industrial base and supply chain resiliency to withstand further shocks. The seat of vulnerability has shifted—the US is now worried about where it gets its rare earths, not the other way around.”
• Quote (16:45):
  • “Rommel said, ‘Our Tiger tank is worth four Shermans. The problem is the Americans always show up with five.’ Now, China is the world’s industrial volume producer—that’s the superpower advantage.”

4. Cheap Energy, Labor & Capital—China’s US-2009 Moment (18:22–24:38)

• “China today is where the US was in 2009: cheap labor, cheap energy, cheap currency, and now abundant government support.”
• “Electricity is so plentiful and cheap in China—Shandong has daytime electricity essentially free because there’s so much solar!”
• US failed to invest in its grid; China’s is all new and efficient.
• “Productivity is off the charts: The Tesla Shanghai factory does twice as many cars per worker as Fremont; wages are one-fifth.”
• “Right now, everyone says China is uninvestable. But where can you find undervalued assets, labor, energy, currency, and government stimulus all at once?”

5. Different AI Paths: Open vs. Closed Systems (24:38–28:19; 37:12–40:16)

• Closed vs Open Development:
  • US: Building closed AI systems (e.g., OpenAI/Anthropic) for enterprise lock-in.
  • China: Forced by sanctions to embrace open-source AI ecosystems—which are now being adopted globally, even by US startups.
  • “It’s the US AI systems that are now the walled gardens—China’s are open, customizable, and suddenly, according to Andreessen Horowitz, 80% of new startups knocking for VC use Chinese LLMs.” (27:10)
• AI Capex:
  • “Historically, China loved to set capital on fire. Now the US is doing that: plowing money into AI, while China, short on chips, is capital-light and plows man-hours instead.” (37:31)
• Quote on Market Shift (39:20):
  • “In a bull market, companies get rewarded for spending capital. In a bear market, they’re rewarded for getting rid of it. That might be what’s happening now.”

6. “Hunger Games” Capitalism and Investor Experience (28:19–37:12)

• For Consumers:
  • “You get better, cheaper products. 7,500 USD for a self-driving car with insane tech—drones, hovercraft mode, lidar for $200.”
• For Shareholders:
  • “Margins are crushed by competition. BYD faces 99 rivals. Investing is hard unless you own protected niches or the largest players.”
  • Chinese investing has been tough because savings rates are high, capital is abundant, and innovation is now creating highly defensible, high-tech niches (e.g., lidar).
  • “You want the ‘barbell’ portfolio: Own high-yield state-owned enterprises or big growth like Tencent, or find deep-tech moats.”

7. Global Power Blocs: US/Europe vs. China/Russia—is That Still Relevant? (40:16–45:07)

• The notion of “good democracies vs bad autocracies” is “totally obsolete.”
• US tried to sever supply chains/decouple economies; it failed. Markets and CEOs (Ford, Raytheon) can’t operate without Chinese supply chains.
• Quote (41:20):
  • “The US could never endure what China did—de-westernize the supply chain at the cost of housing, stocks, and consumption all falling. Americans would revolt in the streets.”

8. Market Implications and Strategy for Investors (45:07–49:48)

• Bullish on Chinese Markets:
  • The real anomaly is the stupidly undervalued renminbi.
  • “One RMB feels like one US dollar on spending power. If the currency is allowed to appreciate, capital will surge into Chinese equities and SOEs, delivering 10–12% annual returns.”
• Barbell Portfolio Construction:
  • If renminbi appreciates: own high-yield dividend stocks.
  • If not: own aggressive growth stocks, as liquidity will drive those.
• Foreign outflows have likely peaked, and new capital inflows will buoy the market.
• Demographics:
  • Birth rate collapse is real, but short-term effect on markets is “not relevant if you’re not in the baby clothes business.”
  • Policy is focused on reflating asset values to restore confidence and consumer behavior.

9. Taiwan Risk Analysis (52:52–58:29)

• “The closer you live to Taiwan, the less you worry about it. The only ones panicking are in Dallas or Toronto.”
• “Politically, the pro-independence party is polling at historic lows; likely to be swept aside peacefully. China prefers negotiations—historically, it took 100 years to reclaim Hong Kong by deal.”
• “There’s no bad blood, no killings, no urgency like in Ukraine's Donbass. The Taiwan scenario is a red herring, used by the US defense establishment to justify military spending.” (53:04–58:29)

Notable Quotes & Memorable Moments

• On Western misconceptions:

  “I think the first thing people get wrong is they look at China like a command economy… This doesn’t correspond to the underlying reality.” (02:14, Louis-Vincent Gave)

• On China’s industrial scale:

  “BYD has 120,000 engineers in R&D; Tesla has 85,000 workers in total—just to give context.” (13:30, Louis-Vincent Gave)

• On the energy advantage:

  “In Shandong, electricity during the day is essentially free. There’s so much solar, they can’t store it.” (21:30, Louis-Vincent Gave)

• On AI ecosystems:

  “OpenAI isn’t open at all, but China’s Deep Seek, Quen, are truly open. That’s why startups everywhere are adopting them.” (27:10, Louis-Vincent Gave)

• On comparative US/China strategy:

  “Historically China set capital on fire. Now the US is doing that. Like, $300 billion on data centers…” (37:31, Louis-Vincent Gave)

• On Taiwan risk:

  “The closer you live to Taiwan, the less you worry about it. It's a red herring, mostly for the US military industrial complex.” (53:04, Louis-Vincent Gave)

Timestamps for Key Segments

| Timestamp | Topic | | --------- | ----- | | 02:00–06:10 | Western Misconceptions on Chinese Economic System | | 06:12–17:42 | Real Estate Bust as Planned Industrial Reallocation | | 18:11–24:38 | Cheap Energy, Labor, and Parallels to 2009 US | | 24:38–28:19 | AI Race: Open-Source vs Closed-Source Ecosystems | | 28:19–37:12 | Hunger Games Capitalism & Investor Implications | | 37:12–40:16 | AI Capex: China’s Manpower vs US Capital | | 40:16–45:07 | US-Europe vs China-Russia: Is Decoupling Real? | | 45:07–49:48 | Chinese Market Setup, Currency, Investor Strategy | | 49:48–52:52 | Demographics and Economic Policy Response | | 52:52–58:29 | Taiwan Invasion Risk: Fact and Fiction | | 58:29–61:48 | What Could Go Wrong? Risks and Market Exits | | 61:42–62:52 | Investing Beliefs that Differ from Peers | | 62:52–63:46 | Last Advice for Investors |

Final Takeaways and Advice

• China’s current economic malaise is not a repeat of Japan, but reflects a systemic, state-driven pivot to industrial resilience, with implications now shifting as China reflates markets and the world’s deflationary underpinning recedes.
• Investment opportunities now hinge on recognizing renminbi undervaluation and the extraordinary productivity dividend China is poised to deliver. A “barbell” approach—owning both high-yield SOEs and fast-growth tech—could capture this.
• Many Western fears about Taiwan, economic collapse, or rigid communism are outdated or entirely misconstrued; on the ground, China is more capitalist, competitive, and flexible than most expect.
• Most important lesson: Track exchange rates and energy costs, and keep a diary to understand your own investing psychology.
  • “Currencies matter. Undervaluation will be a huge driver of forward returns—even if people ignore it for years.” (60:41)

For more from Louis-Vincent Gave:
Visit gavekal.com or follow him on Twitter @gav_vincent.