Why Silicon Valley and Shenzhen Have Exactly The Opposite Problem | Economics Explained

this is san francisco and this is shenzhen two cities that are the backbone of innovation for the most powerful economies in the world the usa and china these two cities are home to some of the most influential companies to ever exist and each one attracts millions of talented workers from across the world looking to apply their craft in extremely technical roles but they each have a major problem and in fact they each have a major problem that is exactly the opposite of one another this is all because while on the surface these two cities look to be working towards the same goals they are of course from very different nations with very different regulations freedoms and systems in place to promote the kind of innovation that has made these cities global powerhouses in their own right fortunately by studying these problems we can learn a lot about these cities the nations that they are a part of and the dynamics of our global economy so what is the big issue facing silicon valley in the united states what is the equal and opposite issue facing shenzhen in china and how is this all made much more difficult to solve because of currency manipulation this episode of economics explained is brought to you by acorns in 2021 it's particularly easy to get caught up in the hot stock du jour especially with names like gamestop and amc going ballistic and reddit millionaires been minted seemingly overnight with so much rampant speculation and sheer mania it's all too easy to lose sight of what actually matters taking care of your financial future retirement is no laughing matter and it's certainly not something that you want to treat casually building wealth is a conscious and deliberate undertaking and one that requires discipline and fortitude that's why i'm proud to partner with acorns a company that truly cares about helping you build wealth with features like acorns later you can easily find a type of retirement account that's right for you tailored specifically to your financial goals in fact it's so easy to get started that in the time it's taken you to watch this much of today's video you could have already set up your account it's that quick stay tuned until the end to learn more or sign up now at acorns.com ee and they'll deposit five dollars into your portfolio to help you get started again that's acorns.com ee the link is on the screen now and in the video description below silicon valley is the unofficial name given to an area just outside of san francisco which is home to some of the largest tech companies in the world the region was established in the 1960s as professors from stanford worked with and innovated on some of the earliest industrial computers aided with funding from the us military the region really came into its own in the 1970s when companies such as intel atari and later apple computers made their home in the area it was the logical place for these early pioneers to set up shop because computers at this time was still the realm of science fiction for most people so the talent pool of potential employees with the expertise to innovate with these new machines was very shallow and located almost entirely within this region the same is true of component suppliers even early computers as basic as the apple ones still relied on circuits and capacitors and switches that were made by other companies in silicon valley so if you wanted to create new technology you had to go where the technology was being created and this almost became a self-fulfilling prophecy this kind of grouping is actually great because it means that development can happen more rapidly as ideas talent and techniques can be shared more easily imagine if the leading semiconductor scientists in the 1970s were based all around the world it would take them longer and cost them more to water parts they wouldn't be able to attend lectures and even day-to-day communication with their peers would be more difficult because at this point these guys hadn't got around to inventing file sharing or zoom calls overcoming these barriers by simply sticking an entire industry together creates something that you might have heard about which is economies of agglomeration remember this because it's important later on for a totally different reason by the way there was something else that was attractive about this particular structure the california coastline and it wasn't the weather or the giant seagulls no it was venture capital today san fran and silicon valley are about as synonymous with venture capitalists as they are with computer programmers and flip-flops but this was true long before the tech bros occupied southern california you see movies were and still are an incredibly popular investment vehicle for sophisticated investment firms and ultra high net worth individuals big money desperately searching for a good investment has been around in this corner of the united states for a long time this was fantastic because technology companies are a lot like feature films in a lot of ways they both have a rigorous production process where no profit is made they are both a combination of technical expertise and creative thinking and of course they are both very risky investments with huge potential payoffs an investor that has made millions from investing into movies might be tempted by a proposal to create a game played entirely on a computer and displayed on a tv the two industries were also surprisingly synergistic think of something like pixar which is ultimately a technology company that just so happens to make movies with that technology now this is all fine and dandy hopeful innovators gathered in a central location to make great things and investors were there to provide capital to unearth those ideas and make them a reality but this is a delicate balance and unfortunately genuine innovation is not something that can be endlessly harvested on demand today the culture of venture capital has seen a dramatic shift investors care less about investing into companies with the potential to create massive value and more about investing into companies that can scale quickly so that they can sell off their stake at a profit my good friend jake tran did an amazing in-depth video on exactly this phenomenon and i definitely suggest checking that out but the ultimate takeaway here is that people have seen what an amazing investment opportunity technology companies can be even if they are not ultimately profitable or even sustainable more competition amongst investors is leading to higher valuations and more of a rush to get in on the ground floor which has meant more and more questionable companies have been funded companies that are wildly unprofitable companies that have no plan for profitability companies that have no real marketable applications and of course companies that are downright fraudulent the phenomenon of having too much excess cash or dry powder as it's known in the industry causes gluts too much money sounds like a great problem to have but it can cause issues the reason it's referred to as dry powder dates back to the 1600s when soldiers had to keep their gun powder dry in order for their cannons to shoot having a reserve of dry gunpowder meant the ability to take advantage of the battlefield when the opportunity presented itself today amongst financial professionals it means having excess cash or liquidity to take advantage of investments in the market when the opportunity presents itself one of the driving forces behind the 2008 subprime mortgage crisis was a savings glut amongst financial institutions that was eventually channeled into mortgage-backed securities this was fine at first but eventually more and more money piled into the market which meant worse and worse mortgage products got funded and well we all know how that ended the similarities of piles of money coming after what started as a good investment idea instead going after increasingly bad ideas being perpetuated by a system that institutionally shifts risk are pretty alarming to say the least but over the pond china is having the opposite problem shenzhen is a lot like silicon valley in theory but this was no coincidence this center for innovation was actually built from the ground up by the chinese government to incorporate a lot of the same ingredients for success as its american peer the government has basically said an established centre of finance well hong kong is one of the largest financial centres in the region let's just park the city right next door and open up a special economic zone that should put the capital in our new capitalist market system agglomeration we will make them agglomerate let's build eight massive universities in the city and establish government research department headquarters and train lines and ports and anything else that a fledgling tech company's little heart could desire the problem with all this was it didn't really work it's anecdotal of course but think of how your life has been changed by innovations that have come out of silicon valley everything from modern personal computers to how we search the web and even the platform you are watching this video on right now were created at least in part thanks to the innovation the valley facilitates now do the same thing for shenzhen it's a fair bit harder now in fairness there are some examples like mobile payment solutions which are very cool but haven't been widely adopted outside of mainland china and tick tock i guess but i don't know if i would really count that as something to be too proud of and of course shenzhen hasn't been doing its thing for as long as silicon valley has but even despite these allowances there just clearly isn't the same level of real innovation which is a real shame because there absolutely could be but it's restricted by a few major hurdles the first is that nobody wants to invest in china or more specifically nobody who can wants to invest in chinese companies given current regulation most major chinese corporations are either wholly or largely state-owned and even those companies that are not government-run are ultimately controlled by the whim of the state this means that investor returns are often not as important as political influence collecting information or simply not causing any disruptions to how things are done something that silicon valley by contrast prides itself on what's more is that even if you could look past this moral greyness the returns aren't really as great as you would expect the usa's economy is about 50 larger than it was 10 years ago in that same time period though the dow jones industrial average has nearly tripled in china the past 10 years have been pretty good as the economy has gone through one of the most rapid periods of economic growth in history the nation's gdp has more than doubled since 2010 but the csi 300 which tracks the largest companies in the nation is only up 50 percent make of that what you will but it does almost seem like the companies have been run like a government and the nation is being run like a company at least according to these growth metrics for all of these reasons the stock market in china is not even a consideration to most households who overwhelmingly prefer to invest into real estate and it's not like the international community is going to fill in these gaps either go watch our video on investing in the chinese stock market to learn more about why now you might ask why does this even matter it sounds like most of the innovation in silicon valley has been funded by venture capital anyway venture capital is not the stock market and that is true but they are dependent on one another as we explored earlier the goal of venture capital firms is to grow the company so that they can sell their position onto the next round of investors the ultimate end destination for this game of equity hot potato is to list the company on a public stock exchange through an ipo then the general public can buy up these shares from all of the venture capital guys and give them the money that they need to start the process all over again if this final step does not exist or is not properly utilized then this whole system doesn't really work to give you an idea of just how broken this system really is the market capitalization of the sse or shanghai stock exchange is roughly 33 trillion rmb or 5 trillion us dollars however its free float adjusted market cap is only around 12.7 trillion rmb well okay but what does free float adjusted mean well it's simply the number of shares multiplied by the price of those shares while excluding the shares that are held by industry insiders promoters or governments what this means is that just under two-thirds of the largest public stock market in china is owned by the government or government officials now even beyond this as far as innovation goes there is probably something to be said about the societal acceptance of failure in the nation as well suffice to say grow fast and break things does not translate perhaps even beyond that the business culture might not yet be where it needs to be to truly drive innovations but this isn't psychology explained and there are people far more qualified to speak on these issues either way it's probably not nearly a bit of a hindrance as the nation's really weird currency okay so china might be the only nation in the world with a currency that is both overvalued and undervalued at the same time its undervaluation is probably what you've heard most about the chinese government does intentionally lower the value of its own currency in the foreign exchange market in order to artificially increase the cost competitiveness of its exports in fairness this practice has actually been on the decline in recent years thanks in part due to international pressure and the fact that the chinese economy is ultimately less dependent on exports year on year but on the flip side of all of this the currency is also overvalued regulations limit the amount of money that chinese citizens can convert in a given year at the moment that limit is set to 50 000 u.s dollars the fact that they write their policies in another sovereign currency should give you a hint as to how crazy this all gets now china is full of a lot of rich people and is also full of a lot of rich people that go missing for no apparent reason so those rich people really want to move abroad to more politically stable countries where they can enjoy their piles of cash without having to look over their shoulder all the time the problem is if they do decide to move abroad they can't take their money with them because of this legal currency conversion limit now of course there are ways around this we made an entire video on it but it's risky so most people don't try however if this law went away tomorrow there would be a huge rush to convert chinese r b into australian american canadian or whatever dollars this would flood the market of that chinese rmb driving down the price now this was obviously very oversimplified but we could and probably will make a video on this currency paradox in the future but for now just remember this the market intervention of an authoritarian government is simultaneously making a currency under and overvalued at the same time this kind of currency risk on top of all of the other issues that we have seen means that investors would rather keep scraping the bottom of the barrel in silicon valley rather than looking into a new market filled with an entirely new pool of talented individuals and potentially world-changing ideas this video was made possible by acorns thanks to features like acorns later you can set up your very own investment retirement account in less than a few minutes once set up you can then configure your risk profile from one of five pre-constructed acorns portfolios like an ultra-conservative fixed income 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that's acorns.com ee the link is on the screen now and in the video description below thanks for watching mate bye

Channel: Economics Explained

Views: 1,762,702

Keywords: shenzhen economy, shenzhen economics, shenzen, sillicon valley, silicon valley, silicon valley economy, silicon valley economics, china currency, china currency manipulation, china rmb, chinese rmb, what is currency manipulation, rmb currency manipulation, ipo, venture capital, silicon valley venture capital, silicon valley vc, san francisco economics, san francisco economy, china sse, dry powder, economy, economics, ee, economics explained, future cities being built right now

Id: ydeuxF0AkR8

Length: 16min 42sec (1002 seconds)

Published: Tue Apr 27 2021

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