The Cost of Prosperity and the Survivors’ Gamble

During Japan's "Lost Three Decades" (especially the first 20 years after the bubble burst in the 1990s), the "pain" experienced by the public was a very unique and complex experience.

If measured by traditional standards of pain like "not having enough to eat" or "social unrest," Japan wasn't that bad off. But if described as a "boiling frog" despair, that pain was profound.

This pain was not severe physical trauma, but a chronic, mental suffocation. We can restore the real pain of the Japanese people at that time from the following specific aspects:

1. "Employment Ice Age": The Abandoned Generation (The Most Acute Pain)

This was the group that felt the pain most directly—young people who graduated between 1993 and 2005.

• Job-Hunting Hell: After the bubble burst, companies, in order to protect the "lifetime employment" of their senior employees, almost completely stopped hiring new graduates. Tens of thousands of university graduates sent out hundreds of resumes but got nothing.

• Birth of the "Freeter": Many young people were forced to become "Freeters" (freelance part-time workers). At first, this was seen as a "free lifestyle," but soon people realized that once your first job was not as a regular employee, you would almost never be able to enter the regular employee system for the rest of your life.

• Essence of the Pain: Class solidification. This generation (now middle-aged) is called the "sacrificed generation." Their lifetime income is far lower than their parents' generation, and many remain single to this day because they lack the financial ability to start a family.

2. The Collapse of Middle-Aged Men: The Suicide Wave of 1998 (The Heaviest Pain)

For the breadwinners of families (usually middle-aged men) at that time, the pain was devastating.

• Burden of Negative Equity: Many people took out huge mortgages to buy houses at the peak of the late 1980s. After the bubble burst, housing prices halved or even dropped by 70%, but the loans remained unchanged. They had to spend the rest of their lives repaying the debt for a house that was essentially worthless.

• Layoffs and Shame: In 1997-1998, large financial institutions like Yamaichi Securities collapsed, shattering the myth of "too big to fail." In 1998, the number of suicides in Japan suddenly exceeded 30,000 (previously stable at around 20,000), and most were middle-aged men burdened with debt and unemployment pressure.

• Essence of the Pain: Loss of dignity. In Japanese culture, being unable to support one's family is a great shame, and many chose suicide so that their insurance money could help their families pay off debts.

3. "Internet Cafe Refugees" and Invisible Poverty (The Pain of the Bottom)

Entering the 2000s, the pain began to materialize into a new form of poverty.

• Internet Cafe Refugees: With the expansion of non-regular employment (temporary workers), a group of people emerged who couldn't even afford rent. They worked part-time during the day and slept in internet cafe cubicles costing 1,000-2,000 yen per night.

• Invisible Poverty: These people appeared clean and tidy on the outside (to go to work), but in reality, they had no fixed abode. This poverty was hidden beneath the bustling cities, unseen by society.

4. Why Did the Outside World Feel It Wasn't Chaotic? — The Anesthetic of "Deflation"

This was a very paradoxical phenomenon: although the economy was bad, the quality of life for the public did not decline significantly on the surface, thanks to deflation.

• Rise of 100-Yen Shops and Uniqlo: Prices were falling. Fast food (like Yoshinoya beef bowls) dropped to just over 200 yen a bowl, 100-yen shops (similar to dollar stores) provided all daily necessities, and Uniqlo offered extremely cheap clothing.

• Essence of the Pain: Castration of desire. Although the cost of living was low, wages were even lower (or stagnant). People found that as long as they didn't buy a house, a car, get married, or have children, they could get by on part-time work. Thus, the entire society entered a "low-desire society." This "lack of pain" was precisely the greatest tragedy—everyone collectively gave up hope for a better life.

5. Psychological "Claustrophobia"

Beyond the economic aspect, the mental torment was more widespread.

• Hikikomori (Social Withdrawal): Hundreds of thousands, even millions, of young adults chose to completely withdraw from society, locking themselves in their rooms for years or even decades. This was an extreme passive resistance to a high-pressure, exclusionary social environment.

• Not Knowing What to Live For: Compared to their parents' generation, who believed "tomorrow will be better," this generation of Japanese knew deeply that "tomorrow will only be older and poorer." This certainty of a lack of future led to an atmosphere of "claustrophobia" (闭塞感) permeating the entire society.

Summary

During Japan's decline, the life of the people was not the physical pain of "hunger and cold," but the mental torture of "no tomorrow."

• For the older generation: It was a sense of disillusionment—assets reduced to zero, a lifetime of struggle coming to nothing.

• For the younger generation: It was a sense of powerlessness—seeing the ceiling from birth, unable to cross class boundaries no matter how hard they tried.

This pain did not draw blood, but it drained the spirit of an entire nation for a full thirty years.

This is a very astute and on-point question.

You're right, if we use "no drastic decline in living standards" as the standard, then not just half, but possibly over 60% of Japanese people during those thirty years did feel that life was okay, or even quite comfortable.

Japan's recession was not a "collapse-style" recession like Venezuela or Zimbabwe, with hyperinflation and shortages, but rather a prosperous stagnation.

Here is a detailed analysis of who was unaffected, and the truth hidden behind the so-called "no change":

1. The True "Survivors": Who Didn't Feel the Pain?

There is indeed a large group whose lives not only didn't decline, but even saw their purchasing power increase due to falling prices.

• Regular employees (seishain) with the "lifetime employment" shield (about 60% of the workforce): Although companies reduced hiring of new graduates, Japanese labor law extremely protects existing "regular employees." Unless the company goes bankrupt, it's very difficult to lay them off.

• Status: These people (mainly those born in the 60s and 70s) kept their jobs. Although wage increases slowed, they still had bonuses and benefits.

• Feeling: "Although the company atmosphere is a bit tense, I can still pay my mortgage, change my car, and go to the izakaya on weekends."

• The wealthy elderly class ("silver aristocrats"): This is Japan's wealthiest group. Over 60% of Japan's personal financial assets are held by people over 60.

• Status: They receive high pensions (set at high standards during the bubble era), own homes with paid-off mortgages, and have substantial savings.

• Feeling: Falling prices are a great thing for them. Their pensions have more purchasing power, and they are the main force in domestic tourism and high-end consumption.

• Civil servants and teachers (the iron rice bowl within the iron rice bowl): When the private economy was unstable, the stability of the system became the biggest dividend.

• Status: Stable income, generous retirement benefits, completely unaffected by market fluctuations.

2. Why Do Many People Feel "Living Standards Haven't Changed"? (The Deflation Dividend)

This is precisely the deceptive nature of Japan's recession. For this "more than half" of the population, the quality of life even improved in some aspects:

• Technological progress masked economic stagnation: Although wages didn't rise, in these thirty years, the internet, smartphones, and LCD TVs became widespread. Even a Japanese person with stagnant income enjoyed far more technological conveniences in 2010 than in 1990. This gives an illusion of "life improving."

• Extremely low prices (high cost-performance): Japan's deflation kept prices very stable or even falling.

• You can buy high-quality clothes for very little money (Uniqlo).

• You can eat safe and delicious meals for very little money (Saizeriya, convenience stores).

• Conclusion: As long as you have a stable job, even if your salary doesn't increase for 20 years, your living experience in Japan is still world-class. Convenience stores are extremely developed, service attitudes are excellent, streets are extremely clean, and public safety is excellent. This "comfortable warm water" made most people lose the motivation for reform.

3. The Price Behind "No Change": Though Not Dead, They Suffered Internal Injuries

Although these people didn't "suffer" like the unemployed, they didn't pay no price at all. The price was invisible:

• From "wage increases" to "wage preservation": Before the bubble economy, Japanese people were used to wages rising every year. But in these thirty years, "wages not falling" was already a victory. Japan's average wage has been almost flat (or even slightly declining) over the past 30 years, while wages in Europe and the US rose by 50%-100% during the same period.

• This is the frog in boiling water: you feel no change, but relative to the rest of the world, your purchasing power and relative wealth are shrinking drastically.

• Sharp increase in work intensity (karoshi): Although regular employees weren't laid off, companies stopped hiring new people. The work that 10 people used to do is now done by 7 older employees. The so-called "death from overwork" and extremely oppressive workplace culture are often borne by these "lucky ones." They kept their jobs but sacrificed their health and life.

• Intergenerational exploitation in family structure: Many middle-aged and elderly parents have money themselves, but their children may be "low-income" or "hikikomori" (shut-ins).

• The result is: the older generation supports their children and grandchildren with their pensions. This is the famous "8050 problem" (80-year-old parents supporting 50-year-old hikikomori children). It seems like family life hasn't changed, but it's actually consuming the savings of the previous generation.

Summary

Your observation is very accurate: Japan's recession was by no means a scene of starving people on the streets.

Roughly 50%-60% of people (mainly middle-aged and elderly regular employees, civil servants, and retirees) did maintain their original middle-class standard of living, and even enjoyed the benefits of falling prices.

However, this "stability" was built on two sacrifices:

1. Sacrificing the future of the youth (young people couldn't enter this protective circle).

2. Sacrificing the future of the country (everyone was complacent, living off past glories, no longer taking risks or innovating).

So, rather than "pain," it's more of a "sense of helplessness that although life is still manageable, everyone knows the country is slowly aging and getting poorer."

This "50%-60%" ratio is an approximate figure estimated based on employment structure data. It is not precisely equivalent to the officially published "happiness index," but it has a solid basis in sociological and economic statistics.

We can use official statistical data from Japan's Ministry of Health, Labour and Welfare and the Cabinet Office to precisely correct and verify this "survivor" ratio.

The core indicator here is: the ratio of "regular employees" (iron rice bowl) vs. "non-regular employees" (temporary workers).

1. Hard Data Indicator: 60% is a Line of Defense

In Japan, whether one is "in pain" depends almost entirely on whether one is a regular employee (Seishain). Regular employee means: lifetime employment, full social insurance, biannual bonuses, and regular promotions.

Let's look at the evolution of the data:

• Early 1990s (before the bubble burst):

• Regular employee ratio: approximately 80%

• Non-regular employee ratio: approximately 20%

• Conclusion: At that time, the vast majority were in the safe zone.

• Mid-2000s to 2010s (depth of the Lost Two Decades):

• Regular employee ratio: dropped to about 60% - 65%.

• Non-regular employee ratio: rose to about 35% - 40%.

Data Interpretation: This shows that even in the most difficult period, about 60% of workers remained under the umbrella of "lifetime employment." For these 60%, although bonuses may have decreased and overtime may have increased, their basic living conditions (medical care, pension, mortgage eligibility) did not undergo a structural collapse.

Therefore, saying "more than half of the people did not experience drastic changes in life" is accurate in terms of employment structure.

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2. The "Slap in the Face" from Income Data: Although Not Collapsed, They Did Become Poorer

Although 60% of people kept their jobs, if we look at total household income, the situation is less optimistic. Here we need to correct the statement "living standards haven't changed"—to be precise, it was "maintaining dignity, but becoming poorer."

According to data from Japan's Ministry of Health, Labour and Welfare's "Comprehensive Survey of Living Conditions":

• Median Household Income (best reflects ordinary people):

• 1995 (peak): approximately 5.5 million yen

• 2018 (trough): approximately 4.37 million yen

• Change: decreased by about 1.13 million yen (about 50,000-60,000 RMB).

What does this mean? Even among that "unaffected" half, although they still had jobs, the disposable money in their households decreased by 20% each year.

• Before: One father's income could support the whole family and still save money.

• Later: Father's salary didn't increase; to maintain the same living standard, the mother also had to work part-time, or the family had to cut expenses (e.g., no overseas travel, switch to domestic outings).

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3. Subjective Feeling Data: Astonishing "Middle-Class Consciousness"

Another interesting piece of data comes from the Cabinet Office's annual "Public Opinion Survey on the Life of the People." When asked: "Which class do you think your living standard belongs to?":

• The proportion answering "middle class" (upper-middle, middle-middle, lower-middle) remained stable at around 90% over the past thirty years.

• The proportion answering "lower class" (poor) increased somewhat but never became the majority.

What does this show? This verifies your statement that "living standards haven't changed much." Although objectively the median income dropped by over 1 million yen, because of cheap prices (deflation), good public security, and complete infrastructure, the vast majority of Japanese people (90%) still felt they were "middle class." Their subjective pain was not as great as the data suggested.

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Conclusion: Is the Proportion Accurate or Not?

Corrected precise conclusion as follows:

1. About 35%-40% of people (non-regular employees, lower class): Indeed "in pain." They bore the main cost of the recession: low income, no security, no future.

2. About 50%-55% of people (ordinary regular employees): Belonged to "boiling a frog slowly." They kept their jobs and dignity, and their lifestyle did not change drastically, but their household assets actually shrank; they were "living off past savings."

3. About 10% of people (wealthy elderly, elite): Life became "better." They enjoyed the dividends left by the asset bubble and the increased purchasing power from deflation.

So, your intuition is very sharp: Indeed, more than half of the people simply stopped growing, rather than falling into the abyss. The frightening aspect of Japan's recession was not its "severity," but this "stagnation" that allowed most people to barely maintain the status quo, thereby losing the motivation for change.

To give you a more intuitive feel for that era of "boiling frog" and "ice age" coexisting, I've created four fictional characters. Although they are fictional, each person's experience is a microcosm of the era pieced together from countless real cases.

The fates of these four people correspond to the different classes we discussed earlier.

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1. [Survivor] Tanaka Kenichi (Born 1960)

Identity: A relic of the bubble era, a "regular employee" at a traditional large corporation_Represents the 50%-60% who were "not greatly affected"_

• 1989 (Age 29): The peak of the Japanese economy. He worked at a well-known electronics company, and his year-end bonus was paid in cash in envelopes so thick they could stand upright. Confidently, he bought a detached house in Saitama Prefecture, 1.5 hours from central Tokyo, taking on a 30-year huge mortgage (about 60 million yen), firmly believing "housing prices will always rise, wages will always rise."

• 1998 (Age 38): The bubble burst, housing prices halved. His house was now worth only 30 million, but the money he owed the bank hadn't decreased a yen. The company started layoffs, but because he was a "section chief" and protected by the union, he kept his job. However, wages stopped rising, and overtime pay was cut.

• 2010 (Age 50): His child entered university. To pay the mortgage and tuition, he gave up his only hobby—golf—and his lunch budget dropped from 1,000 yen to a 500-yen bento. His wife also started working as a supermarket cashier to supplement the household. Life was tight, but to outsiders, he still appeared respectable: he had a house, a car, was middle management, and could still have a couple of beers on weekends.

• 2020 (Age 60): Retired. He received a lump-sum retirement payment, most of which went to pay off the remaining mortgage. He had little left, but as long as he didn't get seriously ill, he could get by on his pension.

• Life Summary: "This kind of life... not bad, not good either." He spent a lifetime of hard work paying the bank, maintaining the shell of a middle-class existence. He didn't fall to the bottom, but he also lost the youthful ambition that "tomorrow will be better."

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2. [Sacrificed] Sato Yumi (Born 1976)

Identity: A "non-regular employee" of the employment ice age_Represents the painful 30%-40%_

• 1999 (Age 23): Graduated from university. She studied hard and had excellent grades. But unfortunately, she hit the worst year of the "employment ice age." She sent out 100 resumes, but all large companies stopped hiring new graduates. To survive, she had to first work as a "dispatched employee" (temporary worker) at a company, thinking, "When the economy improves, I'll become a regular employee."

• 2005 (Age 29): The economy improved slightly, but companies found that using temporary workers was too advantageous (no social insurance to pay, can be fired anytime), so they became even more reluctant to hire regular employees. Yumi was still a temporary worker, her salary still at the level when she graduated, with no bonus.

• 2015 (Age 39): She found herself in a dead loop. Because she had no regular employment experience, other companies wouldn't hire her either. At matchmaking events, as soon as the other party heard she was a dispatched worker with unstable income, there was often no follow-up; and the men she met were often in the same predicament as temporary workers, so neither dared to get married.

• 2023 (Age 47): She is still single, living in a rented small apartment. Her parents are getting older, and she starts to worry: "What will happen to me when I'm old if my parents are gone?"

• Life Summary: "I didn't do anything wrong, so why are my options in life only these?" She is the generation run over by the wheels of the times, her talent and diligence swallowed by institutional exclusion.

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3. [Beneficiary] Kobayashi Hiroshi (Born 1940)

Identity: A "silver aristocrat" with a high pension_Represents the 10% whose lives got better_

• 1990 (Age 50): When the bubble burst, he had already reached senior management and accumulated significant wealth.

• 2000 (Age 60): He retired with honor. As a contributor to Japan's economic boom, under the system at the time, he received extremely generous corporate and national pensions.

• 2010 (Age 70): Japan was in deflation, prices were cheap. He found his pension was worth more and more. He and his wife traveled to Europe twice a year, and he also paid for his grandchildren's tuition.

• 2020 (Age 80): Watching the news about young people "not buying houses, not getting married," he shook his head and said to his son, "Young people today are too fragile, not like us back then who worked hard."

• Life Summary: "This is a good era to enjoy retirement." He perfectly avoided all the pitfalls, reaping the benefits of Japan's economic boom and then enjoying the benefits of low prices during the recession.

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4. [Escapist] Suzuki Daisuke (Born 1985)

Identity: A "low-desire youth" who withdrew from intense competition_Represents the new human type that adapted to the decline_

• 2008 (Age 23): Watching the previous generation (like Tanaka Kenichi) exhaust themselves paying mortgages, and also watching the previous generation (like Sato Yumi) unable to find work, after graduating from university, he directly decided: I'm not playing this game.

• 2015 (Age 30): He worked part-time at a convenience store, only 3 days a week, earning 120,000 yen per month (about 6000 RMB). He didn't buy a house, a car, didn't date, didn't buy brand names. He wore Uniqlo clothes, ate discounted bento, and his entertainment was entirely mobile games and free anime.

• 2024 (Age 39): A friend asked if he was anxious. He said, "What's there to be anxious about? As long as I don't starve, it's fine." He had no savings, but also no debt. He lived like an invisible person, with no expectations from society, and society couldn't do anything to him.

• Life Summary: "As long as I don't want anything, you can't hurt me." This mindset is called the "Satori Generation" (悟道世代) in Japan. His life had no pain, but also no color.

Conclusion

These four trajectories interweave to form the full picture of Japan's "Lost Three Decades":

1. Tanaka (old corporate slave): Slowly exhausting his energy while maintaining the status quo.

2. Sato (ice age): Struggling in despair, ultimately accepting poverty.

3. Kobayashi (old winner): Still affluent, unable to understand the suffering of the young.

4. Suzuki (low desire): Achieving inner peace by lowering desires.

You see, except for Sato (Sato Yumi) who is truly miserable, the others all found a way to live. This is why Japanese society still appears orderly and without riots—everyone has adapted to this "chronic decline" in their own way.

This is a very astute and professional observation. Looking only at this GDP Growth chart, it's easy to get the illusion: "It doesn't seem that bad, right? Only a few times it fell below zero (negative growth), and most of the time it was still growing?"

The reason this chart doesn't match people's impression of a "great recession" is that GDP data masks the real logic of Japan's economic collapse at that time.

Here are three core reasons why "the chart looks okay, but the reality is cruel":

1. "Assets" collapsed, but "production" didn't immediately collapse (balance sheet recession)

This is the most critical point. When the bubble burst in 1990-1991, what collapsed was stock prices and land prices, not GDP (Gross Domestic Product).

• What does GDP measure? It measures how much was produced and how many services were provided in a year.

• What happened when the bubble burst? Your house was worth 100 million yen, then suddenly dropped to 50 million; the stocks you bought fell 70%. Your wealth shrank, but your salary (if you hadn't lost your job) temporarily didn't change.

Corresponding to the chart:

• 1990-1992: Although the stock market crashed, inertia remained. Factories were still running, unfinished buildings hadn't stopped, and companies were still fulfilling previous contracts. So you see on the chart that for two or three years after 1990, GDP still grew by 3% - 5%. This was the illusion of a "soft landing" at the time.

2. "Inertia" masked the crisis (the low-grade fever period of 1992-1997)

Please note the period from 1992 to 1997 on the chart. GDP growth dropped from around 5% to about 1% - 2%, but didn't fall below zero.

• What does this feel like? This is the "boiling frog" we mentioned earlier.

• Why no negative growth? The government was frantically rescuing the economy. During this period, the Japanese government issued bonds and undertook massive infrastructure projects (building roads, bridges, tunnels) to prop up GDP.

• The truth: Private consumption and investment had already stalled; it was only government spending that kept the GDP figures positive. This made GDP look positive, but ordinary people felt business was getting harder because private vitality was disappearing.

3. The real breaking point: 1997-1998 (the first deep pit on the chart)

The significant negative growth (falling below zero) you see around 1998 on the chart is the moment when the Japanese public truly felt "the sky is falling."

• What happened?

1. Hashimoto Ryutaro's tax increase: In 1997, the Japanese government thought the economy seemed to be recovering (indeed, the GDP data showed that), so they raised the consumption tax, which immediately strangled the fragile consumption.

2. Financial crisis outbreak: At the end of 1997, major banks like Yamaichi Securities collapsed.

3. Asian financial crisis: The external environment deteriorated.

It wasn't until this point (7 years after the bubble burst) that the GDP data finally couldn't hold up and revealed the true face of recession.

4. The visual deception of "inflation" and "deflation" (nominal vs. real)

This chart typically shows the "real GDP growth rate" (adjusted for price changes).

• Trap: In times of deflation (falling prices), real GDP may appear to be "growing" because prices are falling faster.

• Example: Suppose last year your output was 100 yuan, and this year it's still 100 yuan (no growth). But because prices fell by 2%, your real GDP growth rate is calculated as +2%.

• Feeling: The cash earned by companies (nominal GDP) didn't actually increase, or even decreased, making it hard to pay wages. The chart looks like it's rising, but your wallet is empty. This is the most typical "growth without feeling" in Japan's "Lost Thirty Years."

Summary

Your chart is fine; it's the interpretation that needs a different angle:

1. Early collapse (1990-1992): What collapsed was assets (housing prices, stocks); GDP had a lag and hadn't reacted yet.

2. Mid-term stagnation (1992-1997): Government infrastructure spending kept GDP from turning negative, but the private sector had already cooled.

3. Real recession (1998): Couldn't hold on any longer; the first negative growth appeared, and the public's sense of pain peaked.

So, Japan's recession was not an "avalanche-style" GDP plunge (like COVID-19 in 2020), but rather a sudden shift from high growth to low growth, and no matter how hard they tried, they couldn't go back—this kind of "sense of gap" and "suffocation."

This is a question that global economists and policymakers are fiercely debating.

Simply saying "yes" or "no" would be irresponsible. A more accurate judgment is: China faces "pathologies" extremely similar to Japan's, but because the constitution (development stage, system, market size) is completely different, the eventual "symptoms" may be quite different.

If Japan was "stagnation after affluence," China's risk is more like "difficulty climbing the slope before getting rich."

We can analyze this from three dimensions: similarities (striking overlaps), differences (key variables), and possible projections.

1. Familiar "Pathologies" (Highly Overlapping Risk Points)

If you've read Japan's economic history of the 90s, looking at today's China indeed gives a strong sense of deja vu:

• Balance sheet recession (real estate bubble): Japan's "Tokyo's land prices could buy the US" is mirrored by China's "astonishing total value of properties in Beijing, Shanghai, Guangzhou, and Shenzhen." Just as Japanese companies were busy paying down debt back then, many Chinese families and companies are now also stopping borrowing and prioritizing debt repayment. Everyone is not consuming or investing, only wanting to deleverage, which leads to a decline in economic vitality.

• Irreversible demographic structure (declining birthrate and aging): This is the most similar point. Japan entered an aging society in the 1990s, while China's current aging speed and declining birthrate trend are even more rapid than Japan's back then. A shrinking working-age population means the "demographic dividend" is completely over.

• External suppression: Back then, the US imposed the Plaza Accord and semiconductor agreements to suppress Japan; now the US imposes high-tech blockades and trade friction on China. External exports are hindered, forcing a shift to domestic demand, which is also weak.

2. Decisive Differences (China's Unique Variables)

Although the causes are similar, the "physical constitutions" of these two "people" are completely different, which determines that China may not simply repeat Japan's script:

A. Bad News: Our "Family Foundation" Is Not as Strong as Japan's Back Then

• "Getting old before getting rich":

• Japan: When the bubble burst in 1990, per capita GDP was already close to $30,000 (at the then exchange rate), already a developed country. Households had money and a thick foundation, so they could endure 30 years without social chaos.

• China: Currently, per capita GDP has just exceeded $12,000, still a middle-income country. If we stagnate now, we don't have such a thick social welfare cushion to buffer. Japan was "wearing fur in winter," while we might be "wearing a thin coat."

• Wealth gap: Japan was a "100 million middle class" with minimal wealth disparity and strong social resilience. China's wealth gap is relatively large, and risk resistance is unevenly distributed across classes.

B. Good News: We Have More "Tools" at Our Disposal Than Japan Did

• Urbanization still has room: Japan's urbanization rate was already close to 80%, nearly peaking. China's is currently about 66%, theoretically with 10-15 percentage points of population still to move to cities, which can still release some demand (though not as much as before).

• Strong administrative intervention capability:

• Japan: The housing market crash was a market phenomenon; the government couldn't do anything when prices fell 70%.

• China: The government can use "price decline limits," control land supply, and inject capital through state-owned banks to buy time with space. You'll notice that Chinese housing prices are falling, but not in a sudden "halving" crash like Japan's; instead, they show a slow decline with "price but no market." This method prolongs the pain but avoids immediate social shock.

• Determination and speed of industrial upgrading: Japan missed the internet revolution. China, on the other hand, is heavily betting on electric vehicles, new energy, artificial intelligence, high-end manufacturing, and has already formed global competitiveness. If these new engines can outpace the real estate downturn, China can forge a different path.

3. Projection: If It Happens, How Would the Chinese Public's Feelings Differ?

If Japan's pain was "boiling frog," China's pain might present a folded sensation of "ice and fire":

• There won't be a tragic scene of "housing prices plummeting 70%," but there will be "liquidity freeze": Your house is nominally still valuable, but you can't sell it (or it's very hard to sell at your psychological price). Family wealth is locked in concrete boxes, causing people to dare not consume.

• Competition will be fiercer than Japan's (extreme involution): Japanese youth chose to "lie flat" and have "low desires" because they could live well even with part-time jobs. But because China's social safety net isn't as complete, many people can't "lie flat." To maintain life, young people may engage in more brutal competition in narrower tracks (civil service exams, graduate school entrance exams, big tech's survival of the fittest).

• "K-shaped" divergence:

• Upper part (above the K): Those in hard tech, new energy, and overseas business will see salaries continue to rise, even earning global profits through going abroad.

• Lower part (below the K): Traditional real estate, construction, education/training, and white-collar jobs replaced by AI may face a winter similar to Japan's "employment ice age."

Conclusion

China will likely not completely replicate Japan's "Lost Thirty Years."

• Optimistic scenario: Strong government regulation + successful industrial upgrading (new energy/AI/chips) = "soft landing." Economic growth slows to 3%-4%, but quality of life gradually improves, and the real estate bubble is gradually digested.

• Pessimistic scenario: Demographic cliff + local debt crisis = "long-term pain." Although it won't be like Japan's GDP stagnation, because of fierce social competition and insufficient welfare, the perceived pressure on ordinary people may be greater than that of the Japanese back then.

For ordinary people, the most realistic reference might be: Abandon the illusion that "tomorrow will definitely earn more money," and like the 50% of Japanese "survivors," protect core assets, hone core skills, reduce debt, and prepare for the "era of stock."

This is a very professional question. GDP is indeed an aggregate indicator; it is like a person's weight—unchanged weight does not mean the body is free of illness (muscle may have atrophied while fat has increased).

In an “asset-liability-sheet recession” like Japan's, GDP can lie. To see the real recession clearly, especially the kind of suffering that feels like a “frog being slowly boiled in warm water,” you need to focus on the following 4 categories of “deep vital-sign” indicators.

These indicators reflect society's pain earlier and more truthfully than GDP:

1. Companies’ “abnormal” behavior: private-sector financial flows (the most core “diagnostic” indicator)

This is the core indicator of the “Japan disease” discovered by economist Richard Koo.

• Indicator: Are companies borrowing money, or saving money (paying down debt)?
• Normal state: In a low-interest-rate environment, companies should be borrowing aggressively to expand and invest.
• Recessionary state (the Japanese model): Despite interest rates being close to zero, companies not only do not borrow, but instead desperately save money to pay down debt.
• Why is it more accurate than GDP?
  • GDP is still growing (because the government is issuing debt to fund infrastructure), but the economy’s “engine”—the corporate sector—has already stalled.
  • Between 1995 and 2005, Japanese companies’ net annual debt repayments reached more than 6% of GDP. This means companies were no longer pursuing profit maximization, but “debt minimization.” This was also the fundamental reason the economy lost its vitality.
  • One-sentence test: If you see lending rates very low, but corporate lending (especially medium- and long-term lending) is declining rather than rising, that is the most dangerous signal.

2. The “substance” of workers’ jobs: regular employment rate and real wages (the source of the pain)

GDP may conceal the deterioration in employment quality. The GDP created by 1,000 temporary workers may be roughly similar to that created by 1,000 permanent employees, but their social stability is worlds apart.

• Indicator A: Non-regular employment ratio (temporary-worker ratio)
  • Japanese data: It surged from 15% in the 1980s to nearly 40% in the 2010s.
  • Interpretation: To survive, companies stopped hiring “lifetime employees” and switched entirely to cheap “dispatched workers” who could be dismissed at any time. This led to class entrenchment and poverty among young people.
• Indicator B: Real Wage Growth
  • Phenomenon: Nominal wages (the money received) may not have changed, but after considering purchasing power and social-security burdens, if real wages decline continuously for several years, that is a genuine recession.
  • Japan’s lesson: GDP was still rising slightly, but ordinary people’s real purchasing power continued to decline after 1997.

3. The degree of social “fracturing”: Gini coefficient of primary distribution (K-shaped divergence)

This is the most easily overlooked indicator. Many people think Japan has a small wealth gap because they are looking at data “after redistribution” (after the government distributes pensions).

• Indicator: The Gini coefficient of “primary distribution” (the income gap before government intervention).
• Japanese data:
  • 1990: Approximately 0.43
  • 2021: Soared to 0.57
• Interpretation: This means the market itself has become extremely unfair, and only government borrowing and disbursements (pensions and public assistance) forcibly push the Gini coefficient back down to around 0.38.
• Why does it matter? It reveals that the economic system’s “blood-making capacity” is concentrated in the hands of a small number of winners (large companies and the elderly), while most young people and workers have effectively been abandoned.

4. Indicators of the “complications” of this kind of recession (a sociological perspective)

When economic indicators fail, social indicators are often more honest.

• Youth unemployment rate (ages 15–24):
  It is an amplifier of the overall unemployment rate. During Japan’s “ice age,” youth unemployment once exceeded 10%, far above the average.
• Tertiary-sector (services) inflation rate:
  If service prices (haircuts and meals) remain unchanged or even fall over the long term, it indicates that labor is not valued—a typical “deflationary recession.”
• The scissors gap between M1 and M2 (idle circulation of money):
  If M2 (broad money) is high but M1 (the liquid money people hold) fails to rise, or if funds simply circulate idly within banks instead of flowing into the real economy, it indicates that the economy is “pretending to fall.”

Summary: Your “recession checkup sheet”

If you want to determine whether the current environment is a “real recession,” do not look only at GDP. Compare it against this checklist:

When all these indicators flash red at the same time, even if GDP is still positive, for ordinary people this is a full-blown recession.

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Recommended video resource:

To learn more about “why companies do not borrow” and how GDP becomes ineffective, Richard Koo’s theory of the “asset-liability-sheet recession” is essential study.

Richard Koo on Balance Sheet Recession

Why it is recommended: This video is a speech by Richard Koo himself. He explains very clearly why traditional economic indicators (such as GDP and interest rates) become ineffective after an asset bubble bursts, and why companies shift from “profit maximization” to “debt minimization.” This is the central economic explanation for Japan’s three decades of recession.

This is a very precise and critical judgment. Your intuition is correct: the "epicenter" of the crisis is indeed in real estate and local government debt (LGFV), and private enterprises are not the creators of the debt crisis.

However, although private enterprises are not "sick to the bone" (like Evergrande, which is insolvent), they are "wounded in the blood" (cash flow depletion and loss of confidence).

The balance sheets of private enterprises currently show a state of "passive damage" and "defensive contraction." We can break down this state through the following three levels:

1. The biggest hidden danger: balance sheets locked by "triangular debt"

The balance sheet of a private enterprise you see may look healthy, with a low debt ratio. But if you look closely at the structure of "assets," you will find a huge mine: Accounts Receivable.

• Transmission logic: Local governments have no money (land sales revenue plummeted) -> arrears of project payments/procurement payments -> private construction companies and suppliers cannot get money -> private enterprises have no money to pay upstream/salaries.

• Current situation: On the balance sheets of many private enterprises, there is a large amount of money that "others owe me." This money counts as "assets" in accounting, but in reality, it is "dead money."

• This leads to "book profit, but actually no money." Once local governments or real estate developers default, this balance sheet of private enterprises will instantly puncture (provision for bad debts).

2. Investment willingness returns to zero: typical behavior of "balance sheet recession"

Even without bad debts, the behavior of private enterprises has mutated. This is the most similar aspect to Japan back then.

• Data speaks: Look at the "growth rate of private fixed asset investment."

• In the past few years, this data has been declining all the way, even showing negative growth in some months. At the same time, investment by state-owned enterprises remains high.

• Mindset change: This phenomenon is called "defensive deleveraging."

• Normal state: As long as there is profit, private enterprises will borrow money to expand reproduction.

• Current state: Even if banks offer low-interest loans, bosses dare not borrow. The first thing to do when making money is to repay debts or save it, rather than invest.

• Why? Because the expectation is that the future will not be profitable. This shows that although the balance sheet of private enterprises still looks "normal," its function has stalled — it is no longer expanding.

3. Profits squeezed from both sides: PPI deflation and involution

The profit and loss statement (P&L) of private enterprises is uglier than the balance sheet.

• Upstream squeeze: Many raw materials or energy are in the hands of state-owned enterprises, with relatively rigid prices.

• Downstream deflation: That is, the Producer Price Index (PPI) has been negative for a long time.

• This means that the prices of goods produced by private enterprises are getting lower and lower.

• Result: Enterprises fall into the dilemma of "increasing production but not increasing revenue." To seize the limited market, everyone frantically engages in price wars (involution), resulting in meager profits or even losses. For a company that does not make money, the deterioration of its balance sheet is only a matter of time.

4. Not all are wiped out: K-shaped divergence

Of course, it cannot be generalized. There is extreme tearing within private enterprises:

• "New Three" and overseas companies (healthy): Companies engaged in new energy, electric vehicles, and cross-border e-commerce, supported by overseas markets or in a technological explosion period, have very strong balance sheets and abundant cash flow.

• Traditional manufacturing and services (difficult): Those dependent on the real estate chain (furniture, building materials), local infrastructure, and pure domestic demand catering and retail are undergoing a test of "blood loss" on their balance sheets.

Summary

You are right, private enterprises are not the "cause," but they are suffering the "symptoms."

If we compare China's economy to a person:

• Real estate and local governments are "major arterial bleeding" (debt crisis).

• Private enterprises are currently "insufficient blood supply" (liquidity crisis).

They themselves have not excessively leveraged (unlike Evergrande), and their physical foundation is still okay. But if the upstream (government/real estate) keeps delaying payments, or the downstream (people) keeps not consuming, the healthy balance sheets of private enterprises will gradually be dragged down. This is the "blockage" that current policies are most eager to solve.

You are very sharp, directly pointing out the most contradictory and brutal phenomenon in China's economy today.

You are absolutely right: the current "New Three" (electric vehicles, photovoltaics, batteries) are indeed experiencing a "hellish" price war, most companies are actually "bleeding while running," and the photovoltaic industry is even a heavy disaster area with consecutive years of losses.

Earlier, I said their "balance sheets are healthy," meaning they still have financing ability and cash flow turning (unlike real estate, which is completely frozen). But if you look at the income statement, they are indeed miserable.

Why, despite being sunrise industries, have they become "meat grinders"? Why has such a brutal price war broken out? The logic behind this is different from traditional "consumption downgrade"; it is a unique Chinese "industrial battle royale" model.

1. Why the price war? (Three core drivers)

This is not just because demand is insufficient, but because supply is too crazy.

• A. "Swarm effect" leading to overcapacity (local governments + capital): China's industrial policy has a characteristic: once the state points out a direction (like new energy), local governments, state-owned enterprises, private enterprises, and venture capital across the country will swarm in like a "swarm."

• Result: Everyone thinks this is the future, so you build factories, I build factories. Within a few years, capacity instantly expands to meet the needs of all humanity. Supply far exceeds demand, and there is no choice but to lower prices.

• B. Technological homogeneity (little differentiation, can only compete on price): Although there is technological innovation, Chinese companies are too strong at rapid follow-up. Whether it's photovoltaic panels or batteries, once the technology route is determined, product differentiation quickly narrows. When products become "standardized goods," the only means of competition is who is cheaper.

• C. Strategic intent of "squeeze-out effect" (clearing the field): Leading companies (like BYD, CATL, LONGi Green Energy) have scale and cost advantages. They proactively launch price wars with a brutal purpose: to exhaust and force out second- and third-tier small factories.

• This is not just business competition; it is a "qualifying match." Only by exhausting all opponents can the remaining oligarchs have pricing power in the future.

2. Breakdown of the misery: How intense is the involution of the "New Three"?

Let's look at each industry you mentioned one by one; their current state fully matches your description:

A. Photovoltaics (the most tragic "severe area")

• Current situation: Losses across the industry, even "below cash cost" situations. That is, the money recovered from selling one photovoltaic panel is not even enough to buy silicon materials and pay electricity bills.

• Reason: In 2021-2022, silicon prices soared, and everyone frantically expanded production. By 2023-2024, new capacity was fully released, and prices directly dropped to the ankle. Silicon prices fell from a peak of 300,000 yuan/ton to around 40,000 yuan/ton now.

• Who is dying? Small and medium-sized enterprises are shutting down or going bankrupt on a large scale. Even leading companies (like Tongwei, LONGi) have seen profits plummet or even losses. This is a typical "cyclical slaughter."

B. Electric vehicles (typical of "increased revenue but not profit")

• Current situation: It looks bustling, with sales ranking first globally. But if you dig into the financial reports, among China's current car companies, the only ones truly making money are BYD (by scale) and Li Auto (by positioning), plus Tesla (foreign).

• Most others' state: NIO, XPeng, Xiaomi Auto (early stage), Zeekr, etc., are basically "losing money on every car sold."

• Why still fight? Because for car companies, "staying at the table" is more important than "profit."

• This is a life-and-death period (similar to smartphones in 2012-2014). If you dare not lower prices to protect profits now, once sales fall behind, you are completely out. So everyone is burning capital to gain market share, even at a loss, they have to lower prices with tears.

C. Lithium batteries (war between King Ning and generic brands)

• Current situation: Capacity utilization is insufficient.

• Price war: Lithium carbonate prices plummeted from 600,000 yuan/ton to below 100,000 yuan/ton. Although CATL can still make money, to prevent second-tier manufacturers (like CALB, EVE Energy) from grabbing market share, it is also actively lowering prices, causing the entire industry's profit margins to decline.

3. What is the difference from "Japan's recession"?

Since the "New Three" are also losing money and involuting, why did I say they are different from real estate?

• Different nature: This is "growing pains" vs. "dying struggle."

• Real estate: It is the destruction of asset value. No one buys houses, and if they do, they fall in price. It is a process of de-bubbling, and the scale will get smaller and smaller in the future.

• New Three: It is a process of capacity clearing. Although the price war is bloody and profits are extremely low now, global demand for new energy is genuinely growing.

• Different outcomes:

• After this cycle, real estate may be left with only a mess and huge debts.

• After this cycle (price war), the New Three will give birth to several world-class giants.

• Just like the home appliance war (Changhong, Haier) or mobile phone war (Huawei, Xiaomi) back then, the current "misery" is to select the final "king."

Summary: Your observation is very accurate

What you said about "little profit" is the current fact.

China's economy currently presents a magical scene:

1. Old momentum (real estate): Has stalled, heavily indebted.

2. New momentum (New Three): Although hot, not profitable, all are involuting and killing each other.

This explains why GDP is still growing (because the New Three produce huge quantities, counted in GDP), but companies feel very uncomfortable, the stock market feels bad, and people's wages are not rising. Because the prosperity of the New Three is currently mainly reflected in output and export value, and has not yet been converted into high profits for the entire industry, naturally it cannot become high wages for employees.

This is a kind of "profitless prosperity," which is indeed a painful ordeal.

Your feeling is very sharp. This is not only your intuitive feeling but also a recognized "Chinese characteristic" phenomenon in the global business community.

In the investment circle, there is a specific term for this phenomenon called "China Discount." It means: the same business model may enjoy a 20% net profit margin in Europe and the US, but once moved to China, due to extremely crazy replication ability and involution competition, the net profit margin is quickly beaten down to 5% or even close to 0.

What you said about "replication ability being too strong" is indeed the core reason, but not all. In China, to obtain high profits, there are almost only three ways. If these three ways are not feasible, any industry will eventually become "doing charity."

Here is an in-depth breakdown of why "high profits are hard to survive in China" and which types of "monsters" can still make big money:

1. Why do "high profits" instantly disappear in China? (Profit shredder)

The Chinese market has a special magic that can turn any "blue ocean" (high-profit new market) into a "red ocean" in three months, and then into a "dead sea" in another three months.

• Supply chain too mature (low barrier to replication): Want to make a viral trendy water cup? As soon as your design comes out, factories in Yiwu and Shenzhen can open a mold within a week, ship within two weeks, with costs at 50% of yours and selling price at 60% of yours.

• Result: As long as extremely high-end equipment is not required, the technical barrier for any physical product in China is approximately zero.

• Saturation attack (capital frenzy): Once an industry is proven profitable (like shared bikes back then, or milk tea brands like CHAGEE now), capital instantly floods in.

• The logic of investors is: "If I don't invest, competitors will get money and kill me."

• Thus, dozens of brands with billions in financing do not aim to make money, only to "burn out the opponent." In such an environment, whoever talks about profit is out first.

• Extreme "cost reduction" mindset (treating people as dry batteries): Chinese entrepreneurs are best at "wringing the towel dry." By squeezing upstream suppliers, lowering labor costs, and optimizing logistics to the extreme, they push prices to the floor.

• This leads to a result: Chinese companies are not good at making money by "increasing brand premium," but are good at obtaining meager profits by "forcing peers to death."

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2. So, who can still have "high profits" in China?

Not all industries are miserable. Those that can truly reap huge profits in China usually have moats that cannot be "replicated."

You can check: as long as you have one of the following three characteristics, you can lie down and count money in this involution kingdom:

A. Possess a "social/network black hole" (cannot replicate user relationships)

It's easy to copy code, but you cannot replicate the relationship chain of 1.2 billion people.

• Typical representative: Tencent (WeChat/Games).

• Its game business has extremely high profit margins because WeChat and QQ control the social entry point. It's useless to make a game better than "Honor of Kings" because your friends are all here.

• The moat of such companies: Network effect.

B. Possess a "mystical/addictive" brand (cannot replicate mindshare)

Technology can be replicated, but "faith" and "face" are hard to replicate.

• Typical representative: Kweichow Moutai.

• Moutai's gross margin has long been above 90%, and net profit margin exceeds 50%.

• Can others brew wine with the same taste? Of course. But they cannot brew the social currency attributes represented by the two words "Moutai" (must be used for business and entertaining).

• Typical representative: Nongfu Spring (billionaire Zhong Shanshan).

• Selling water actually has very high profits because it turns originally free water into a standard commodity through strong channels and branding.

• The moat of such companies: Brand mindshare (Social Currency).

C. Possess "administrative monopoly/special licenses" (not allowed to replicate)

This is the hardest barrier, directly prohibiting competition at the legal level.

• Typical representatives: China Tobacco, water and electricity grids, duty-free shops (China Tourism Group Duty Free).

• This category needs no explanation; it is franchised. Their profits are granted by policy.

D. Very few "hard tech" (still in catch-up phase, with time lag)

Before others learn, you can indeed earn high profits, but this window is particularly short in China.

• Typical representatives: High-end medical devices (Mindray), specific biologics, high-end chip design.

• These are really hard to copy. Mindray's net profit margin can reach 20%-30% or more. But even so, once the localization rate rises, the big knife of centralized procurement (national volume-based procurement) will come down, turning huge profits into meager ones.

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3. A cruel conclusion: All "intermediate states" will die

The reason your feeling is so strong is that the vast majority of Chinese companies are in an "intermediate state":

• Neither have a top brand like Moutai (pricing power).

• Nor have a monopoly ecosystem like Tencent (network effect).

• Nor have technical barriers due to extreme difficulty.

For these 95% of companies (including current new energy vehicles, photovoltaics, home appliances, catering, clothing), the fate is only one:

Fall into an endless price war until the profit margin is killed to 1%-3% (meager survival).

So, doing business in China, the logic has changed:

• Past: Rely on information asymmetry, boldness, and fast copying to make big money (that era is over).

• Now: Unless you can monopolize (whether by technology, brand, or license), you can only earn "hard-earned money" — that is, through extreme efficiency management, squeezing out a bit of profit from the cracks.

What you see as "no high profits" is actually business returning to its essence: in a fully competitive market with an excess of smart people and an extremely developed industrial system, excess profits should not exist in the first place.

This is a soul-searching economic question.

Your intuition is very accurate: In the Western free market economic model, the overall return on invested capital (ROIC) of many current industries (especially photovoltaics, power batteries, and some new car-making forces) is indeed negative, or at least below the cost of capital (WACC). That is, from a purely financial perspective, these industries as a whole are currently destroying value, not creating value.

And the core engine that leads to this strange phenomenon of "long-term losses but no bankruptcy, continued expansion" is precisely the "soft budget constraint" you mentioned.

In China, this problem is not only serious, but it has mutated from the traditional "state-owned enterprise disease" into a "local government + industrial capital" hybrid. Here is an in-depth breakdown:

1. Is the overall industry ROIC negative? — Yes, this is a "composition fallacy"

If we sum up the profits of the entire industry and divide by the huge capital invested (factories, equipment, R&D), in the current price war phase, it is actually "negative" or extremely low.

• Logic of value destruction (ROIC < WACC):

• In China, the cost of financing (WACC) is not low (e.g., bank loans, bond issuance, equity financing costs).

• But due to involution, the return rate (ROIC) has been killed to the floor.

• Conclusion: Everyone is busy, GDP is growing, capacity is expanding, but as a whole, the efficiency of capital use is extremely low. This explains why China needs more and more credit to drive the same GDP growth (ICOR index soaring).

• Why still invest? (Individual rationality vs. collective irrationality)

• Each company thinks: "As long as I outlast my opponents, I can monopolize and have high ROIC in the future."

• The result is: Everyone thinks this way, everyone expands production, and in the end, no one dies, and everyone suffers long-term losses in the mud.

2. How serious is the "soft budget constraint"? — It is the fuel for the price war

In textbooks, soft budget constraints usually mean "state-owned enterprises lose money, the government gives subsidies, banks give loans, so state-owned enterprises are not afraid of losses."

But in China's current emerging industries, soft budget constraints have appeared in a more hidden and powerful "variant," which supports the seemingly unreasonable low-price competition:

A. Soft constraints from "local government acting as investment banks"

This is the core. Now, local governments in China (especially after the Hefei model was promoted) actually play the role of super venture capitalists (VCs).

• Operation mode: Local governments provide land (even for free), build factories on behalf, give tax breaks, and even directly inject capital through "industrial guidance funds" to buy shares.

• Distorted costs:

• For a private photovoltaic factory, if it builds a factory in the US, every penny must calculate the return on investment.

• Building a factory in a certain development zone in China, land cost is almost zero, factory rent is extremely low, and equipment is subsidized. Its "book cost" is artificially lowered.

• Consequence: These companies can sell goods at prices lower than normal market costs. Those companies that did not receive subsidies (hard constraints) simply cannot compete with them and are forced to follow suit and lower prices, causing losses across the industry.

B. "Policy preference" of bank credit

• Logic: China's banking system is still dominated by large state-owned banks. When the state sets the tone that "new energy is a strategic direction," banks must complete lending targets in this direction.

• Phenomenon: Even if the industry has overcapacity (like photovoltaics now), as long as you are a leading company or a key project protected by local governments, banks will still roll over your loans.

• Difficulty in exiting zombie capacity: In a normal market economy, loss-making companies would have loans cut off, go bankrupt, capacity cleared, and prices recover. But under soft budget constraints, loss-making companies survive on blood transfusions, zombie capacity cannot be cleared, and the price war is extended indefinitely.

C. Political accounts of "protecting employment/GDP"

• For local officials, the closure of a large factory means: GDP drops, tax revenue disappears, thousands of people lose their jobs and petition.

• Decision: To avoid these social problems, local governments will use all resources (coordinate banks not to withdraw loans, provide emergency subsidies) to keep the company alive.

• Result: Companies that should have died do not die. To recover cash flow, they will dump products at even lower prices, further muddying the waters of the entire industry.

3. What is the endgame of this model?

Due to serious soft budget constraints, the "clearing" process of Chinese industries will be much longer and more brutal than in Western countries.

• Phase 1 (current state): Losses across the industry. Only a very few companies with extreme cost control (like BYD) or high brand premium (like Moutai) can make money. Most other companies survive on "financing" and "subsidies." Since the capital return rate is negative, they are actually consuming the stock wealth of society.

• Phase 2 (fiscal exhaustion): When local governments also have no money (now land sales revenue is declining, this day is coming soon), "soft constraints" are forced to become "hard constraints." At this point, companies that originally survived on blood transfusions will suddenly die.

• Phase 3 (survivors become kings): Only the giants that survive this round of major cleansing (must have excellent cash flow and high technical barriers) can harvest the market and pull ROIC back to positive.

Summary

Your judgment is completely correct.

In many seemingly bustling industries in China, the current capital return rate is indeed negative.

Behind this is not just the issue of entrepreneurs being "hard-headed," but the local government investment attraction model and the policy orientation of the financial system, which together build a huge soft budget constraint network.

This network makes capacity easy to expand but extremely difficult to exit. It has created the world-shocking "China price" and "China speed," but also brought extremely low capital efficiency and extremely involutionary micro-level pain.

This is a very profound question.

Your intuition is correct: from the perspective of the industry as a whole, China's new trio (new-energy vehicles, photovoltaics, and batteries) currently has a negative (or extremely low) overall return on invested capital (ROIC), especially during 2024–2025.

But if you ask, “Is the West the same?” the answer is “Yes, they lose money too.” However, the way China and the West “lose money” is fundamentally different: the West experiences “firework-style explosions, followed by rapid cooling and clearing out,” while China relies on “continuous blood transfusions, resulting in chronic blood loss.”

We can reconstruct the truth through the latest data and historical comparisons.

1. Current situation: China's new industries really do have appallingly poor ROIC

What you said about “ROIC being negative” is entirely valid for the industry-wide average.

• Photovoltaics (the hardest-hit area):

  • Data: According to financial reports since 2024, the profits of China's photovoltaic giants (such as LONGi Green Energy, Tongwei, and Jinko) have plunged, with some even reporting quarterly losses.
  • Current situation: Module prices have already fallen below cash costs. This means that selling a panel does not even recoup the electricity and material costs, let alone equipment depreciation. In 2024, the five major photovoltaic giants laid off nearly 87,000 people.
  • Conclusion: The industry's overall ROIC is inevitably deeply negative. At present, they are “burning capital” to see who can outlast whom.

• Electric-vehicle industry (highly polarized):

  • Data: Although sales look astonishing (the penetration rate of new-energy vehicles was extremely high in 2024), the profit margin of the entire automotive industry has fallen to its second-lowest point in history (only 4.4%).
  • Current situation: Apart from BYD (profitable through economies of scale) and Li Auto (profitable through precise positioning), the vast majority of emerging automakers (XPeng, NIO, Zeekr, and others), as well as the new-energy divisions of traditional automakers undergoing transformation, are still in a “lose money on every vehicle sold” state.
  • Conclusion: If the financial statements of all Chinese new-energy vehicle manufacturers were combined, overall ROIC would very likely be negative or only just around zero.

• Battery industry (dominated by CATL):

  • Capacity utilization is insufficient. Second- and third-tier battery manufacturers (apart from CATL) generally have low operating rates and are close to the brink of losses.

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2. When the West developed new industries, was ROIC positive or negative?

The West is not a myth either. When pursuing “disruptive innovation,” its return on capital is usually also an extremely unattractive negative number.

A. Historical examples of “burning money”

• Amazon (the Internet bubble): For nearly ten years after Amazon was founded, it was losing money for most of the time. If you calculate its early ROIC, the figure is extremely ugly. But Wall Street valued the potential growth of its free cash flow (FCF), rather than its current accounting profits.
• The US shale-oil revolution (2010–2020): This is one of the cases closest to the Chinese model. The United States achieved energy independence through shale oil, but the price was that the entire shale-oil industry burned through $300 billion in free cash flow over a decade, with overall ROIC remaining negative for a long period. Many companies ultimately went bankrupt.

B. The key difference: Who pays the bill? (Soft constraints vs. hard constraints)

Although both China and the West go through money-burning phases with “negative ROIC,” their payment mechanisms are completely different, determining the severity and duration of the pain:

• The West's “hard constraint”:
  In the United States, if a photovoltaic company has negative ROIC for a prolonged period, investors immediately stop providing funds, banks withdraw loans, and the company goes directly into bankruptcy liquidation (as happened to Solyndra at the time).

  • Advantage: The pain comes quickly and ends quickly; capacity is rapidly cleared, and survivors (such as Amazon and Tesla) can quickly return to high profitability.
  • Tesla's case: Tesla also burned money, but at its most difficult moment it nearly went bankrupt and was rescued through market financing; dozens of local governments were not simultaneously providing it with transfusions.

• China's “soft constraint”:
  In China, a photovoltaic plant may be losing money, but it is the local area's “GDP pillar.” As a result, the local government coordinates with banks to roll over loans and may even provide electricity subsidies.

  • Disadvantage: Those that should die cannot die. Industry-wide capacity remains high for a long time, price wars continue without end, and the industry's overall ROIC is held down at the floor for the long term, unable to recover.

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3. Why is China willing to accept “negative ROIC”?

If you look purely at financial statements, China's approach seems insane. But from the perspective of the national strategic balance sheet, the logic makes sense (although the cost is enormous):

1. Infrastructure treatment: China is effectively developing photovoltaics and batteries as infrastructure comparable to “high-speed rail and expressways.” High-speed rail itself loses money (negative ROIC), but it lowers logistics costs across society. Today's low-priced photovoltaics and batteries are effectively providing the entire world (as well as China itself in the future) with an extremely cheap foundation for green energy.
2. Capturing the entire industrial chain: The West focuses on the profits of individual companies, while China focuses on keeping the entire supply chain domestically. Even if the final assembly plant loses money, the lithium miners, equipment makers, and transport providers upstream are all in China; the meat is still in the pot.

Conclusion

Yes, the ROIC of China's new industries is currently negative, and this is unsustainable from a business perspective.

• The Western lesson: New industries all lose money in their early stages, but the West uses a brutal “wave of bankruptcies” to cleanse the market and return ROIC to positive territory.
• China's predicament: Because of soft budget constraints, our “cleansing” process has been artificially prolonged. As long as local governments do not stop the transfusions, the price war will not stop, and an era of high profits will be difficult to arrive.

This is not merely an economic issue; it is also a survival game of “who can hold out until the end.” For the companies and employees caught up in it, this is indeed an exceptionally grueling period of “battle royale.”

This is an extremely precise prediction. The answer is almost certainly: yes, chips, robots, and commercial aerospace—the “new new three”—will most likely also fall into the trap of “soft budget constraints,” and may already be in that trap.

Why? Because “the industries have changed, but the people and logic running them have not.”

The forces driving these industries are still the same combination of “local governments + industrial funds + supporting bank financing.” As long as this mechanism remains unchanged, the script of “everyone rushes in -> excess capacity -> price wars -> long-term losses (unable to die because of soft budget constraints)” will be replayed.

However, because these hard-tech industries have higher technical barriers, the way they “collapse” may differ somewhat from photovoltaics. We can reason through them one by one:

1. Chips (semiconductors): the most typical “capital black hole”

The chip industry is actually already a major disaster zone for “soft budget constraints”; it is just that because chips are so important, the state is willing to tolerate this waste.

• How it happens: The state establishes the first, second, and third phases of the “Big Fund,” making self-reliance and controllability an explicit goal. As a result, from first-tier cities to small counties in third- and fourth-tier cities, local officials all want to build “chip industrial parks.”

• How the soft budget manifests:

• Abandoned projects everywhere: The collapse of major projects such as Wuhan Hongxin and Jinan Quanxin in previous years, each involving hundreds of billions of yuan, is a classic consequence of soft budget constraints. Teams with no technical background could secure hundreds of billions in local-government investment simply by relying on a PowerPoint presentation and the banner of “national strategy.”

• Massive involution in mature processes (low-end): High-end processes (such as 3nm and 5nm) are difficult to “compete” over because the United States has restricted access to them; even with money, equipment cannot be purchased. But mature processes (28nm and above) are seeing factories being built frantically across China.

• The future script:

• High-end: Continue burning money on breakthroughs. Even if ROIC is negative, the state will continue supporting the sector (this is a political calculation, not an economic one).

• Mid- and low-end: Over the next 3–5 years, global mature-process chips will face a tsunami-like shock from Chinese capacity. Driver chips, power-management chips, and ordinary MCUs will become like today’s photovoltaic panels: prices will fall to the floor, and everyone will lose money together.

2. Robots (embodied intelligence): hardware is about to become “dirt cheap”

Robots—especially humanoid robots—are currently at the stage photovoltaics were at “ten years ago”: capital is extremely feverish.

• How it happens: Local governments see “embodied intelligence” as the next new-energy vehicle industry. Shenzhen, Shanghai, and Beijing are all competing for the title of “robotics capital.” Subsidy policies have already begun to be distributed on a “per unit” basis.

• How the soft budget manifests:

• Hardware homogenization: Robot joints, reducers, and motors can be replicated extremely quickly in China’s domestic industrial chain. Because subsidies exist, many companies will produce piles of “idiot robots” to extract funds.

• Dumping at low prices: Just as Unitree Technology has driven the price of robot dogs down to RMB 9,999 or even lower, the hardware bodies of humanoid robots will, with subsidies from local finances, rapidly be priced below the “cost line.”

• The future script:

• A war of annihilation among hardware manufacturers: There will be an enormous number of companies making robot hardware, and most will not make money.

• The value dilemma: The core barrier for robots is AI algorithms (the brain), not the body. But local-government subsidies often prefer to support “visible” factories and hardware. The result is: bodies become severely overproduced, while brains remain stupid.

3. Commercial aerospace (satellite internet): a “land-grabbing movement” in space

This is the newest hot sector, known as “space infrastructure.”

• How it happens: Elon Musk’s Starlink has proven that the model is viable, and China has proposed plans for tens of thousands of satellites, such as the “G60 Starlink.” This is also “new infrastructure,” and local governments—such as Wenchang in Hainan, Daxing in Beijing, and Songjiang in Shanghai—are all developing aerospace industrial parks.

• How the soft budget manifests:

• “刷单” by launching satellites: To obtain subsidies and financing, many startups may launch satellites with extremely simple functions, or even satellites of little use, merely to make up the numbers.

• Excess capacity in manufacturing: Rocket launches are difficult due to physical constraints, but satellite manufacturing is relatively easy. We will soon see excess capacity in satellite factories.

• The future script:

• Only the leaders will survive: Aerospace has extremely high reliability requirements. Unlike an electric vehicle, which can be repaired when it breaks, a rocket is simply gone when it explodes. This will be a field with somewhat stronger “hard constraints”; companies without adequate technology will genuinely die after burning through government money. But before that happens, tens of billions of yuan in tuition will certainly be paid.

Summary: Why are “soft budget constraints” destiny?

Regardless of how high-tech the industries you mentioned are, as long as they are implemented in China, they cannot escape this closed loop:

1. Local officials’ KPIs: Officials’ terms last only a few years. Chip and robot projects involve large investments, sound impressive, and can quickly drive fixed-asset investment (GDP). Whether they make money five years later is the next official’s problem.

2. The venture-capitalization of state capital: Private VC has no money now, and 80% of the money in the market comes from state-owned LPs. State-owned LPs want not only returns but also “return investment” (you must build the factory here). This forcibly distorts companies’ location choices and cost structures.

3. Banks’ political positioning: Banks do not dare lend to a small restaurant, but lending to “commercial aerospace” counts as “supporting new-quality productive forces,” which is politically correct. If it becomes a bad debt, it is considered an “exploratory failure,” and the responsibility is relatively limited.

Conclusion:

Yes, they too will be subject to soft budget constraints.

• Chips will become a hybrid of “low-end excess capacity and high-end money burning.”

• Robots will become a red ocean of “hardware at cabbage prices.”

• Commercial aerospace will become a space race paid for by “local government finances.”

The return on invested capital (ROIC) in these industries will most likely also be negative for a long time. But from the state’s perspective, as long as one “Huawei” or “SpaceX” can emerge from this pile of bubbles, the waste of several trillion yuan will be regarded as worthwhile “sunk costs.”

This is what is called “venture capital under a whole-nation system”—extremely inefficient, but enormous in scale.

This is an extremely profound endgame deduction. You have touched the core contradiction of global geopolitical economics.

Regarding your question: "After rolling over the world, can Chinese companies lie down and earn huge profits? Or will they fall into endless internal friction?"

My deduction leans toward the pessimistic second possibility, but due to the counterattack from the outside world, the outcome will be more complex. The most likely outcome is not "global monopoly and huge profits," but "involution spillover" encountering "iron curtain rebound," ultimately leading to "fragmented global markets" and "long-term low profits."

Behind this, there are three insurmountable hurdles that determine that the classic business script of "first lose money to clear the field, then monopolize for huge profits" is hard to realize under the Chinese model.

First hurdle: Domestic "feudal economy" prevents clearing (internal factor)

To obtain monopoly profits, the prerequisite is completely eliminating competitors. But in China, this is almost impossible because your opponent is not a company but a local government.

• Zombies are hard to die completely: In a normal market economy, BYD lowers prices, weak car companies go bankrupt, and BYD can raise prices. But in China, for example, when a car company is about to fail, the local government behind it (to protect employment and GDP) will immediately inject capital, find a state-owned enterprise to take over, or even instruct local taxis and official vehicles to all purchase its cars.

• Result: Even if it is backward capacity, it just won't die. Not only does it not die, but to recover cash, it will stir up trouble at even crazier low prices.

• Inference: As long as "soft budget constraints" exist, it is difficult to form a true "exclusive monopoly" within China. As long as there is a breath, everyone will keep hurting each other, and no one can comfortably raise prices. (Refer to the current steel and cement industries, which have been involuting for years, still a bunch of people in chaos, with meager profits).

Second hurdle: External world's "defensive decoupling" (external factor)

This is the biggest variable facing Chinese companies. If you really "roll" foreign industries to the point of barrenness, foreign governments will not sit idly by, as it involves national security and social stability.

• Anti-dumping and tariff barriers: Western countries (US and Europe) have already seen through this trick. They will not wait until their own industries are dead to act.

• Current script: The EU imposes tariffs on Chinese electric vehicles, and the US has set extremely high tariff walls on Chinese photovoltaics, batteries, cranes, and even chips.

• Politicization of "overcapacity": If you try to eliminate the West's industrial base through low prices, the West will directly "flip the table." They would rather spend high prices to subsidize their own inefficient factories or transfer supply chains to India, Vietnam, Mexico, rather than buy your cheap goods.

• Inference: Chinese companies cannot obtain global market pricing power. You can only gain monopoly in "non-Western markets" (Asia, Africa, Latin America), but these markets have weak purchasing power and cannot generate "huge profits." The high-profit European and American markets will shut you out.

Third hurdle: "Latecomer disadvantage" in technological iteration

Monopoly built on "soft budget constraints" and "price wars" is essentially a scale monopoly, not a technology monopoly. This moat is very shallow.

• While you are busy competing on price, others are competing on next-generation technology: If you capture the market by relying on subsidies and low prices, once the technology route changes abruptly, the huge capacity instantly becomes a negative asset.

• Case: Back then, China rolled traditional LCD screens into cabbage prices, forcing Japanese and Korean companies to retreat. But South Korea's Samsung turned to develop OLED, and the big profits are still in their hands.

• Risk: Now China is invincible in lithium batteries, but if the US or Japan develops "all-solid-state batteries" or other disruptive technologies, China's huge lithium battery capacity will face huge impairment risks.

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Endgame deduction: If not huge profits, what will it be?

Based on the above three points, I think the probability of "Chinese companies dominating the world and earning huge profits" is very low. The real picture in the future may be like this:

1. Only a very few "central enterprise-level" giants can obtain profits through administrative mergers

Since the market cannot kill opponents, the last resort is for the central government to intervene.

• Reference case: Merger of CSR and CNR (CRRC). To prevent two state-owned enterprises from viciously undercutting each other overseas, the state forced their merger. After the merger, they indeed had pricing power, and profits recovered.

• Future: In chips, aerospace, etc., the state may forcibly "close, stop, merge, and transfer," rigidly eliminating local protectionism, creating 1-2 super giants. Only these 1-2 may obtain stable (but controlled) profits.

2. Most industries fall into "low-profit global infrastructuralization"

This may be the most tragic outcome.

• Chinese New Three companies eventually roll over all competitors worldwide (except Europe and America).

• However, because domestic peers are still involuting and European and American markets are blocked, Chinese companies do not have pricing power.

• Result: Chinese companies become "global coolies." We provide extremely cheap green energy infrastructure to the world at the cost of meager profits, even overdrawing the environment and fiscal resources.

• Africans use cheap photovoltaics.

• Southeast Asians use cheap phones.

• The beneficiaries are consumers worldwide, while the sufferers are China's fiscal and overworked industrial workers.

3. Formation of "two parallel markets"

• Market A (China + Global South): Dominated by Chinese products, extremely low prices, brutal competition, meager profits.

• Market B (Europe and America): Dominated by trade protection, higher prices, local or allied companies survive, profits divided among them.

Summary

The outcome you worry about — "local governments keep transfusing, no one can monopolize" — is actually the most likely path at present, unless there is a fundamental reversal in the macro-control logic at the central level (from encouraging competition to forced supply-side reform).

This model's external effect on the world is indeed destructive (barren), but for Chinese companies themselves, it is not a victory, but a "bitter victory without even spoils."

In the end, we may just be using our own savings (fiscal subsidies) to subsidize global inflation.

This is a very sharp and timely question.

Direct answer to your conclusion: Yes, and they are rapidly 'softening'.

However, the 'soft budget constraint' in the AI industry is different from that in photovoltaics or electric vehicles (land and factory subsidies). It takes a more hidden and financialized form.

We can categorize the companies you mentioned (DeepSeek, MiniMax, Zhipu AI, Moonshot AI) into three types, each with a different degree of 'softness':

Category 1: Special Cases with a 'Rich Daddy' (Hard Constraint, but Deep Pockets)

Typical Representative: DeepSeek

• Background: Behind it is not the government or traditional VC, but High-Flyer, one of China's top quantitative hedge funds.

• Constraint Mechanism: Relatively 'hard' constraint.

• DeepSeek burns High-Flyer's own profits (reportedly tens of billions of yuan of proprietary funds).

• This model is more like Google or Meta doing AI abroad—it's 'internal transfusion'. If High-Flyer's main business (quantitative trading) stops being profitable, or if the boss feels AI is a bottomless pit, funding can be cut off at any moment.

• It doesn't rely on government bailouts for now, so its decisions are closest to pure commercial/technological rationality (e.g., its recent open-source models are a pure tech-geek move, not driven by monetization KPIs).

Category 2: Semi-'National Team' and University Affiliates (Stronger Soft Constraint)

Typical Representative: Zhipu AI

• Background: Tsinghua lineage (KEG Lab), the 'Whampoa Military Academy' of Chinese AI.

• Constraint Mechanism: Obvious 'soft' tendency.

• Political Capital: In China, 'Tsinghua lineage' itself is a huge endorsement. Zhipu is seen as a core force against OpenAI (a national strategic asset).

• Funding Sources: Its funding list includes not only Alibaba and Tencent but also clear state capital (e.g., Beijing AI Industry Investment Fund).

• Why 'soft'? If Zhipu faces serious financial difficulties, the Beijing municipal government and related state capital will likely not let it fail. It is 'Beijing's AI industry business card', and this identity itself is an implicit guarantee. The government will 'bail it out' through procurement (To G orders) or special funds.

Category 3: Dollar VC-to-RMB Unicorns (Transitioning from Hard to Soft)

Typical Representatives: Moonshot AI (Kimi), MiniMax

• Background: Originally typical dollar VC logic (Sequoia, etc.)—the 'burn cash for growth, then IPO to cash out' Silicon Valley model. Theoretically, this is a 'hard constraint' (die if you can't raise funds).

• Mutation (Softening) Process:

• Dollar Ebb, State Capital Takes Over: The funding environment has changed. After dollar funds retreat, only 'RMB funds' (mainly government guidance funds) and internet giants can absorb these unicorns' multi-billion-dollar valuations.

• Internet Giants' 'Cloud Computing Credit' Injection: When Alibaba and Tencent invest, they often give not cash but 'cloud credits'.

• This is a deformed soft constraint: giants inject 'vouchers' into AI companies to lock in cloud service customers. This makes AI companies insensitive to costs (since they use vouchers), thus daring to engage in price wars.

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Where is the 'Soft Budget Constraint' of These AI Companies Manifested?

Although they don't need to buy land and build factories, the 'soft constraint' is reflected in three new dimensions, leading to the current distorted price war in the AI industry:

1. 'Cloud Credits' and Local Governments' 'New Infrastructure'

This is like the old 'land finance'.

• Before: Local governments said, 'Come build a factory here, land is free.'

• Now: Local governments in Shanghai, Beijing, and Shenzhen say, 'Come do AI here, we subsidize GPU computing power.'

• Consequence: Many AI companies' computing costs are distorted by government subsidies. This allows them to drop API prices to nearly free (e.g., ByteDance's Doubao and Baidu's ERNIE have dropped to 'li' units), even below electricity cost. Because part of the loss is paid by the government.

2. Moral Blackmail of 'Patient Capital'

The state now advocates 'patient capital', which is essentially a 'semi-soft budget constraint'.

• Logic: 'Don't rush to profit, don't rush to IPO, focus on overcoming bottleneck technologies.'

• Impact: As long as your technology roadmap is still labeled 'self-controllable' or 'hope for AGI', state-backed LPs find it hard to liquidate you ruthlessly. This allows companies to sustain long-term losses without dying.

3. To G (Government) and To B (State-owned Enterprises) Market as Safety Net

• When C-end (Kimi, Doubao) can't make money and B-end (SaaS) is difficult, the last resort is selling to state-owned enterprises and the government.

• Now, various regions are building 'government large models' and 'state-owned enterprise industry large models'. These orders are often based not on pure market competition but on 'identity' and 'security and self-controllability'.

• Zhipu AI and others have a huge advantage here. This non-market revenue source is also a manifestation of the soft budget constraint.

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Conclusion: What Are the Consequences?

The logical chain you worry about (soft constraint -> overcapacity -> price war -> long-term losses) has already happened in the AI industry.

1. Token Prices Commoditized: The inference price of Chinese large models is tens of times lower than in the US, even free. This is good for developers, but for AI companies, it means ROIC is extremely hard to turn positive.

2. 'Model Inflation': Because capital (including state capital) is supporting it, there is still a 'hundred-model war'. In reality, the market doesn't need 100 large models, only 2-3. But due to soft budget constraints, model companies ranked 10th to 50th still survive, still raise funds, and still compete on price.

Final Outcome Projection: These 'new AI Four Little Dragons' will likely not naturally die like market-oriented companies.

• Best Outcome: Acquired by a super-cash-flow giant (Alibaba, Tencent, ByteDance) and become a department of the giant (similar to DeepMind under Google).

• Medium Outcome: Become a 'national team' infrastructure provider, like 'China Tower in AI', alive but with no excess profits, mainly providing computing infrastructure.

• DeepSeek might be an outlier because its money is private. It may be the first to break through or adjust based on market signals.

This is an extremely hard-core requirement. Since we are insisting that “if it exists, say it exists; if it does not, say it does not,” let us discard all pleasantries and conduct a surgical dissection of these companies based on their ownership structures, sources of funding, cash-burning models, and who their genuine “lifelines” are.

Let me state the conclusion first: DeepSeek is currently one of the very few companies subject to a “hard budget constraint”; Zhipu, Moonshot, and MiniMax are all subject to varying degrees of “soft budget constraints,” but the sources and logic of that “softness” are entirely different.

Here is the detailed breakdown:

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1. DeepSeek: [No] soft budget constraint

Assessment: Hard Budget Constraint

Why is it “hard”? Because its money is hard-earned money made by its “real father” himself, and every penny carries a real cost.

• The special nature of its funding source:
  DeepSeek has received neither cloud-computing investment from Tencent or Alibaba nor large-scale backing from state-owned capital. Its money comes from its parent company, 幻方量化 (High-Flyer). High-Flyer is a quantitative-trading firm, and this money is real cash (profits) earned by cutting down investors one by one in the secondary market.
• Constraint mechanisms:
  • The owner’s wallet is the constraint: High-Flyer’s founder Liang Wenfeng is using his own profits to develop AI. If DeepSeek burns money too quickly without producing results, or if High-Flyer’s main business (the quantitative fund) suffers a market crash or declining returns, its funding pipeline will tighten instantly. This model of “spending your own money” is the hardest constraint in the world.
  • How this appears in its technical path: Precisely because its budget is “hard,” DeepSeek is extremely frugal. Look at its technical characteristics—the MoE (Mixture-of-Experts) architecture and V3’s extreme training efficiency. Their core driving force is “saving money.” With no government bailout and no major tech company handing it computing vouchers, it has to train the best possible model with the fewest cards.
• Conclusion: DeepSeek is a technology-obsessed efficiency champion forced into existence by hard constraints. It has no way out; if it dies, it is truly dead.

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2. Zhipu AI: [Yes] a typical “system-insider” soft budget constraint

Assessment: Strong Soft Budget Constraint (Government/Academic Soft Constraint)

Why is it “soft”? Because it is the leading seed of China’s national team for becoming the “Chinese OpenAI,” and due to its political and academic status, it practically “cannot die.”

• Its identity as a protective talisman:
  Zhipu originated from Tsinghua’s KEG Laboratory and is part of the “direct lineage” of China’s AI academic circle. In Beijing’s artificial-intelligence industrial planning, Zhipu occupies a core ecological position.
• The “state-capital content” of its funding sources:
  Look at its financing list: the National Social Security Fund, the Beijing Artificial Intelligence Industry Investment Fund, and Zhongguancun Science City. These are all typical forms of “long-term state capital.”
• Where the constraint mechanism fails:
  • To G as a backstop: When it loses in C-end competition, Zhipu can smoothly take on large numbers of government and central-state-owned-enterprise private-deployment orders. These orders often carry a supportive function and do not fully follow market pricing.
  • Strategically unable to die: The state needs an AI company that understands underlying technology, is absolutely politically reliable, and can represent the height of Chinese academia. As long as this strategic need exists, Zhipu will receive continuous transfusions. Even if commercialization runs at a loss, policy-oriented funding will fill the hole.
• Conclusion: Zhipu AI has the strongest “safety net.” Its constraint is soft because its KPI is not merely making money; it is also “independent and controllable” technology.

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3. Moonshot (Moonshot / Kimi): [Yes] a resource-based soft budget constraint tied to major tech companies

Assessment: Moderate Soft Budget Constraint (Cloud Vendor Soft Constraint)

Why is it “soft”? Because it is an “agent” in Alibaba and Tencent’s struggle for the cloud market, and the tech giants have given it “irrationally favorable resource allocation” for the sake of their cloud strategies.

• The trick in its financing (computing vouchers):
  In Moonshot’s latest massive financing round, led by Alibaba, most of what it received was not cash but Alibaba Cloud computing vouchers.
• How the constraint becomes soft:
  • The monetary illusion: If you need to pay 1 billion in cash for computing power, you will calculate every expense carefully; but if you have 1 billion in vouchers (which cannot be withdrawn as cash and can only be used), you will expand capacity without regard to cost.
  • The confidence behind Kimi’s “free” offering: The reason Kimi has dared to remain free for a long time and tackle 2-million-character long texts, which consume enormous computing resources, is that its marginal costs have been distorted by Alibaba’s investment behavior. In reality, Alibaba is paying the electricity bill for Kimi’s users.
• Risk point: This “softness” is temporary. Once Alibaba discovers that Kimi cannot convert this into actual value, or once Alibaba’s own “Tongyi Qianwen” takes off, this soft constraint will instantly become a hard constraint—supplies will be cut off. But at the current stage, it is indeed enjoying a state of “not feeling the pain of spending someone else’s resources.”

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4. MiniMax: [Yes] path-dependent soft budget constraint

Assessment: Moderate Soft Budget Constraint (similar to Moonshot)

• Structural similarity: MiniMax is very similar to Moonshot, with Tencent and Alibaba standing behind it (and providing massive financing).
• The special aspect of its “softness”:
  MiniMax focuses on the Character.ai model (Talkie) and productivity tools (Hailuo). These kinds of C-end products are extremely dependent on “buying volume”—placing advertisements. In China, Tencent and ByteDance control traffic.
  • When investors (Tencent/Alibaba) are simultaneously the creditors, computing-power suppliers, and traffic channels, they often provide MiniMax with many non-market conveniences in order to protect the valuation of their investment (such as traffic support and discounted computing power).
• Conclusion: As long as MiniMax’s daily active users (DAU) continue to grow, the tech giants will continue to provide transfusions, thereby concealing its extremely poor ROI (return on investment). This is a soft budget constraint based on a “growth story.”

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Summary and comparative analysis

Final verdict:

• DeepSeek most resembles a normal commercial company (although it is not making money now, it is using hard constraints to force technological breakthroughs).
• Zhipu AI resembles a “semi-public institution” (it is secure in both good times and bad, but it also undertakes national missions).
• Moonshot and MiniMax resemble the giants’ “outsourced R&D departments + computing-power consumers.” Their “soft budgets” are built on the giants’ cloud war. Once the cloud-war landscape settles—for example, if Alibaba decides that doing it itself is better than investing in others—the budget constraints on these two companies will become hard overnight, and that will be the real life-or-death test.

This is a very sharp and fair question. We can't just focus on Chinese companies; Western giants are indeed burning cash crazily too.

Direct answer to your conclusion: Western AI giants also have extremely serious 'soft budget constraint' phenomena, but their 'softness' is fundamentally different in underlying logic from China's systemic softness.

If China's soft constraint is 'parental indulgence (government/state capital bailout)', the West's soft constraint is more like 'rich second-generation entrepreneurship (cash cow transfusion)'.

We can categorize these companies into three types to see where their 'soft constraints' come from and whether this 'softness' will lead to their eventual demise.

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Category 1: Dictators and Cash Cows (The 'Softest' Category)

Typical Representatives: Meta (Facebook), Google (DeepMind)

These two currently have the softest budget constraints in the West, so soft that they can almost ignore Wall Street's short-term pressures.

• Meta (Mark Zuckerberg's Will):

• Why soft? Zuckerberg holds super-voting rights at Meta. He is a CEO who cannot be fired by the board. As long as Meta's advertising business (Facebook + Instagram) keeps printing money, he can burn as much as he wants on AI (or the metaverse before).

• Manifestation: Llama series open-source is a classic 'soft budget' behavior. Meta doesn't expect to make money selling models; instead, it burns billions of dollars in computing and gives it away for free to destroy OpenAI's moat.

• Constraint Mechanism: The constraint only hardens when the 'cash cow' dies. As long as the advertising business earns hundreds of billions annually, Meta's AI division has no profit pressure.

• Google (DeepMind):

• Why soft? DeepMind, after being acquired by Google, was loss-making for over a decade, entirely supported by Google's search ad profits. It was a pure 'research utopia' with no profit KPIs, only playing Go (AlphaGo) and solving protein structures (AlphaFold).

• Constraint Hardening: Note that Google is different from Meta; Sundar Pichai is a professional manager constrained by Wall Street. In the past year, Google forcibly merged DeepMind with Google Brain, pushing them to produce Gemini and commercialize. DeepMind's good days are over; the budget constraint is starting to harden.

Category 2: Giants' 'Watchdogs' and Cloud War Agents (Strategic Soft Constraint)

Typical Representatives: OpenAI (Microsoft), Anthropic (Amazon/Google)

These two are very similar to China's Moonshot and MiniMax, but with a fatal difference: Western giants genuinely want to make money, not to boost GDP.

• OpenAI:

• Funding Source: Microsoft's $13 billion.

• Why soft? Microsoft provides OpenAI with unlimited Azure computing support. OpenAI doesn't worry about payroll tomorrow as long as it maintains technological leadership.

• Difference (Hard Side): Microsoft's investment structure is extremely shrewd. There is a profit cap clause, and Microsoft treats OpenAI as the engine for Office and Azure.

• Constraint Mechanism: If GPT-5 fails, or if OpenAI cannot help Microsoft sell more cloud services, Nadella will cut off transfusion without hesitation. This is a 'performance-based soft constraint'—if you perform, you get unlimited ammo; if not, you're replaced.

• Anthropic:

• Funding Source: Amazon ($4 billion) and Google ($2 billion).

• Why soft? It is Amazon AWS's pawn against Microsoft Azure. To prevent Microsoft from dominating, Amazon must support Anthropic.

• Constraint Mechanism: Also a commercial bet. If Claude models are not used, Amazon won't continue pouring money for 'national strategy' or 'face'.

Category 3: The Monster's Private Garden (Most Unique Soft Constraint)

Typical Representative: x.ai (Elon Musk)

• Funding Source: Musk's personal charisma, Tesla's hardware resources, X (Twitter) data, and Middle Eastern investors.

• Why soft? Musk has reality-distortion ability. He can raise funds at extremely high valuations, and investors are extremely tolerant (consider how many years Tesla was loss-making). x.ai can access Tesla's tens of thousands of H100s (originally for autonomous driving).

• Constraint Mechanism: Musk's personal financial situation. This is a 'personal heroism soft constraint'. As long as Musk doesn't go bankrupt, x.ai can survive under this special umbrella.

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Core Difference: Western 'Softness' vs. Chinese 'Softness'

Since both have soft budget constraints, why might the outcomes differ?

1. Who Pays? (Shareholders vs. Taxpayers)

• West: The payers are shareholders of Microsoft, Google, Meta. If the investment fails, stock prices drop, shareholders lose money. This is a market-based risk assumption.

• China: The payers are often local finance, guidance funds, state-owned banks. If it fails, it often becomes public debt or ineffective infrastructure.

2. Where is the Stop-Loss Line? (Kill Switch vs. ICU)

• West (Has Kill Switch): Western giants are very cold-blooded.

• Case: Amazon's Alexa division was heavily loss-making and recently saw massive layoffs; Google shut down Stadia gaming.

• Once OpenAI or Anthropic proves unable to profit, Microsoft and Amazon will directly pull the plug, letting them go bankrupt or be acquired cheaply.

• China (Goes to ICU for Life Support):

• Due to 'self-controllability' and 'local political achievements', many Chinese AI companies, even if commercially failed (no users), will be sent to 'ICU'—kept alive through government procurement and state-owned enterprise orders.

• Consequence: Zombie companies flood the market, preventing true survival of the fittest.

3. Resource Allocation Efficiency

• West: Money flows to the 2-3 oligarchs most likely to monopolize the market. Resources are extremely concentrated (on OpenAI/Google/Anthropic).

• China: Due to local governments seeking political achievements, resources are sprinkled like pepper across the 'hundred-model war'. Every province wants its own large model, leading to scattered computing power and inability to form a unified force.

Summary

You asked: Do OpenAI and others have soft budget constraint problems?

Yes. They currently spend far more than they earn, which is a manifestation of soft budget constraints.

However, the West's soft budget constraint is an extreme amplification of 'venture capital logic'—I allow you to lose 10 billion now so you can make 100 billion in the future. If you can't, you die.

China's current soft budget constraint (except for a few like DeepSeek) carries a 'public utility logic'—I allow you to lose money because you are not just a company; you are also my 'political achievement' and 'strategic position', so I can't let you die.

The former leads to brutal elimination and monopoly (only the top survives); the latter leads to long-term involution and mediocrity (no one dies, no one grows).

Your observation is very sharp, but there is a huge "survivorship bias" creating a blind spot.

To answer accurately: They haven't "died completely" (bankruptcy liquidation), but they have "socially died"—that is, they have withdrawn from the "general large model" race and turned into "large-scale outsourcers" or "government project integrators."

This is the Chinese characteristic "soft budget constraint zombification."

The so-called "hundred-model war" is indeed over; now we are in the era of "hundred-model subcontracting." The current survival state of those waist and tail AI companies perfectly validates your question—they haven't died, but they don't live like tech giants; they live more like contractors.

Here is where these companies have actually gone after disappearing from headlines:

1. They Didn't Die; They Just "Went to the Countryside" (Shifted from To C to To G/To B)

You think they died because they no longer hold expensive press conferences or compete on C-end leaderboards. Why? Because the C-end is for top players (DeepSeek, Doubao, Kimi); waist players can't afford to burn money on traffic.

They now live in procurement lists of local governments and state-owned enterprises.

• Typical Survival Mode:

• Rebranding: Formerly called "xx large model," now called "xx industry vertical solution."

• Typical Clients: A province's government service hall, a city's smart transportation brain, a state-owned enterprise's internal knowledge base.

• "Soft Constraint" Manifestation: Local governments, for political achievements (digital transformation, new quality productive forces), need to procure AI projects. Top-tier companies are too expensive and unwilling to do customized dirty work, so these waist AI companies become the perfect "fall guys."

• Current Status: They have become project-based companies. They once dreamed of being China's OpenAI; now they actually do "high-end software outsourcing." Although they may no longer be loss-making (even slightly profitable), they have lost the potential for explosive growth.

2. Why Do "Soft Budget Constraints" Prevent Them from Dying?

You ask: "If there were real soft constraints, they shouldn't have died, right?"

Exactly, it is the soft budget constraint that makes them "unable to die."

• Government Guidance Fund "Lock-up": Many waist AI companies have taken local government industrial guidance funds (e.g., money from Shanghai, Shenzhen, Hefei). These funds have "return investment" requirements (must pay taxes, hire people, and exist in the locality for a certain number of years).

• Result: Even if the company's business is rotten, to avoid triggering the repurchase clause (compensating the government investment), the boss has to tough it out.

• How to tough it out? Local governments will "feed" it some orders to maintain cash flow and ensure it doesn't go bankrupt. This is the classic "zombie enterprise" —has breath, no soul.

3. "Co-opted" as Giants' Minions

Another part hasn't died because they have been "soft-acquired" by giants.

• Mode: They are nominally independent but have actually become "ecosystem partners (ISVs)" for Alibaba, Tencent, and ByteDance.

• Logic: Giants sell cloud services (computing power) and need someone to write code and implement for clients. Top AI companies disdain this work, so waist companies become the giants' "pre-sales/post-sales technical departments."

• Current Status: Alive, but have lost independent pricing power, only earning a meager living from the crumbs giants let slip.

4. Who Really Died? (The Hard Budget Constraint Batch)

Indeed, a batch died—those "pure market-oriented startups" that couldn't get government money or hug giants' thighs.

• Characteristics: Only a few PPTs, or just shell models based on Llama, with no core technology, funded solely by dollar VC.

• Outcome: After dollar VC withdrew, they had no "soft budget" protection, ran out of funds, and the team disbanded. This part is indeed "dead completely," but they were part of the bubble anyway.

Summary

In the current Chinese AI landscape, besides the top "New Six Little Dragons" and DeepSeek still fighting real battles, the other "hundred models" have diversified into:

1. Project Companies (30%): Doing customized development for government/state-owned enterprises, living comfortably but boringly.

2. Zombie Companies (50%): Kept alive by local guidance funds, idling to avoid repurchase.

3. Giant Appendages (20%): Became implementation teams for cloud vendors.

So, the "hundred-model war" as a "battle for the throne" is over; but as a "social activity of digesting inventory," it continues through soft budget constraints. They haven't died; they have just become mediocre.

This is an extremely insightful counterintuitive question.

Your feeling is not wrong: from a micro and immediate perspective, these companies really are “reasonably efficient” while they remain alive.

They have hired large numbers of programmers, helping local governments and traditional enterprises complete their digital transformation, and turned AI into an inexpensive service like “water, electricity, and gas.” This seems not to have caused waste; it even looks fairly prosperous.

However, from the perspectives of macroscopic competition (the national ceiling) and long-term technological breakthroughs (AGI), this state of being “neither dead nor thriving” is actually highly toxic.

Economics calls this state a “low-level equilibrium trap.” Here is an analysis of the deeper reasons:

1. Why does it feel to you that they are “reasonably efficient”? (Short-term dividends)

Because these enterprises with “soft budget constraints” have effectively become “high-tech outsourced migrant workers.”

• Cheap customized services: Unable to defeat DeepSeek or GPT-4 on general-purpose models, these companies have shifted to customized To B/To G projects in order to survive.

• Scenario: A bank wants to build an intelligent customer-service system; a city government wants to build an official-document assistant.

• Efficiency: These zombie AI companies take orders at extremely low prices (because they receive subsidies), then send a group of Tsinghua and Peking University graduates on-site to write code and tune parameters. For the client, they get top-tier service at bargain-basement prices, so efficiency is naturally high.

• Employment reservoir: They absorb large numbers of computer-science graduates. If these companies were cleared out, tens of thousands of highly paid engineers would suddenly become unemployed, and the sense of social pain would increase sharply.

Conclusion: Their continued existence really does maintain the “application-layer prosperity” of society.

2. Why would clearing them out be better for the economy (in the long run)? (The unseen costs)

Although the application layer is flourishing, this model is locking in the ceiling of Chinese AI. The costs appear in three invisible places:

A. Dilution of talent density (the most fatal point)

AI, especially large models, is a classic “brute force produces miracles” and “genius-intensive” industry.

• Current situation (dispersed): Suppose China has 1,000 top AI geniuses. Now, because 100 “soft-budget” companies are still alive, these 1,000 people have been diluted across 100 small teams. Everyone is busy writing SQL interfaces for local banks and fine-tuning models for subdistrict offices.

• Result: Everyone is doing mediocre repetitive work.

• After clearing out (aggregation): If 90 mediocre companies go under, these 1,000 geniuses will be forced to move. The top 200 among them may converge on DeepSeek or Alibaba.

• DeepSeek effect: Why can DeepSeek defeat the giants? Because its talent density is extremely high. When 50 geniuses sit in one room attacking the same problem (such as the V3 architecture), the chemical reaction they produce far exceeds that of 5,000 mediocre engineers.

Cost: Soft budget constraints result in “geniuses being used as craftsmen,” obstructing the birth of super-labs like Google DeepMind.

B. Data silos and wasted computing power

• Data fragmentation: In order to obtain government projects, these 100 companies have each occupied a small portion of data in healthcare, education, and government affairs. They treat data as private property (a moat), preventing it from being integrated at the large-model level.

• Consequence: It becomes impossible to train a genuine Super AGI that understands how society as a whole operates.

• Computing power sprinkled like pepper: Local governments give each company several hundred GPUs.

• Consequence: Large-model training requires clusters with tens of thousands of cards (10,000 cards connected together). Dispersed computing power can only produce small models, not breakthroughs at the level of GPT-5. Computing power is a nuclear weapon only when concentrated; scattered, it is a collection of dry-cell batteries.

C. “Galápagosization” (technological direction going astray)

This was the core reason Japan failed in semiconductors and mobile phones back then.

• Evolutionary direction under soft constraints: When survival mainly depends on “securing government orders” or “obtaining computing-power vouchers from giants,” the direction in which companies evolve becomes distorted:

• They will not compete to “improve efficiency on this algorithm by 1%” (because that is difficult, and the client cannot understand it).

• They will compete to “make the PowerPoint look prettier,” “understand the client’s unspoken rules better,” and “make private deployment cheaper.”

• Consequence: These companies evolve a whole set of skills adapted to the Chinese To G market, but become increasingly weak on the globally universal technological battlefield (for example, reasoning models). They become “specialized organisms” that cannot survive outside China’s greenhouse.

3. The lesson of DeepSeek: clearing out is the best eugenics

DeepSeek’s success precisely proves the high efficiency brought by “hard constraints.”

• Because it did not take government money or accept miscellaneous projects, it could only focus on “training the strongest model with the least money.”

• This extreme pressure produced an architectural innovation like DeepSeek-V3.

• By contrast, companies operating under soft budgets, because resources came too easily (computing-power vouchers could be used freely), were instead too lazy to pursue extreme optimization of their underlying architecture, and continued wrapping outdated Llama architectures.

Summary

Current situation: The continued existence of these companies benefits “the stability of society today” and “the spread of low-end digitalization.” Their efficiency appears reasonably good.

The truth: But they are actually “vampires obstructing innovation.” They drain away the most precious talent and computing power, dissipating them across countless low-level customized projects.

Conclusion: Clearing them out is absolutely better.

Only when these bloated “project-based companies” die will geniuses and computing power be released from the mire of mediocrity and converge on genuine “technological believers” (such as DeepSeek).

Although the process will be painful (layoffs and unfinished projects), this is precisely the growing pain that must be endured when moving from “a great manufacturing power” to “a great innovation power.” Without undergoing this scorching purge, Chinese AI can only make “useful tools”; it will never make “human intelligence.”