Episode summary
The Global Power Shift | Jason Hsu on AI, Factor Investing and What Investors Miss About China
Excess Returns
· · Guests: Jason Hsu
Summary
Jason Hsu argues that U.S. investors badly misunderstand China by treating it as a monolithic, centrally planned economy. He says China is better understood as a fiercely competitive capitalist system inside a protected domestic market, with the state acting more like a giant VC allocator than a planner. In his view, that competition explains China’s manufacturing dominance, the low cost and improving quality of products like BYD and EVs, and why tariffs on all of China are far harder to win than tariffs on a single company.
He also says China’s real estate reset was necessary to shift capital away from unproductive assets and toward technology, AI, and advanced manufacturing. On AI, Jason Hsu thinks the technology is the next wave of globalization: like outsourcing manufacturing, it will replace work in professional services and push up labor nonparticipation, while also creating new winners. He expects G2-style fragmentation between the U.S. and China to be less winner-take-all than many assume, because each side can innovate inside its own sphere.
On investing, he says China remains an “alpha reservoir” because retail participation is still high and institutional arbitrage is limited, which makes traditional factors work better there than in the U.S. He also argues that U.S. investors should think more carefully about home-country bias, consider China separately from broader emerging markets, and recognize that machine learning may help quants find more esoteric, less crowded signals.
Key takeaways
- Jason Hsu says China’s edge comes from fierce domestic competition, not just state support, and that this makes it more capitalistic than many U.S. investors assume.
- He argues tariffs on all of China are a weak strategy because China functions like a manufacturing monopoly while the rest of the world remains price takers.
- Jason Hsu expects AI to do to professional services what globalization did to factories: lower labor costs, raise profitability, and displace many jobs.
- He says China’s stock market remains an “alpha reservoir” because retail traders dominate and institutional arbitrage is weaker than in the U.S.
- He thinks U.S. investors should reconsider heavy home-country bias and treat China separately from broader emerging markets.
- Jason Hsu says machine learning will matter most by identifying which factors are crowded and which are still esoteric enough to work.
Notable quotes
“China has become the world's factory. In fact, it may be the world's only factory”
“The Chinese government probably is the largest, you know, LPGP in sort of private equity and VC funds”
“that doesn't come from just state subsidy and state intervention. That can only come from fierce profit-driven competition”
“AI is the same thing, right? We are just finding a cheaper source of labor”
How the episode opens
China has become the world's factory. In fact, it may be the world's only factory. Everyone else is sort of, you know, much smaller by an order or two.
The Chinese government probably is the largest, you know, LPGP in sort of private equity and VC funds. And these VC funds are all very very, you know, IR driven. They're trying to maximize return to shareholders.
And so they they drive a hard bargain. They drive a hard deal with entrepreneurs. In China, you kind of go there.
It's like, wow, they got tens of brands. They compete fiercely. It's cheap.
It's it's effective. They got, you know, better in Tesla quality at a third of Tesla price. You know, that doesn't come from just state subsidy and state intervention.
That can only come from fierce profit-driven competition. I think uh what we seen from Deep Seek, right? They just have a you know like it cost them 120th of money to get 80% of the way in training and AI.
Um that that's the kind of innovation that happens when you don't have enough money. Uh, and I think we'll continue to see that coming out of China.
Jason, welcome back to Access Returns.
Jack, glad to be back. I'm really excited today because we're going to talk about a wide range of topics. We're going to talk about China, and China's really interesting right now in terms of what's going on geopolitically, but also what's going on in terms of AI.
We're going to talk about factor investing, and you've got some exciting new stuff we're going to talk about as we get towards the end. But before we get started, just to give viewers some background on you. You are a co-founder of research affiliates with Rob Arnot and you're currently the founder and chairman of Reliant Global Advisors and you've also got an exciting partnership with Sal Management that you just launched that we're going to talk about as we get into the podcast.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- ai strategy
- factor investing
- china economy
- emerging markets allocation
- machine learning quant
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Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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