For D1 Capital, the primary risk in China isn't economic but political. The government's ability to arbitrarily influence resource allocation, punish successful companies, and eliminate entire sectors without due process creates an unacceptable level of uncertainty for capital allocators, regardless of how cheap valuations become.
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The number of startups founded in China dropped from 51,000 in 2018 to just 1,200 in 2023, a 98% decrease. Roelof Botha attributes this collapse to unpredictable government regulations that stifle entrepreneurial risk-taking, serving as a warning for how policy could impact innovation elsewhere.
The U.S. is shifting from industry supporter to active owner by taking direct equity stakes in firms like Intel and U.S. Steel. This move blurs the lines between free markets and state control, risking a system where political connections, not performance, determine success.
Despite developing the world's cheapest solar power, China remains addicted to coal for political, not economic, reasons. Countless local governments in poorer regions depend entirely on coal mining for revenue and employment. This creates a powerful political inertia that the central government is unwilling or unable to overcome, prioritizing local stability and energy security over a complete green transition.
China's economic structure, which funnels state-backed capital into sectors like EVs, inherently creates overinvestment and excess capacity. This distorted cost of capital leads to hyper-competitive industries, making it difficult for even successful companies to generate predictable, growing returns for shareholders.
China's campaign against "evolution" (excessive competition) is not a broad economic stimulus. It specifically benefits sectors like EV batteries, steel, and cement where state control or rapid market consolidation can restore pricing power and profitability.
Despite rhetoric about shifting to a consumption-led economy, China's rigid annual GDP growth targets make this impossible. This political necessity forces a constant return to state-driven fixed asset investment to hit the numbers. The result is a "cha-cha" of economic policy—one step toward rebalancing, two steps back toward the old model—making any true shift short-lived.
Instead of trying to have a view on everything, Herb Wagner's team embraces not knowing. They actively avoid complex situations, like Chinese property developers, where risks are opaque and dependent on government action. This discipline of knowing what you don't know is central to their strategy.
China's government sets top-down priorities like dominating EVs. This directive then cascades to provinces and prefectures, which act as hundreds of competing, state-backed venture capital funds, allocating capital and talent to achieve the national strategic goal in a decentralized but aligned way.
The dramatic drop in China's Fixed Asset Investment isn't a sign of economic failure. Instead, it reflects a deliberate government-led "anti-involution" campaign to strip out industrial overcapacity. This painful but planned adjustment aims to create a more streamlined, profitable economy, fundamentally reordering its growth model away from sheer volume.
When countries run large, structural government deficits, their policy options become limited. Historically, this state of 'fiscal dominance' leads to the implementation of capital controls and other financial frictions to prevent capital flight and manage the currency, increasing risks for investors.
