How Technology is Driving Change in China

Paul Schulte is the founder and editor of Schulte Research, a company that does research on banks, financial technology, bank algorithms, and credit algorithms. He has had a career in equity research which spans 27 years on both the buy and sell sides covering the Asian and emerging markets.

He also has 5 years of government policy experience in emerging markets. He has been frequently ranked in top-five positions in Euromoney, Asiamoney, and Institutional Investor. In Institutional Investor’s 2010 poll, he received top rankings in All-Asia Banks Team, Asia Equity Strategy Team, and Asia Economics, Team.

Mr. Schulte was most recently at China Construction Bank Intl as Global Head of Financial Strategy and Asia Banks Research and based in Hong Kong. Prior to that, he was Managing Director and Head of Multi-Strategy and Asia-Pacific Banks Research for Nomura International. Prior to that, he was Chief Equity Strategist, Asia ex-Japan, for Lehman Brothers.

He served from 2001 to 2006 as Portfolio Manager and Head of Research for GEMS equities at Big Sky Capital, a US$350 million global macro fund (Tiger Cub) of the Wynn Family funds in Los Angeles, California. At the same time, he was also a lecturer at the Hilton School of Business at Loyola Marymount University.

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How Technology Is Driving Change In China | Paul Schulte & Zain Jaffer

If you look at New York, the Fifth Avenue area, in a very short space of time, it went through a massive transformation. There are pictures of it in the 1900s where there were these horse carriages and people. Within a decade or two, it's full of cars. Can you imagine living through that time or that transformation? One would say that was the most radical transformation, and the most extreme before and after picture you can think of. Are we about to see that happen again? You talked about autonomous vehicles, for example, and how smart cities are going to change. Is that happening in China already? Is that a massive change? Is it about to happen here too? Do you think we're decades behind?

That's a good point. It’s already happening in China. A few years ago, everybody used credit cards and cash. Months later, nobody has a nickel of Chinese money in their pockets. Nobody uses money anymore. Nobody uses credit cards anymore. A blockchain-based currency is being rolled out. The experimentation externally in Macau and Hong Kong is already starting. We are looking at the elimination of the distribution of paper money by central banks. This hasn't happened since the Banking Reform Act of 1844 in the UK. 1844 was the last big revolutionary shift in central bank law. That's a big deal.

In terms of technology, no one can go to China now. I haven’t been to China in two years because you can't get there. I've been going off and on since 1992. The transformation in China is radical in so many different ways. The integration of life makes it easy. Tickets are given out for everything. It's illegal to honk your horn in certain areas of Shanghai for noise reduction. If you honk your horn, the machine knows whose car honked, so you got a ticket. That eliminates the cronyism of like, “I'm a government official. I don't get tickets.” In America, it’s the same thing. They’re like, “I'm a cop.”

What blockchain and all these infrastructure offer is when you look at the amount of corruption that was alleged in China in the crackdown, these things are like ancient relics. Everything is so accountable and trackable even when you gave the example of horning in a car and it is attributed to you. We talked about in an earlier segment, O2O, online-to-offline. Everything is merging and being centralized and tracked, which creates a very interesting type of society.

We have a different level of problem in the US with a lot of social unrest. At least I don't read about it. There doesn't seem to be as much crime or social unrest happening. We may exclude Hong Kong from that for a moment. When you have this technology and this accountability, I live in San Francisco, it's a nightmare. There are videos on social media of people walking into a CVS store and stealing things and not being stopped. In Saudi Arabia, if that happened, you'd get your hand chopped off. It wouldn't happen in China because if accidentally walked out of a store, the alarm will go off. You gave an example in that segment. It's such a crazy juxtaposition or contrast.

That's right. There's no graffiti. There's no crime. I had a lot of employees all over China. I asked them, “Are you nervous? What's going on?” They're like, “What are you talking about? I get a great deal on everything that I do. The higher my credit score, the better discounts I get. I get discounts on rental cars when I'm going on vacation. I get discounts on hotels. The better my credit score, the more discounts I get. There's a payoff for me cooperating with the social contract in China. I get a sense in America that there isn't a payoff for cooperation.”

People think the system is broken. The genesis of Bitcoin in 2008 was, “Look at all these oligarchs in New York City getting bailed out.” Everyone got a $10 billion check from the government and 3 million people lost their homes. That is fundamentally wrong, and no one did anything. Most important of all, nobody on Wall Street was arrested. I was at Lehman Brothers when all that happened. I know one person who should have been arrested. It was one of the leaders of my organization. Nobody was arrested. Nobody went to jail. People said, “That's fine. If that's the way you want to have it, then we're going to have to go off and find a way to seek options and systems where we can get a payoff.” That's Bitcoin.

My insurance was taken away. I have nine siblings. I'm the youngest. I saw all my siblings were crippled physically and emotionally because all of their benefits were taken away as laborers. They lost it. When you're too old, they chuck you out. You get thrown out. When you're 50, they didn’t have a reason to have you around anymore. The lax labor laws have caused a lot of problems because people have permanent disabilities. They get injured and they don't get medical attention because they can't afford it. They let chronic issues linger. People go to alcohol and opioids because they don't feel like they have a lot of hope.

You don't see this in China. People still believe that they get a good deal. If they participate in the system, they're going to feel very likely better off for the most part. That's starting to gurgle in China where you have people in the West that are not as well off as you have on the East Coast of China. That is rampant in the UK where the same thing happened. All the banks were bailed out. In China, we don't have social unrest because there was not a GFC. That's the critical historical point here. China's banking system didn't fall apart. It might in the future, but it didn't fall apart in 2008.

GFC means Great Financial Crisis, right?

Oligarchs in New York City are getting bailed out, and everyone got a $10 billion check from the government. Three million people lost their homes, and no one did anything.

That's right.

We have readers from all types of places, whether they’re VCs, executives or founders. We've got Paul here screaming from the rooftops publishing books. I’ve read the Digital Transformation of Property in Greater China, the book you published. You can get it on Amazon or from your website too. Is that right?

No, you can get it on Amazon and you can get it on the World Scientific website. It made number one in the real estate section of Amazon, so we're very happy.

It's a must-read. The screaming message here is to not believe everything you read in the media. The media understands a lot of bias. The tables have turned. It's time to look at China in terms of where PropTech is going. I'm inspired as a venture capitalist to see how PropTech is taking off. For me, the playbook is so different now. Before, it used to be, “Make something work in the US and then create a copycat in Latin America, in China, etc.” Now it's, “What are the Chinese doing?” It's being proven out.

If you're a PropTech founder, you need to pay attention to what the Chinese counterparts are doing because that is a very likely scenario for how things may go big if the US gets it right. We may cripple ourselves with legislation, too much regulation, and internal strife. If we can get through that, and I'm a believer in forward progress, as you've said in an earlier segment, the US has the ability to sprint and get things done, I do think this is where PropTech is heading. Do you have any concluding remarks before we say goodbye?

I would also say the other place that came up on our radar that's interesting is that golden triangle between Cambridge, Oxford, and GCHQ in the West of England. There is a lot of good stuff with AI and PropTech going on. That's another place to go digging for gold. There are a lot of interesting companies popping up there.

Oxford publishes some great reports around the PropTech segment. There's an old report I've seen that summarizes how I learned about PropTech. I agree, it's interesting. Thank you so much for coming to this program. It was a great pleasure having you.

I love talking to you. It’s fascinating. You ask great questions. I enjoyed it.

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About Zain Jaffer:
Zain Jaffer is an accomplished executive, investor, and entrepreneur. He started his first company at the age of 14 and later moved to the US as an immigrant to found Vungle, after securing $25M from tech giants including Google & AOL in 2011. Vungle recently sold for $780m.

His achievements have garnered international recognition and acclaim; he is the recipient of prestigious awards such as “Forbes 30 Under 30,” “Inc. Magazine’s 35 Under 35,” and the “SF Business Times Tech & Innovation Award.'' He is regularly featured in major business & tech publications such as The Wall Street Journal, VentureBeat, and TechCrunch.