On November 3, U.S. President Donald Trump’s Republican Party suffered an electoral shellacking of historic proportions in the US midterms.

• The Democrats handily won control of both the Senate and the House of Representatives.

China’s foreign ministry called the result an “internal affair” and pledged to “properly uphold and implement” the consensus reached by Xi and Trump during their recent summits.

But despite Beijing’s tight-lipped rhetoric, the blue wave has important implications for US-China ties.

Trump’s attention will shift to domestic issues as he tries to salvage the wreckage of his party and fend off a hostile congress; foreign policy, including U.S.-China relations, are likely to slip down the list of priorities.

• As a result, the administration may be less likely to innovate new trade and economic restrictions targeting China until after the dust settles.

It also reduces the urgency of key aspects of recent U.S.-China understandings on trade.

• In particular, Trump’s focus on agricultural purchases was aimed at easing economic pressure on his rural base before the midterms.

• With the electoral damage already done, the pace of progress on other pending agreements will likely slow to crawl.

Despite their big wins, the Democrats’ influence on China policy will take time to manifest.

• Most of Trump’s remaining tariffs and economic restrictions on Beijing flow from his executive powers and are not subject to congressional approval.

• Like Trump himself, the Dems’ priority will be domestic political consolidation rather than foreign policy entrepreneurship.

Get smart: We think American China policy will go on autopilot in the short-term.

• Trump is still likely to meet Xi Jinping twice more this year, but we’re not expecting much in terms of new deliverables.

The long view: With a post-Trump future now in sight, Beijing will be bracing for a less volatile, but not necessarily friendlier relationship with the next US administration.

Joe Mazur, Head of Geopolitical Research

What you missed

U.S.-China

China’s commerce ministry said Beijing was willing to expand purchases of US agricultural products, but: “Only on ⁠the condition that the two sides implement their agreed ‘$30 billion-for-$30 billion’ reciprocal tariff-reduction arrangement.”

• Translation: The USD 17 billion in US agriculture purchases the White House announced in May are contingent on tariff reductions that haven’t been finalized.

• Even if those tariff reductions were finalized today, the “pro-rated” target for 2026 would presumably be less than one sixth of the total – or under USD 2.7 billion.

Foreign affairs

German President Frank-Walter Steinmeier met Xi Jinping in Beijing during a five-day state visit to China and the tone was decidedly positive.

• Steinmeier voiced confidence that trade disputes could be resolved through dialogue, though he also raised concerns about China’s growing trade surplus and Europe’s increasing dependence on Chinese products.

Beijing and Ottawa bought two more years for the trade detente that Xi Jinping and Canadian Prime Minister Mark Carney reached in January.

• China’s suspension of 100% tariffs on canola meal and peas and 25% on lobster and crab, in force since March, now run to the end of 2028.

• Canada will likewise continue to waive tariffs on certain Chinese steel and aluminum products across the same period.

Econ and finance

The stats bureau’s (NBS) October PMI print reported production, exports, and new orders all falling into contraction, while the three subindices expanded under the S&P RatingDog survey.

• But on pricing, both PMIs point toward easing inflationary pressures, with the NBS producer price subindex falling sharply to 51.7 from 54.0, and the RatingDog equivalent recording an outright decline.

Chinese households are shifting their spending from goods to services – but not fast enough to prevent an overall consumption slowdown.

• Year-to-date, households allocated 38.2% of consumption expenditure toward services, up from 37.5% over the same period last year.

• But aggregate per capita consumption grew just 3.6% y/y year-to-date, down from 4.6% over the same period last year.

Tech
DeepSeek raised RMB 105.5 billion in its second fundraising round, giving it a valuation of RMB 615.5 billion (about USD 92 billion).

• That makes it the largest venture round yet for a Chinese AI firm, topping DeepSeek’s first round, which closed in June at a valuation above USD 50 billion.

• State-owned investors accounted for 27% of the funding, up from 2% in the first round.

Researchers from DeepSeek, Alibaba’s Qwen, and MiniMax discussed open-source AI on a panel at the World Internet Conference in Wuzhen.

• Qwen lead Liu Dayiheng said open models have two safety weak spots – they can’t be recalled once released, and third-party developers can strip out their built-in guardrails.

• DeepSeek researcher Gao Xi said open-sourcing could amplify AI safety risks and the company “has a responsibility to keep safety problems from getting bigger.”

Business environment

MofCom released draft measures setting out how it investigates and penalizes violations of dual-use export controls, pulling its 2020 Export Control Law and 2024 dual-use regulations into a single enforcement manual. According to the draft, investigators can:

• Seal or seize premises, facilities, and property – not just the goods in question

• Take up to a year or longer to decide the case, versus a 90-day default under China’s general penalty rules

Politics

Guo Ningning was appointed acting governor of Fujian and is expected to be formally elected governor soon – making her the youngest woman at full ministerial level in China.

• A career banker, Guo has a solid background in international finance – an asset in an export-oriented province on the front line of Beijing’s Taiwan policy.

• At 56, and as one of very few women in the Party’s top ranks, she’s one to watch for the 2032 Politburo.

As always, it was a busy week in China.

• Thank goodness Trivium China is here to make sure you don’t miss any of the developments that matter.

• Jessica DiCarlo, an assistant professor of geography at the University of Utah, calls this “managed interdependence,” not de-escalation.

• And she says the idea that Beijing can simply flip an on-off switch on minerals processing and shipments underappreciates the complexity of the sector’s regulation in China.

On this latest episode of the Trivium China Podcast, host Andrew Polk and special co-host Cory Combs (Trivium’s Head of Supply Chain and Critical Minerals Research) sit down with Jess (a scholar and co-founder of the Second Cold War Observatory) to unpack:

• Why China’s rare earth sector is regulatorily “fractured,” and how local officials, provinces, and firms – not just Beijing – shape what actually gets mined and shipped

• Why processing, not mining, is China’s genuine chokepoint

• How cobalt underscores the deep interconnection between China and other countries (e.g. the DRC) in the minerals space: about 96% of Congolese cobalt goes to China for processing

• Why China’s real edge may be guaranteed buyers up and down the supply chain, and why price swings keep sinking Western projects like Idaho’s cobalt mine

• The “minerals at the margins” — like hafnium, zirconium, boron, and beryllium — that may become strategically important, and why definitions of “critical minerals” keep changing

• Why the idea of a “just transition” for mineral mining belongs in the security debate, not on the sidelines

Give it a listen and let us know what you think.

Transcript

Andrew Polk: Hi, everybody. Welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium co-founder, Andrew Polk. And today, I’m joined by two great folks. First, we’ve got a familiar voice to listeners, which is Cory Combs, our Head of Supply Chain and Critical Minerals Research at Trivium, who’s going to be co-hosting with me today. And then secondly, we have a special guest that I’m very excited to have on.

She is an assistant professor of geography at the University of Utah. She’s also a co-founder of the Second Cold War Lab Observatory and an editorial board member at the Global China Lab, which advances open access, grounded analyses of China’s global engagements. That’s Jessica DiCarlo. Jessica, welcome to the pod.

Jessica DiCarlo: Thanks so much, Andrew. I’m so excited to be on here with you both, and I feel like we have so much to catch up on.

Andrew: Yeah, it’s going to be a great, wide-ranging conversation, so, very pumped to have you on. Just for a little bit more background for listeners, Jess and Cory have done quite a bit of work together, largely relating to various developments globally in the critical mineral space. So, we’re going to talk a lot about critical minerals and rare earths and the geopolitics of all of that. Cory and I have talked a lot about all of that on the pod in sort of relation to sort of ongoing news developments. But Jess is going to take us a little bit deeper and talk about things really more from a global perspective.

Of course, that will relate to China and what the U.S. and the West are doing in response to kind of China’s approach to critical minerals and rare earths, but it’s going to be a really great conversation. I forgot to say, Cory, how are you doing today? Welcome to the pod as well.

Cory Combs: Cheers. It’s good to be back on, as always.

Andrew: All right. Well, I’m pumped for this conversation today. But of course, before we get into the meat of it, we have to start with the customary vibe check. So Jess, I’m going to start with you. How’s your vibe today?

Jess: Well, it’s an honor to be a part of the vibe check. Thank you. I think despite the constant background noise of U.S. and world politics, I’d say my vibes are generally high. It’s a really lovely autumn afternoon in Utah. We’re on fall break. And I’m really focused on a few writing projects and kind of finding reasons to stay curious in my research and for my students. So yeah, vibes are in the A range.

Andrew: That’s awesome. I love it. I love it. I think, Jess, we can put you in the fellow China nerd category. I don’t know if I’m allowed to call you that.

Jess: Big time.

Andrew: Okay, cool. So, Trivium is just a bunch of China nerds who work together, basically. And so, it’s good to have another nerd in the nerdery with us. And glad to hear that you’re bringing positive energy today. Cory, how’s your vibe?

Cory Combs: You know, I’m going to follow suit. I’m feeling pretty positive, partly because a bunch of stuff that’s now off my plate for the last couple months. But also, it’s close to Halloween. And I know that’s polarizing, but I’m a huge fan. Probably not for the reason people expect. For me, it’s concert season. If you like music, and specifically the minor keynote, now is the time. I’ve got a concert coming up. I’m going to see Nobuo Uematsu as a composer, for any nerds of other forms, a Final Fantasy composer. He’s legendary.

So, I’m going to get to see one of my heroes in action orchestrating in the next couple weeks. So, my vibes are very positive.

Andrew: That’s awesome. Okay, I love the music in the minor keynote, spooky music. And mine’s sort of related, actually. My vibe, so, as soon as we get off this pod, I’m driving with my wife and two kids to New York. My daughters are obsessed with Hamilton. So we’re going to see Hamilton for the first time as a family and very excited about that. So, I’m not going to let that excitement to go to New York make us rush through the pod, but I am bringing kind of that vacation energy. So, I’m pumped to get into it.

Last thing, of course, we also have to quickly do housekeeping. Just a quick reminder to folks that we’re not just a podcast here. Trivium China is a strategic advisory firm that helps businesses and investors navigate the China policy landscape that, of course, includes domestic policy in China, a long a range of issues, including critical minerals and rare earths and industrial policy, some of which we’ll touch on today, and policy towards China out of Western capitals like D.C., London, Brussels, and others, which we will also touch on today.

So, if you need any help on that front, please reach out to us at hq@triviumchina.com. We’d love to have a conversation about how we can support your business or your fund. Otherwise, I always say this, but we really do appreciate the word of mouth recommendations from our listeners and our clients. So if you like the podcast, please tell somebody about it so that we can both grow our business and grow our listenership. And I feel confident that after today’s episode, you are definitely going to want to tell some colleagues about this discussion. So, with that, Jess, you ready to get into it?

Jess: Let’s do it.

Andrew: All right. Okay.

So we’ll start with sort of the most recent developments on this front, which are, of course, Xi Jinping recently being in Washington, D.C. for the state visit with Donald Trump. And also, we’re sort of in the middle of EU-China talks on trade, which obviously have a rarest element, critical minerals element to them. So, I just want to start by kind of getting your lay of the land. You’re an expert in this field. You look at it from not just China’s point of view and the West point of view, but sort of a broader global South point of view, I would say. Just talk to us about your broad thinking on the critical mineral space and some of the key trends you’re watching of the space at the moment.

Cory: Yeah, thanks, Andrew. And that’s a great question to kick us off with. So, I think the summit really reinforced how central various forms of leverage around critical minerals have become to trade negotiations. So, the two sides extended their trade truce, but reliable access to critical minerals remains unresolved in many cases. So, the White House said that discussions are continuing around U.S. concerns over things like rare earths and other minerals and ensuring shipments return to appropriate levels, as they say, on their site.

So, I expect the upcoming EU-China talks to focus similarly on making exports and licensing more predictable rather than really resolving any structural dependencies with China. And in some ways, I appreciate how this acknowledges the fantasy of complete decoupling. There’s so much talk about reducing dependence on China, but the Western ideal of this globalized world economy and offshoring, often polluting industries to places with cheaper labor has, in part, shaped today’s global production networks. And these have been built over years, and you can’t quickly undo that.

So, I think these meetings and their outcomes are really signaling that. In terms of these summits, China’s position is also about more than resource access. And I know we’re going to talk a lot about this, but it’s about these big industrial ecosystems built around them. So, the processing capacity, technical expertise, infrastructure, manufacturing, that allows us to turn minerals into materials that industries depend on. So, what we’ve seen is that this industrial position can also translate into geopolitical leverage, export controls, licensing delays, and disrupt manufacturers beyond China. So, that’s really what I see as what’s made critical minerals such an important issue in these kind of higher level summits.

Andrew: Yeah, I really appreciate the comment on the fantasy of full decoupling. And I know we’re going to get into that and specifically like some of the West’s view on China’s leverage, the way it uses its leverage. So, I’m excited to talk about that. But I think you had one more point to make.

Jess: Sure. I mean, on that, we’re obviously not going to reverse decades of globalization by simply redirecting supply chains. So, I guess I’ll be watching for whether policymakers recognize this complexity in negotiations in any way. And I would say my final, final point here, and something I keep coming back to in multiple projects, is what does it actually mean to build more secure, resilient mineral supply chains and for who? So, if we simply relocate extraction or processing while maintaining the same kind of underlying modes of resource extraction or environmental harm or unequal distribution of benefits, then we may change that geography of production without addressing a lot of the deeper problems.

So, I think that needs to be a part of these conversations about mineral security as well, rather than a separate issue.

Andrew: Yeah, that’s great. Cory, I want to bring you in for thoughts as well. I will just say, I know you’ve also been doing some of your most recent work on this idea of sort of as we rejigger supply chains, how do we do so in an equitable way in ways that also take climate into account? And I mean, let’s be honest, the whole reason that we offshore the rare earths industry to begin with was because we didn’t want the climate degradation in our own countries, right? So now we’re just going to invite that back? That doesn’t seem like necessarily the right answer. So I don’t know. Thoughts on that?

Jess: Yeah, absolutely. And there’s the climate argument to this. And also so much of this reshoring, friendshoring that the U.S., EU, other countries are trying to do also has a lot to do with other industries. So critical minerals are no longer just about climate and low carbon technology, right? It’s very military defense focused as well, digital technologies. So, it’s an increasingly complicated field.

Andrew: Yeah. Well, we’re going to dig into all of this as we go along this discussion. Cory, your thoughts and kind of where we are and any kind of up top additional questions for Jess to kick off with?

Cory: Yeah, no, I think a lot of different threads to pull on here, but one is that, just following up on the EU China piece, it’s very explicit what Jess was talking about. I mean, Maroš Šefčovič and Wang Wentao spoke recently, October 9th, 8th to 9th. And they have a list of deliverables that focus on moderating Chinese exports of hybrids and plug-in hybrids through the EU, the U.S. trying to get more market access.

But in the center of that was the rare earth licensing. That is not the same type of problem as the trade and investment issues we’re talking about, and yet it’s the centerpiece of those talks. I think that that is very specifically talking to. And in that set of talks, Maroš Šefčovič was very, very clear as well. The phrase I’m going to, I think it’s more or less verbatim, I don’t have it in front of me, but it was basically the EU is interested in basically reconfiguring, but not interested in decoupling from China. “The EU is committed to de-risking, not decoupling from China,” direct quote, right? And that’s to Jess’s point about handling the myth.

And I think a reasonable response has to recognize not just what we can and can’t do, and can we replace all of Chinese supplies for the entire electronics chain and not just for defense? That’s one question. The question that EU is grappling with, I think much more meaningfully is, To what extent do we want to? Obviously, you don’t want to be beholden to any particular supplier of 80%, 90% of your goods that can sway your whole trade negotiation, right? That’s obviously too much. But there’s also a real conversation around what degree of de-risking, not decoupling is actually acceptable. And I think having a clear vision of that is a prerequisite for a lot of further action.

But yeah, that and then I would just flag, hopefully we’ll talk about this more later in the episode, but the notion of a just transition, and you talk about the climate impacts, environmental impacts, one of the policy, just to toss it out on the table, one of the policy issues I see right now, or one of the issues with policy discourse I see right now, especially in D.C., but also elsewhere, is that, on one hand, a lot of folks talking about these issues, rare earths and other critical minerals, it’s the question of just literal access, just as fast as you can do it.

Any supply you can get is good. That’s the goal. And then you have the other group that’s very, very intently focused on this is more about the people who recognize that extractive industry has a lot of harm associated with it, a lot of historical issues. And apart from that, anything that doesn’t take into account local stakeholders and actual impacts beyond the financial, they tend to fail by their actual real risks to not having a properly what you might call a just transition from an ethical and moral perspective, from a climate perspective, but also from a very practical perspective.

And I want to talk about that later because Jess has done a ton of great work on this as well. But yeah, there’s two big pieces of the conversation. One is how rare earths end up in conversations that really are not about rare earths, but they’re just so much of leverage that they’re at the center. And then separately, that’s only one of the policy conversations around critical minerals. And Jess has a lot on the other piece as well.

Andrew: Yeah. I don’t want to get too much off of our roadmap here, Jess, but I do want to, following your point and then Cory’s point, I feel like the EU, they introduced the idea of de-risking, right? And trying to emphasize, we’re not decoupling, we’re de-risking. And then the U.S., I think, kind of increasingly started saying that, “Yeah, yeah, yeah, we just don’t want to de-risk. We don’t want to decouple.” I don’t know. I feel like that’s kind of politicians just trying to get the words right. But is there more to that in your mind? How do you think of the de-risking versus decoupling idea?

Jess: It’s a great question. I think my gut reaction would be that it has a lot more to do with discourse and rhetoric than it does actually shifting policies. I think decoupling so quickly became unpopular and there was a lot of pushback against it. And I think de-risking just sounds like a much more reasonable approach to say, well, you know, of course we’re going to stay connected in some ways. And I do think governments and companies realize that actually fully decoupling from major global supply chains would just be a bad decision for them. So the shift in language has to be a part of that as well.

Andrew: Yeah. Well, and I mean, to be fair, we work with companies at Trivium a lot. They’ve always known that coupling wasn’t going to happen, and I think the policymakers are starting to catch up. But I did also want to follow up on the agreement between Xi and Trump. It looks like they’ve punted on the Busan agreement from last year for at least a couple of months. And the thinking is, although it seems like China hasn’t officially confirmed it, but has kind of hinted that this is correct, that they’re, of course, going to extend the licensing regime in various critical minerals and rare earths that were part of that Busan agreement.

Do you feel like this is a fundamental de-escalation between U.S. and China and China and the world? Or are we just kind of on a pause from your point of view?

Jess: Yeah, I think there are really important ways that the U.S. and China are coming together and talking. And I think these summits are very important. In terms of this particular issue, I see it as more of a pause than a real de-escalation or solution. I think the extension, of course, matters because it gives companies and governments some breathing room and reduces the immediate risks of supply disruption. But the underlying issues haven’t gone away.

So, you have China’s position. It’s about the leverage that comes from its supply chain positions. And from Beijing’s perspective, export controls are a way of signaling that it has options when it does face pressure from the U.S. So, I don’t see that suspension as China giving up that leverage. I think it’s more that China can be selective about when it uses that leverage. And the regulatory tools are all still there. So its supply chain positions are significant. It can tighten restrictions if negotiations break down. So, I guess I’d describe it more as kind of a managed interdependence or some sort of diplomatic interdependence rather than any fundamental de-escalation.

I do think both sides recognize the costs of full-blown confrontation, as we were just saying. So they have incentives to keep at least things the short-term stable. But I also don’t think either side has abandoned strategies of reducing their own vulnerabilities or building leverage over the other. So, in general, the immediate risk of disruption may have declined, but the underlying competition hasn’t. Cory, maybe you can speak more to the specifics here, but my understanding is that the extension of the trade truce runs through January 2027, but the formal suspension of the October 2025 controls haven’t necessarily been amended the same way.

So, should we be careful not to treat a diplomatic understanding as settled or implementable or legal? Yeah. What are your thoughts on that?

Cory: Yeah, it’s a great thing to flag because when we say the truce has been extended, that is, as you say, a diplomatic agreement. We have not seen any federal register confirmation. We have not seen any MOFCON announcement that formalizes it. Now, I also think, I mean, given both systems are very kind of centralized right now, and if a leader says something, it happens. We’re 95% confident the truce is the truce, but it is true that there’s still a little concern, but more importantly, I think, than just this instance is, there is, not to use decoupling in more contexts, even than it already is used.

But there is a distinction between the legal and political sides that is increasingly frustrating. Because half the time, like if it’s January 8th and we haven’t seen the formal language changed, everyone’s going to b, well, the truce should end in two days. We should be…” you know. Anyway, so I think it’ll be fine, but it is definitely one of those things that can creep up. And it’s more broadly indicative of a problem that rhetoric and policy and law are not necessarily fully in unison at all times at this point. Not worried about this case, but yeah.

Jess: Not at all.

Andrew: Yeah, I was going to say, I don’t think for a legal counsel, general counsel of a major company going to them and saying, “I think it will be fine,” is really the answer they want to hear. They want, “Okay, was it legally extended? We need to see the paper.” That’s a great question, Jess. We will be on the lookout for that because it’s going to matter to how all this stuff gets implemented.

I wanted to pivot now to some of the deeper research that you do, Jess, and some of which you have done with Cory, and start with some really interesting work you all have done on domestic governance of China’s own critical minerals industry. So you wrote a paper with Cory and another colleague, Raphael Deberdt?

Jess: Deberdt.

Andrew: Deberdt. Okay. Yeah. See, yeah, I’m from Texas. We don’t know how to pronounce these names. So, but in it, you described China’s rare earths sector, characterized as fractured extraction. I love that name. Can you kind of introduce our listeners to that topic and what you mean by that? And then we’ll talk about kind of how that’s applicable to what’s going on.

Jess: Sure. Yeah. This was such a pleasure to work on with Coey. He’s a fantastic thinker and writer. So thank you for that, Cory. I guess I view, and I’m curious if you think about this differently, but I view fractured extraction as a way of capturing kind of the gap between China’s centralized ambitions for the rare earth sector and the more uneven contested ways those ambitions play out on the ground. So fractured extraction as a concept builds on a very long tradition in China’s scholarship on fragmented governance and central local relations in China.

The term itself also builds on Lee Jones and Shahar Hameiri’s excellent book, Fractured China. So, we’re using that perspective to understand how extraction is shaped by kind of overlapping, sometimes conflicting agendas domestically in China. So, in terms of rare earth production, the Chinese central government has pretty clear objectives – wants to consolidate the industry, strengthen environmental regulation, move the sector toward higher value production, among other things. But those goals obviously don’t automatically translate into uniform outcomes across the country.

So, what we found is that provincial and local governments, as well as firms, obviously have their own priorities. Local governments, for example, may support tighter environmental controls in principle, but when they’re thinking more about employment or local revenue or maintaining production, maybe some of those concerns go out the window or have less of a bar to reach. So, you end up having these tensions between what the center wants and what different actors are incentivized to do.

And what’s important for us, I think here, is that China’s dominance in the rare earth sector can sometimes be portrayed as highly coordinated. So, a centrally controlled system. They can turn supply on and off around the world. But in practice, all of the policies domestically are interpreted, negotiated, and resisted at different levels of government. And that’s why I think environmental and regulatory problems persist even when the central government has made those problems a central priority.

So, I hope this concept helps us think about kind of the limits of thinking about top-down efforts to reorganize the sector. And as many of us China nerds have been saying for a very long time, China is not a monolith and we can’t treat it that way if we really want to understand how various sectors work. So an aim of fractured extraction is to encourage us to look beyond these national strategies or production figures to understand those internal tensions of how power is actually exercised and then how that in turn affects global supply chains.

Andrew: Totally. Yeah. That’s all ringing very true in the areas where I watch China as well, in terms of the center making policy from a macroeconomic standpoint and local officials, you know, choosing how to interpret and implementing to various degrees. But one of the key, I think, implications here that I really want to dig in on is because of this fractured extraction idea, it really kind of undercuts this narrative in the West that we have that Beijing just kind of can turn the taps on and off at will when it comes to kind of anything but rare arts and critical minerals in particular.

So, how does this finding and thinking about the fractured extraction idea, how has that informed how you think about the central government’s ability to actually wield exports as a sort of economic coercion tool vis-a-vis Western countries?

Jess: Yeah, that’s a great question. I think that narrative sometimes gets a little overblown, the turning the tap on and off. China obviously has enormous leverage and it controls about 90% of rare earth processing, but a dominant position doesn’t necessarily always equal control. So, Beijing has spent decades trying to centralize control further. And I think that in itself is a signal that it doesn’t feel like it has that control all the time. I also think there’s an interesting historical dimension to this that we lightly touch on in our paper. And it comes up in a recent foreign affairs article by Gloria Shang and Jessica Chen Weiss.

And China’s rare earth dominance, of course, we all argue it’s developed through this history of domestic industrial policies, technological change, Western offshoring efforts. But something they point out that supports our fractured extraction argument is the 2010 dispute with Japan. And Gloria and Jessica note that while rare earth export restrictions were widely seen as retaliatory for a diplomatic dispute with Beijing, local customs officials and other actors may have withheld shipments without a clear directive from Beijing.

So, we’ve been seeing these sort of local moves for a long time. And I think that episode helped, on one hand, the Japan episode helped cement rare earth’s reputation as a geopolitical weapon. But looking at it from this view, you see that it really does raise questions about control. So when we’re asking questions about leverage, it feels impossible to look at these just high-level statements and actions without trying to dig into, well, why did it happen? And who did it? And where did that come from?

So, the idea that Beijing can cut off critical mineral supplies at any moment, I think when we’re talking about that in a Western context, that can also be a really powerful rhetorical tool for Washington or Brussels. I think it helps generate a sense of urgency around dependence on China and it’s building support for things like reshoring, friendshoring, etc. So, you have this historical dimension of domestic politics, but then also the rhetorical power of something like China being all powerful that we need to think about.

So, China obviously has leverage in terms of export controls and licensing, but a simple on-off switch is really overly simplistic and it misses kind of these histories, domestic politic, discursive uses of this kind of narrative.

Andrew: Totally. Cory, do you have thoughts?

Cory: Yeah, I’ll add it. It also is to Beijing’s advantage. Beijing wants to project an image of being able to cut off the taps. And so the West in many ways has reinforced the narrative that Beijing loves because Beijing, as you said, has worked decades in many cases to be able to do kind of the things it’s doing. So as well to add to that point, one other kind of practical note for companies who might be like, “Okay, well maybe…” and I’ve heard this a lot, right? Including for folks who’ve read the rest of your work as well.

And they’ll say things like, which is reasonable, I think, to say like, okay, we see how historically, maybe it was like a local effort in 2010, but then Beijing learned the lesson and now it is taking control. So interesting historically doesn’t matter anymore. Now, I push back hard against that. I’m very curious about the ways in which you would respond to that. But my first thought here is that, one, again, none of us are kind of downplaying the extent of China’s actual leverage in terms of we’ve seen no gallium, tungsten, etc., yttrium shipped to Japan since the effect of embargo, right?

And that’s control. At the same time, we’ve seen, already this year, several massive smuggling cases, including some that implicate local authorities, including a Chinese optics firm, which has a lot already getting massive domestic penalties. I think it was the Shanghai Customs Anti-Smuggling Bureau had caught them mislabeling things. And the reason that’s called out is because they need an example to make because they know this is happening much more broadly, and don’t have full control.

And so one stuff is still happening that Beijing is still reacting to. But I think, more broadly, it’s interesting to know what was different between the rare earths industry of 10 years ago and the rare earths industry of today that enabled Beijing to increase its effective leverage over that industry? And I’d say at this point, yeah, Beijing has a pretty good, I mean, good as a relative term, but pretty effective ability to cut off certain exports, but they have invested so heavily.

And so, as we look to new targets and new risk vectors and other controls, I think when we’re looking at fractured extraction, a lot of what we’re looking at is in fractured governance and in general of these production chains is what is necessary for not complete, but much stronger control, what undermines control. And then you can really, this isn’t exactly a simple formula or something, but it helps to think through for any potential new risk factors, does China have what it needs? Does Beijing have what it would need to implement controls to what extent?

And if you don’t have a sense of what it requires, you’re not going to be able to model that at all. I don’t know if you have any thoughts on that part.

Jess: Yeah. I mean, on the note of undermining control, I have some ongoing research very much in process on the China Myanmar border and just thinking about the high levels of heavy rare earths coming in from Myanmar to China. And a lot of what we’re seeing there is that much of the supply chain is depending on actors’ relationships that really extend so far beyond central control, which is maybe not surprising in many ways.

But heavy rare earths, many are mined in Kachin State, where Chinese firms and cross-border brokers, transporters, local authorities are all helping organize this movement, including ethnic armed organizations. So you have the Kachin Independence Organization taking control of key mine sites in 2024. It suspended mining operations.

It renegotiated arrangements with Chinese investors. And since then, it’s introduced more centralized licensing, taxation, transport controls. So we’re seeing not only how political authority on the Myanmar side can disrupt supply, but also how customs processes and middlemen and all of these actors that are really hard to get your finger on and talk to and understand, they’re shaping the movement of these resources across the border too.

Andrew: Totally. That’s fascinating. And I mean, it strikes me that, this is an obvious observation, but I still think it’s worth pointing out, when there’s big money to be made, as there are in critical minerals and rare earths, people will find a way, right? And so even when Trump was first putting on the tariffs, the Liberation Day tariffs, I remember listening to a podcast and someone saying, “Yeah, people are just going to smuggle stuff across the border to Canada or from Canada,” right? Across some of the Great Lakes or whatever.

And I was like, “Yeah, of course, they are. People are incentivized to do this.” So, I don’t know if you have any wider thoughts on how some of the things you talked about interact with some of the more illicit activity like smuggling or even just kind of lobbying various governments, whether that be in China or outside China, to change policy. How does all that fit into it in terms of kind of weakening China’s leverage, broadly speaking?

Jess: I am a China nerd. I’m also a China in Southeast Asia nerd. So I’ve been focused on Laos for a very long time and a bit more on Myanmar recently. And seeing how the demand for heavy rare earths has increased. You hear the Myanmar story a lot more, but I’ve also been kind of slowly tracking that in Laos and how mining regulations have been shifting to allow for more exploration, or there are mines that are already kind of starting up very quietly that maybe don’t have the legal approval yet. So, I’m seeing kind of smaller scale operations.

It reminds me of really similar cases in the early 2000s of Chinese agricultural businesses coming into Southeast Asia and kind of setting up shop and dealing with like a steep learning curve in a new regulatory environment. So, I feel like we’re seeing that with some of the rare earth rush here too.

Andrew: Yeah, that makes sense. I mean, commerce finds a way and policymakers always somehow feel surprised that people will break the rules in order to make some money. Switching gears just slightly, but staying on the fractured governance topic, how does what you’ve learned, both of you, about kind of China’s governance of these industries impact how you think about U.S. efforts to reshore or fringe shore some of the production of these minerals. Is there any lessons there, you think?

Jess: Yeah, absolutely. And I’m curious what Coey thinks about this one, too, because we’ve talked about it a little bit. But I guess looking across China’s rare earth experience, one lesson is that building domestic capacity is one challenge, and it’s a massive challenge. But then coordinating across an entire supply chain and making it resilient or trying to nudge it towards social, environmental acceptability or commercial viability, it’s a whole other suite of problems.

So Western governments can subsidize mines or processing facilities, but that doesn’t automatically create a supply chain that works at scale or can withstand political or commercial pressures. I think, even a really highly centralized government like China’s, The sector took ages to develop, and we’re still seeing all of these instances of illegal mining, uneven enforcement, environmental issues. So, it’s not that they have an industry that works. And I think those are problems we’re going to have to keep dealing with.

And the U.S. regulatory environment is particularly challenging. We see Beijing repeatedly trying to consolidate the industry and bring production under tighter control. I guess I’ve been doing a bit more work here in Utah and the western U.S., and I see a related set of challenges. There’s a real interest in building these domestic processing facilities here in the West rather than relying on overseas facilities.

But I think we’re going to talk about this more later. The difference between setting up a mine or setting up a mine to processing to manufacturing is a real challenge that I’m noticing. And we’re seeing kind of roadblocks to setting up processing facilities here already. So, I guess in the U.S., as in China, challenges are whether everything from governments to firms to researchers, investors, local communities, can they actually coordinate or agree on a shared project, even though we know their interests are going to change over time?

Yeah, I also am concerned about companies, maybe they’re willing to invest in a commodity when prices are high, but they pull back when that falls. Maybe policymakers are willing to prioritize national security in the moment, but perhaps that shifts down the road or local communities are concerned about employment versus environment. So, you have all of these puzzle pieces that when I’m looking at material facilities on the ground, it just replicates a lot of the issues that we’ve seen in China.

Andrew: Yeah, all great points. Cory, I know you’ve got thoughts. Why don’t you give us your thoughts? And then I’d love to kind of talk about this processing issue. So maybe you can kind of introduce that as our next topic.

Cory: Absolutely. So I’ll try to segue that. No, absolutely, and I think Jess is exactly right. A lot of the things that we see Chinese policymakers doing are to address challenges that we’re now starting to face without a toolkit. And so, I’ll add just a couple of things, I think she said it very well already, but I’ll just add a couple of thoughts.

One, I think increasingly, as I talk to entities that are dealing and setting up new projects in Southeast Asia, often trying to figure out whether to court or shun Chinese investment and partnership, that’s always a big question. Do you go with the entity who you’re kind of afraid of, but is really good at it and will give you a lot of money or the entity who says it’ll give you a lot of money doesn’t really know what they’re doing, and with the US, which has other issues?

So, it’s definitely challenges. But as I engage with some of those folks, they will frequently say that one of the most powerful facets of the Chinese mineral economy, if you will, obviously it’s a diverse economy, there’s a lot of different stuff with different minerals, but in general, one of China’s greatest strengths, comparative advantages, is just the integration across industry chains. And so, if you want to make nickel in Indonesia, well, you have a thousand Chinese buyers. And all the people buying that nickel and going to HPAL or whatever, or the ore to HPAL or whatever to get your high value, high purity products, well, then there’s another entity that they can guarantee get offtake. And that person with offtake is guaranteed offtake for them as well.

So we have this whole chain of guaranteed buying, basically. And the thing is that’s not guaranteed because a government has told them to. Yeah, there are subsidies for sure. There’s supports for supply side. And China’s got a lot of supply side supports, don’t get me wrong. But the ecosystem now is that if you bring online some capacity, there’s probably an industry in China that wants to buy whatever you’re making.

For batteries is the prototypical case. But now we’re facing the U.S., is like, yeah, we’d like to have someone make gallium. Great. Get gallium by product recovery. Who’s going to buy it? Someone who makes gallium nitride. Well, who’s going to make gallium nitride if the only buyers are Chinese and they have their own? Where’s the rest of the connection there? And so that’s what I mean by integration. I’m not talking about vertical integration within one company.

That’s a thing, right? But I’m talking about just the chains. And alongside that, I’d argue that this isn’t a thoroughly vetted thesis or anything. I’m not going to defend the dissertation on this tomorrow. But a thought, at least, is that I see a lot of China’s efforts to overcome some of the fragmentation with, or some of the fracturing, with consolidation of industry, right? You do see that a lot. And so, for example, there are a bunch of different rare earth miners. Now there’s only a few because Beijing has forcibly consolidated a bunch of them, right?

And I think the kind of banal, obvious analysis is that there are fewer entities to control. This notion of there’s a central government who can just press the button and control these entities, and the fewer the better it’s easier. That’s a superficial analysis, frankly. It’s not wrong, but it’s just very shallow, I think more interesting is what they’ve done is shaped entities whose incentives already align with the rest of the incentives. So, if you have a company that is only making something because of a subsidy, that company stops doing what you want the moment the subsidy ends.

That’s not what Chinese industry is. Chinese industry is highly subsidized But also, you even see when you see VAT rebates falling, you see subsidy supports falling, you see R&D supports falling, and they keep doing what they’re doing because at this point, they’re incentivized to do it. So, I think what Beijing has been doing, where Beijing is successful in industrial policy, I would argue, it’s less about direct control necessarily of particular actions, and much more about selecting and reshaping entities so that what those entities want is what Beijing wants.

And that’s where I see the greatest successes. Where that isn’t happening, Chinese industrial policy is failing. And I don’t want us to take the wrong essence from that on our side as well. So, push back on that as well, obviously.

Andrew: Now, I want to throw back to Jess. Do you have thoughts? I have two quick…

Jess: No, that was just great. I totally agree.

Andrew: Cool. Yeah. I also agree. I have two quick thoughts. One is Jess operates in the world of academia where she has to thoroughly provide evidence for all of her assertions. We, in the consulting business, can shoot from the hip a little bit or so. I just pointed that out, which I like. That gives us a little bit more flexibility.

Jess: It’s a privilege.

Andrew: But this is becoming a theme actually that one of the strengths of Chinese industrial policy is demand management providing guaranteed offtake of whatever it is whether that be a new innovation or even a technology that’s actually not quite up to the frontier standard that the Chinese state will still buy or these minerals going into different things. I don’t hear that as enough of a discussion in D.C. It seems like a real weakness in U.S. industrial policy, partly because that’s not in our governing DNA to govern our economy like that.

But if we’re really going to do industrial policy, we need to get better at it or at least wrap our minds around it. At least that’s kind of my thinking. Related to that, I think, is this idea of it’s not just pulling the stuff out of the ground. It’s this idea you have to process it, right? And then when you process it, who’s going to buy the processed material? And then what does that go into? But I want to bring it back just to another great paper that you wrote around what you call midstream geopolitics, the processing stage of the supply chain.

So, maybe you can introduce us to that concept and just talk about how all this relates, the processing piece, why that’s so important, I guess.

Jess: Yeah, thanks for this question. I’m really excited about processing these days. This is a paper that I wrote, again, with Raphael Deberdt and Philippe Le Billon at the University of British Columbia. And we worked on, well, when we started to work on this, we felt there was so much focus on mining, while at the same time, some of the most consequential industrial and geopolitical dynamics were happening further along the supply chain and kind of that refining processing space.

So, for us, midstream geopolitics is about how control over those processing capabilities create certain points of power, leverage, dependency. Having minerals in the ground is, of course, one thing, but transforming them into materials that industry can actually use requires things like specialized facilities, technical expertise, intellectual property, really long-term investment. Right? It’s not just that upfront investment. So processing isn’t just a technical step in the supply chain. It really can be a strategic choke point. If you think about this, you know, think about rare earths, since we’ve been talking about them a lot, the U.S. has the Mountain Pass mine in California, and historically its ore concentrate was sent to China for processing, like much of the rare earth material around the world.

So, even with domestic extraction, even if it was low, it was being sent elsewhere to be processed. And I think what we’re trying to do in this paper is show how the midstream connects not only to mining, but also to the upstream. So, countries with mineral deposits take, Indonesia with nickel or the DRC with cobalt, they can use things like export restrictions or domestic processing requirements to attract investment, but they may still, as Cory mentioned, depend on things like Chinese capital technology expertise to build that capacity.

Meanwhile, you get processors, you know, dependent on mines and manufacturers, dependent on processors for usable inputs. So, we were trying to trace all these relationships between the midstream and downstream and midstream and upstream. And we ended up in the paper identifying nine different relationships that I’ll talk about a little bit later or kind of mechanisms that explain how the mid is connected to the down and upstream. So, I think we’ve talked a lot about how mining and the midstream kind of interact. And something we’ve tried to cover in this paper is also the downstream.

So, how processing can constrain downstream manufacturers through things like trade restrictions or tech dependencies, as we’ve talked about. But also then how manufacturers and governments can influence processing through investment, de-risking, purchasing contracts. So, when we’re looking at these relationships, what we’re trying to flag in this paper is that they’re multidirectional. It’s not one influencing the other, but that it goes both ways.

I guess to your question on how this relates to great power competition, we see the U.S. and Europe trying to build alternative processing capacity through subsidies, investments, friendshoring, while China’s advantage reflects decades of investment or economies of scale. And all of this makes it difficult for new facilities to compete, especially when prices are low. So, in the paper, we use cobalt as a case study to go through these nine mechanisms.

One thing, for example, we mentioned is on the U.S.-Idaho cobalt belt and how it illustrates how efforts to develop domestic production have been undermined by market conditions that make it really difficult for companies to sustain operations there.

Andrew: Yeah, I think, and Cory, maybe you have thoughts here as well, one thing I never really hear all that much about in this discussion in the U.S. in terms of building out our own rare earths and critical mineral supply chains, people talk about offtake agreements and price floors, but they actually don’t talk much about what you’ve mentioned twice, just sort of the price environment in which you’re investing, right?

So you’re going to invest capital to extract or process a certain mineral with some kind of assumptions around what the price will be and what the profit will thereby be, and also kind of what you would require for a subsidy for the government if the price isn’t high. But these prices are going to move, right? So I don’t know if either of you has further thoughts on that. But you’re trying to build an alternative supply chain in a global environment. And I think actually maybe not to preempt you, Cory, but I mean, one thing that China can do is really push the price up or push the price down by adjusting its supplies and kind of potentially impact Western efforts to build alternative supply chains through sort of market mechanisms.

Cory: Yeah, just I’ll add one piece. I don’t have a grand theory of this yet. Certainly not one I could defend in a dissertation at a Jess’s level, but…

Andrew: We’re consultants, remember. Go for it.

Cory: The bar is low. No, I’m just kidding. No, one thing we do see already is that Beijing itself is very concerned about this exact issue. And I’ll just give one tangible example, the lithium price cycle. Effectively, so on two fronts, there have been a lot of mining investments by Chinese companies that then get completely canceled. And we’re talking about appreciable percentages of theoretical global capacity appearing overnight and disappearing overnight as a company says, actually, the price environment isn’t right.

And this quite clearly perturbs Beijing, which is thinking about this from a kind of a national energy and resource security perspective. Like they’re very dependent, for example, on imports of lithium from, I mean, certainly Australia, Chile, also Zimbabwe, elsewhere, and they process it all, most of it, but they’re looking at domestic to balance the geopolitics of the midstream, as to Jess’s point. And so, it’s great for Beijing when a company is like, “Okay, we’ll invest in more lithium extraction assets, more lithium processing,” whatever it is, and especially the mining in the case of lithium.

And then a company says, “You know what? The price environment is shifting away from what our assumptions were. This is no longer tenable, end of project.” Back to earlier point, that decision is fully commercial and will actually happen in many cases, including with CATL mines. [Jiangxi 0:43:34] is a particular mine. If anyone is getting PTSD from hearing that word, right? That term, you have to be really niched too, but I’m sure there’s a few listeners out there. Beijing is quiet, but probably livid about this fact that these long-term strategic investments are being driven ultimately by a price cycle.

That’s not great. So that’s another example of where there are gaps between commercial interest and beyond that. Beijing’s broad response to that has been to try to avoid spooking the market with heavy-handed interventions so far. Who knows how long that’ll go? The other thing it’s done is to focus on futures markets and other financial mechanisms for hedging mechanisms that might help companies deal with uncertainty a bit better, right? But generally speaking, Beijing has not solved that problem.

And I think we have only just begun to think about that problem. So for what that’s worth, I don’t have an answer for it. But yeah, Jess, give us an industrial policy that works, Jess. Over to you.

Jess: Yeah, two seconds. Hold on. No, I don’t have that answer for you. I’m sorry.

Andrew: Do you have any further thoughts on the pricing issue, Jess? You mentioned it a couple of times. I don’t know how you think about that.

Jess: Yeah. I mean, the way I’ve thought about it, and this kind of relates back to your point about something we’re not seeing in U.S. industrial policy, kind of the demand and offtake agreements and all of that. I think we see investment in the U.S. at that very kind of front-end stage, and then it kind of drops off. I mean, if we know that prices are going to be volatile the way they are, and you have this very globalized market, I think the U.S. would have to, in some way, start to invest across time and not just right at the beginning or set up something to support companies if this is what the government would like them to do. But I’m not a consultant. So, this is where both of you, I would follow your lead.

Andrew: Well, I think this issue of where the vulnerabilities lie leads me to another question, which I think Cory has highlighted in some of our work for clients on where China’s choke points are and are not. And also in your midstream paper, you look at, of course, China being a dominant processor, but also an importer of a lot of raw materials, which creates a vulnerability, right? China, if it’s importing a bunch, it’s much more of the raw material. It’s harder for it to potentially use its leverage to control the processed export, because it then creates a vulnerability for itself if its imports are somehow cut off.

So, can you just Talk to us about what you’ve found on the import vulnerability piece and how that may or may not affect Beijing’s ability to use its leverage.

Jess: Yeah, absolutely. And I think this will be really high-level and we can direct people towards the paper. But I think this is a really important part of the story. China’s position is often discussed as though it has all the leverage and very little vulnerability. And of course, well, China dominates processing in minerals like rare earth, graphite, etc., positions in other minerals are just more or dominance in other minerals is more partial, like cobalt, copper, lithium, nickel. So, despite this enormous processing capacity, China’s really dependent on these materials.

In another paper that we worked on called Minerals at the Margins, we put together a chart of mineral advantages between China and OECD countries based on reserves, production, and processing, just to try to think through where some of those vulnerabilities and points of leverage are. Something else I’ll say about processing is China’s also expanded its control beyond the materials to the technologies. And I think that’s a really important part of the story because, on one hand, they’re importing and will have to maintain a certain level of imports to keep processing them.

But there’s also this recognition that restrictions are being extended to processing capacity. So, I think it was announcement number 62, maybe correct me, Cory, extended export controls to technologies involved in mining, smelting, separation, recycling. So, I think that is part of this story that we need to pay attention to in terms of vulnerability. It makes processing technology itself a strategic resource and can make it a lot harder for other countries to diversify.

So, you asked, does this affect how Beijing uses its leverage. And I think both are really important parts of the story as to how that happens. Although we shouldn’t assume that interdependence will necessarily prevent China from using expert controls aggressively, those controls can still disrupt downstream industries and also damage commercial relationships, encourage other countries to diversify, even, I think, undermine the wider production networks that China depends on.

So I guess to kind of try to summarize a lot of different thoughts there, I don’t think we can gloss over the fact that China has significant leverage in certain minerals and all of these other import dependencies, processing dependencies, but its position is powerful precisely because it’s so deeply embedded in global networks that allow the import, the shared technology, again, a system resulting from decades of globalization.

And of course, that also can create restraints. So, I think to understand how Beijing is using its leverage, we need to look at both sides of that relationship. And I think the midstream geopolitics offers a bit of a framework to do that. And we should talk about the nine mechanisms at some point, too.

Andrew: Yeah, I definitely just want to touch on the nine mechanisms. I want to give Cory a chance. He said he had a foot stomp on one of the points you made. So, Cory, what do you want to add there?

Cory: Yeah, 10%, Jess. And the way we’ve been kind of breaking it down, just as a basic framework, is that China has a lot of vulnerabilities and a lot of strengths. And it’s trying to wield the strengths to shore up its vulnerabilities, right? And so, for example, tech controls, not good for China’s growth. So, what do they do? Export controls. Well, export controls where they have strengths. But you also see, to your point about controlling like the equipment and everything, restrictions on the export of rare earth processing and the processing of technology and equipment came years.

The first ones came years before any of the U.S. trade issues that we’re talking about now. Why? Because that was an industrial advantage that they want to maintain. And there’s a whole separate logic of industrial policy that in a non-retaliatory context still says protect leading edge advantages. Now, they did not, for example, before the U.S.-China trade eruption, basically, before that, they did not hold hostage exports of raw materials.

That’s a new piece. But I think the first thing is that there are a lot of reasons for controls. In this case, China has expanded the use of those controls for retaliatory purposes, and especially the use of dual use. But now, one of the questions that comes to the rest of the world is, let’s say you diversify and have new rare earth processing technologies outside of China, it’s also in their interests, not for retaliatory purposes or geopolitical purposes, but just to protect their leading edge advantage to make sure no one else has that.

Very simple test of this case — Is Lynas just selling its technology to every other company in the world that wants to make rare earths? Obviously not. It’s Lynas’ selling point, right? And it’s not because Lynas a hostile actor at all, right? And I’m not trying to pick on them. It’s because that’s their advantage. And so, it’s scaled that up to a national, and you still have a similar logic. So, it just kind of further complicates things. But on the flip side, I think we also see, for example, you’re talking about where China’s vulnerabilities are.

What we’re talking about is China’s resource vulnerabilities. You’ve done a ton of great work on that. And the beryllium stuff you worked on, that was really interesting. I’d overlooked previously. But also economic vulnerability. Like, China cannot afford for its biggest export growth markets to fall off. And so, as much as we’ve seen, for example, the threat of cathode materials and other battery related materials before Busan that was threatened, I do not expect that we’d see Beijing materially curb battery exports to the world because what would their industry do?

That’s one of the most important, like that’s an economic security issue if their exports fall off. And so just kind of adding that to the mix of being holistic about our own strengths and vulnerabilities, but also China’s.

Andrew: Yeah, good points. Good points. Jess, I’d love for you to walk us through the, is it the nine mechanisms?

Jess: Mechanisms, dynamics. I forget the word we use in the paper. And I don’t need to walk you through every single one, but I do think it just helps me kind of center what we’re talking about with these midstream geopolitics. We use, again, cobalt as an example, and we walk through all of them. So, the dynamics are things like decoupling and de-risking, as we’ve talked about, export controls, friendshoring, market power, which would include pricing and price dynamics, on-shoring, reshoring, forms of resource nationalism, techno-nationalism, and stockpiling.

So, we use cobalt as a way to kind of walk through all of those and look at dependencies or strengths between the downstream and midstream, and then midstream and upstream. So, the DRC, as I’m sure a lot of your listeners know, accounts for about 76% of global cobalt supply. That was in 2024, while around 96% of Congolese cobalt production is sent to China for processing. So, you have this situation where neither side’s position makes sense without the other at this point, and it creates opportunities for leverage and dependency.

So, in the paper, we walk through these nine dynamics. So, if you took resource nationalism, for example, the DRC can use export policies to encourage domestic processing and capture more value. If we think about this in Indonesia, they’ve done something similar with nickel. But building processing capacity requires capital technology expertise, which is often coming from Chinese firms. So, you have this kind of two-way relationship. So, countries are gaining some bargaining power without necessarily gaining full control over their supply chains.

If you look at that in terms of market power, we could go back to the Idaho example I mentioned. China has invested in processing over decades, creating this huge economy of scale. But we look at Idaho, the copper belt in the U.S., where companies are trying to develop domestic production and facing low and volatile prices. You know, again, one of the mining operations was suspended after just five months after opening in 2022. So, a country doesn’t have to impose an export ban to exercise power. You get these market conditions and pricing that we were all just talking about.

And so, we go through this in the paper, thinking about techno-nationalism, stockpiling, de-risking, etc. And these nine dynamics aren’t completely separate tools. They often overlap with each other. Governments combine them in different ways. But through them, we’re trying to show how leverage comes from the ability to shape other actors’ options. So, I’d emphasize that leverage via midstream geopolitics runs, again, in these multiple directions. And processing isn’t simply a bottleneck. I think that’s often how it’s framed in a lot of policy conversations.

It’s not this choke point bottleneck that you either control or don’t control, but we really see it as a site of ongoing negotiation across these interconnected supply chain segments. And they’re constantly changing. Again, thinking about strategic dynamics or pricing dynamics and more.

Andrew: Totally. Well, and to your point about them constantly changing, I think, by definition, using an export control is not a one-time thing. Maybe that’s the wrong way to say it. By definition, using your leverage begins the process of eroding your leverage. Maybe that’s the way to say it, right? Because you incentivize whoever you’re selling to, to find a new supplier if you become an unreliable supplier. So, I think very clearly, if you’re going to use leverage, you’re using it in a dynamic situation, almost by definition. Cory, I don’t know if you have thoughts on that or the sort of wider kind of framework that Jess put through.

Cory: Yeah, I mean, this is the nature of using your leverage is incentivize everyone to try to get around it. There’s no secret to that. But it does tie back to this conversation we’ve had off and on for a couple of years now, which is, has China overplayed its hand? By deploying leverage, you’ve incentivized everyone. And again, I think both sides have overplayed their hands in many cases, in many specific instances. But in general, this isn’t one of them, to my mind.

I think the overplaying of a hand, for example, is not when someone tries to get around leverage that you’ve deployed. That’s just expected. And I don’t think Beijing was at all… I think they knew very well what they’re getting into with this, frankly. I think overplaying is things like unexpectedly high impacts on the EU that then you have to slowly walk back so you can try to engage with the EU on trade negotiations.

And that kind of collateral damage that some of the Chinese export controls had that disrupted other strategic interests, that’s overplaying your hand. I would entertain that argument that it’s overplayed its hand in those ways, sort of disrupted other interests. But yeah, no, I think that whole discourse has been overplayed a little bit.

Andrew: Thanks, Cory. Yeah, I tend to agree with how you’ve framed that up. I think the other question we need to be asking ourselves, in D.C., everyone’s very focused on kind of the problems as they exist today. Another way to say that is the problems that have built up over the past decade. China, for its part, I think is much more focused on what are the future choke points? You talked just about how China and the U.S. and Europe and others are thinking about how they can build up new points of leverage.

And this relates to another paper you wrote, which I think you already mentioned, the one entitled Minerals at the Margins, looking at critical minerals that sit outside of the current geopolitical spotlight, but could become strategically important as technology and demand shift. So, maybe you can talk to us a little bit about what drew you to that idea and what your sort of definition of a mineral at the margin is.

Jess: Yeah, definitely. I think to be completely blunt, what drew us to this idea was frustration with how narrowly the geopolitics of critical minerals is discussed, right? You just kind of hear the same things over and over. And so much of the conversation, rightfully so, is focused on a handful of minerals, rare earth, lithium, cobalt, graphite, and they’re very important, and also on how Western countries can catch up to China.

So it’s kind of the repeat conversation and they’re important concerns, but they also mean that we’re often reacting to existing dependencies rather than anticipating where things might emerge or, as you mentioned, kind of future technologies or new points of leverage. So, we use the term minerals at the margins to describe minerals that are recognized on lists as critical, but they’re outside this geopolitical spotlight, even though they could become strategically important as technology and demand evolves.

So, they occupy, I think, a kind of double margin. They’re peripheral to current policy debates, and their future material importance is potentially underappreciated. So some examples we write about are hafnium and zirconium, which are important for nuclear technologies and advanced manufacturing, as well as boron and beryllium, which have applications in defense and other advanced technologies. So, something that we found interesting is that I mentioned earlier, OECD countries already have significant advantages in the production or processing of many of these minerals.

So, while conversations are tending to focus on where China dominates, there are these existing strengths elsewhere that receive much less attention. So, our main point in the paper is that we shouldn’t stop worrying about lithium or cobalt, or that these less prominent minerals will necessarily become the next choke points. We’re not in the business of predicting the future. That’s also something you’re better at. But what we’re really trying to get across is that this idea of criticality isn’t fixed.

It changes with technological innovation, material substitution, shifting demand. And a mineral that seems relatively peripheral today could become essential to a future technology or something that dominates today maybe, you know, we’re not using in the future in the same way. So, I think this is really important for how we’re thinking about industrial strategy, rather than simply trying to replicate China’s capabilities and sectors or catch up to China. Countries could also invest in minerals and supply chains where they already have strengths or try to invest in science to navigate where those future strengths will lie. Yeah, I’ll leave it there.

Andrew: Yeah, that’s another great point. Cory, I don’t know if you have thoughts. I mean, I’ve heard you echo some of these before, which is, China’s perspective seems to be, “If the West and the US in particular wants to build a redundant supply chain and spend billions of dollars, tens of billions, hundreds of billions, that’s totally fine with us. You’re just recreating something that we’re already doing. No problem. Go waste your resources and have yourself distracted from trying to contain China.” But it’s also a great point on Jess, not only about there are minerals in the future that may become more critical, but also some of the things that we’re worried about being controlled today, we could potentially design out of products as a solution as well.

Cory: Yeah. I mean, a lot of companies are figuring that out right now, as well as national labs and other actors across the world as well, both government and private sector — Where can you obviate the problem? Where can you insure against the problem? Where can you just handle the problem head on? And those are different solution sets. And I think to state the obvious for the corporate side is you have limited capital, you have limited attention and expertise, and a huge amount of uncertainty.

If any of these things were more certain, if I knew I could spend 10 million on working out a new material that doesn’t require certain input, and that would be security. You just do it. You just pay the price. The thing is you have no idea if that R&D effort would work at all. Is it going to take a year? Is it going to take 15 years? And so I don’t want to overstate the uncertainty in some cases. In some cases, it’s more clear, and we have seen progress.

But in the sticky cases where you haven’t already seen solutions, it’s probably because there’s too much uncertainty, we don’t even know how to allocate the resources. And so, there’s a lot of speculative investment that is not speculative in a way that and diminishing or criticizing, it’s necessarily, you have to speculate on some of these. You have to take bets and risks. And governments and corporations are able to take very different risks and not always in the way that the other one would like.

Andrew: Yeah, I mean, that’s the nature of business, right? Is taking risks and then figuring out where the government should play a role in that, I think is the public policy issue around that. Cory, you did want to bring back up the issue, I think this is actually a good point, as we look at this transition in the West, the issue that Jess has highlighted of a just transition. What do we mean by that? What are the elements we need to be thinking about beyond just the supply-demand dynamics, the choke points, things like that? So, did you have a question you wanted to raise with Jess to kick that discussion off?

Cory: Yeah, no, I would love to get Jess’s thoughts because I think with a lot of policy conversations I have at least, the notion of just transition, it’s very easy to kind of set aside as, oh, it’s this nice to have thing. It’s for the climate folks or it’s for the kind of environmental justice folks, etc. And that’s nice, but we have problems we need to solve yesterday. So, we’re going to solve them through any means necessary. And I’m not trying to dismiss or think too little of some of these conversations, but I do find it’s very easy, in many policy conversations I hear that are focused on security, to set aside a lot of the real just transition principles.

Personally, I think that’s a mistake. I think that a lot of the elements of a just transition are the same things you need for an effective and durable solution to these problems. And so, Jess knows the space so much better than I do. And so what I’m hoping to ask Jess is just to talk a little bit about what do you mean by a just transition, and where does it play a role in not just building a new processing facility, but making something that’s durable, reliable? How does engagement with communities and then things like that that are central types of just transition, how does that impact the viability of a new ecosystem as we’re trying to rebuild?

And I say this also personally, just for what it’s worth, I also think we have a moral imperative. If you’ve got to build something, build it right. But even just on the practical elements, what does this look like? And I would love to hear from your research what you found.

Jess: Yeah, thanks so much. I really care about this question, and agree that setting aside the principles is a definite mistake. There is a moral imperative. I think, let me just start with the idea of a just transition. I think this, in some ways, I understand why it feels played out in certain sectors or for certain audiences. A lot of this is not about transition, what we’re seeing, and there’s some great papers that critique transition as it actually being about addition. So, we’re not at all transitioning energy resources, right? We’re just adding new resources.

And maybe some are low carbon, maybe some aren’t. There’s a lot of great literature in kind of the green extractivism space that also critiques this. So, something that I’ve been kind of thinking about and writing on is not just transition, but something we’re calling just shoring, because why not continue to create a bunch of new terms? So, just shoring, we have a short commentary out in Nature Energy, and then a longer paper that I hope will be out soon. But it’s really asking how critical minerals can be produced in a more socially, environmentally acceptable way.

And we’re reacting to a lot of the shoring strategies. So, friendshoring, onshoring, reshoring, and saying, “Okay, this is all happening. It’s not just for climate, right? It’s not just a transition.” It’s also about, as I mentioned earlier, defense, digital technologies. So how can we insert justice into these reshoring, friendshoring processes in ways that kind of build on a just transition, but also recognize that there were shortcomings to that framework? So, I mean, the practical questions are always the hardest because this is why policy is difficult, right? To come up with the thing that is good for everyone, where it works for business, it works for communities.

But something or a few things we’re writing about in this paper are rethinking demand. So, sort of what you were talking about with the minerals at the margins paper. So, what are we actually producing these minerals for? What are the governance structures around them? Where’s investing on lands that are, for example, indigenous, agrarian, where about 70% of the new investments are for critical minerals projects in the U.S.?

So, just-shoring is not something where we’re saying we need to refuse all mining, but we’re really trying to think about it from exploration phases to closure and develop a framework for how we can bolster critical minerals development in the U.S. or in ways that feel secure that still respond to a lot of the climate imperatives.

Andrew: Yeah, this is, I’m sure for a lot of our listeners, an area where they’re less familiar. Our audience is quite hardcore policy focused. Are you hearing any of this in the conversation around policy as people are talking? How do we build out a critical minerals industry in the U.S.?

Jess: You know, a lot of what I end up talking to people about are specific projects. And projects tend to, from at least what I’ve encountered, they tend to arrive in a place and see environmental and social concerns or issues around land access as obstacles instead of something to tend to. So, I haven’t seen it as something that is like an overarching framework that really considers the kind of principles of justice, right?

So, if you’re thinking about a broad justice framework, it’s distributive justice, it’s procedural, It’s restorative. It could even be intergenerational, environmental. It’s not something that I’m hearing a lot, maybe in some kind of safeguard departments of companies. That’s where I would have these conversations the most, but not as a broad framework for developing new projects, which is something I think we all really need to push for if we’re going to do this at home. And again, back to where we started the conversation, we offshored these industries because they were so damaging.

Andrew: Totally. I was thinking the exact same thing. There’s a reason. China didn’t come steal this industry from us. We gladly used to lead the world, as you all have documented, in rare earths processing, and we decided to give it up effectively. And I would just imagine that, you know, it’s a great point that we can have this strategy, we can want to implement XYZ industrial policy, but at the end of the day, these mines are in someone’s backyard. These processing facilities are in someone’s backyard.

And you’ve got to get the local folks on board if we’re not going to go through another round, 10 years from now, of everyone wanting to boot these industries out again. So, it’s really a great point. And I’m hoping that your writing and conversations can kind of instill some of this thinking into the policy process as it evolves.

Jess: Thank you. I will keep trying.

Andrew: Well, listen, Jess, this has been a great conversation, very wide ranging. You’ve been super generous with your time. So, we really appreciate it. Thank you so much for sharing your wisdom and your time with us today.

Jess: Yeah, thanks so much for having me and wanting to talk about all these papers. And I will continue to admire your work and listen to the pod.

Andrew: It’s very kind of you. We’ll have to have you out again after a couple of the papers you mentioned are published so that you can talk about them in even more detail. That’d be great.

Jess: I’d love that. That would be great.

Andrew: Awesome.

Jess: Thanks so much, Andrew and Cory.

Andrew: Well, thank you. Yeah, well, we’ve lost Cory. We thank him as well. He had an appointment to run to, but thanks, Jess. It’s been great. And we appreciate everybody for listening. So, thanks, everybody, for that. And we’ll see you next time. Bye, everybody.

• It hasn’t worked.

Now, regulators are changing tack. Rather than regulating what manufacturers charge, they are going after the root of the problem — tackling the accounting, taxation, and supply chain payment systems that allow firms to keep prices artificially low.

The clearest case study of this new approach is in autos, with similar measures rolling out across solar and batteries, and a template that could spread to other manufacturing sectors.

There are three levers:

1. Accounting. Selling below cost is already illegal in China, but firms have found creative ways around it.

• Common tricks include leaving discounts out of revenue figures or omitting costs like shipping and warranties.

• New industry accounting standards set a common method for calculating vehicle production costs, which makes it much easier for regulators to identify below-cost sales.

2. Payment terms. Big automakers have long eased their own cash flow pressures by delaying payment to suppliers.

• But now, under regulatory pressure, big auto players have pledged to cut payment terms to 60 days, from an industry average of around 170.

• Regulators have also stepped up enforcement and set a 30-day payment target for small and medium-sized suppliers.

3. Tax breaks. The finance ministry will reduce the VAT export rebate for new energy vehicles from 13% to 9%, effective April 2027. Industry insiders expect it to eventually be phased out entirely.

• The rebate has let automakers price aggressively overseas, effectively exporting China’s price wars. Cutting it will wipe out the thin margins on many mass-market models, forcing exporters to raise prices.

Taken together, this new anti-involution toolkit attempts to raise production costs and force manufacturers to restore margins through higher prices.

• That will change who can afford to compete on price, and how China’s export competitiveness evolves in the coming years.

The big question is enforcement.

• If regulators follow through, these measures could reshape margins and cash flow across key parts of China’s manufacturing sector.

• If firms keep finding loopholes, Beijing will have added one more layer of toothless regulation to a campaign that has so far failed to deliver.

Want the full picture? Subscribers to our Trivium Markets service can read the full note here, which walks through each of the new measures and explains what investors should watch next.

• If you aren’t yet a subscriber, sign up for a 30-day trial on us — no payment necessary.

Cosimo Ries, Head of Clean Energy and EV Research

What you missed

U.S.-China

The US Department of Homeland Security added three Chinese genomics firms — BGI Genomics, MGI Tech, and BGI Group — to the Uyghur Forced Labor Prevention Act (UFLPA) entity list.

• The commerce ministry (MofCom) condemned the listings as having “no factual basis” and vowed to “take necessary measures” in response.

Foreign affairs

At an informal meeting of EU trade ministers in Dublin, EU Trade Commissioner Maroš Šefčovič signaled that Chinese plastics could be the next target for import restrictions.

• The recent agreement to limit Chinese hybrid vehicle imports doesn’t mean Brussels is finished — as Šefčovič said following that agreement, “It’s a crucial first step, but only a first step in the process of rebalancing.”

North Korean supreme leader Kim Jong Un paid a surprise one-day visit to the Chinese city of Dandong via the New Yalu River Bridge which opened earlier this month.

• The recent flurry of meetings between senior Chinese and DPRK officials and the opening of the new bridge suggest a major effort by both sides to reinvigorate ties.

Econ and finance

Nominal per capita household income — which doesn’t adjust for inflation — grew 5.3% y/y over the first three quarters of this year, up from 5.1% in 2025.

• But in real terms — which account for the loss of purchasing power as consumer prices rise — incomes grew just 4.4% y/y, down from 5.2% last year and the slowest pace on record outside the pandemic years.

Business environment

MofCom released draft provisions allowing it to investigate and sanction foreign entities suspected of infringing Chinese trade secrets.

• Under the proposed rules, MofCom could restrict or prohibit trade and investment involving sanctioned entities, bar associated personnel from entering China, or impose fines.

• Our Quick Take examines the draft’s ambiguities, enforcement mechanisms, and implications for foreign businesses.

Tech

Top diplomat Wang Yi released China’s ten-point Position on Strengthening Outer Space Governance at the Global Governance Forum in Xiong’an.

• The new position paper calls for states to regulate commercial space firms so they “avoid intervention in the armed conflicts and internal affairs of other States in an unlawful way.”

• Beijing is likely thinking of Taiwan, which is currently courting Starlink as a possible backup communications system in case a conflict with China results in disrupted subsea communications.

The State Council General Office released guidelines on building an “employment-friendly” AI development model.

• The measures focus on creating jobs in new AI industries, building out AI retraining programs, and providing transition support for displaced workers.

• AI deployments that could cause major job losses (think robotaxis) must undergo an employment risk assessment as part of their review.

Politics

The recently concluded Fifth Plenum passed over central bank (PBoC) Deputy Governor and foreign-exchange chief Zhu Hexin when promoting alternate Central Committee members.

• Based on votes they received at the 2022 Party Congress, Zhu ranked ahead of three officials who were promoted, making his omission a conspicuous departure from the rules.

• The snub comes on the heels of investigations into former securities regulator Fang Xinghai and former Chongqing mayor Huang Qifan, both prominent financial technocrats.

As always, it was a busy week in China.

• Thank goodness Trivium China is here to make sure you don’t miss any of the developments that matter.

On the surface, that looks like a real pickup. A closer look tells a less encouraging story.

• Nearly all of the growth came from China’s record trade surplus, which rose almost 30% y/y. Consumption and investment added very little.

• Joe Peissel calls it “hollow growth.”

On this episode, Dinny McMahon (Trivium’s Head of Markets Research) fills in for regular host Andrew Polk. He sits down with Joe (Trivium’s Lead Macroeconomist) to unpack:

• Why nominal GDP grew 6%, its fastest pace since 2022, and why that comes from cost pressures caused by the Iran war rather than a healthier economy

• The price-versus-volume story behind September’s export boom

• Why September’s pickup in retail sales and services spending owes more to the iPhone 18 launch and an early Mid-Autumn holiday than to any real recovery in consumption

• Why Beijing’s latest support package, including its new mortgage subsidy, will help China hit its growth target but won’t fix weak demand

• And why Beijing’s bet that tech-led growth will eventually lift household spending isn’t paying off

Transcript

Dinny MacMahon: Welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Head of Trivium’s Markets Practice, Dinny McMahon, standing in for your usual host, Andrew Polk, who I believe is having a nice lie-in this morning. And today, I’m joined by my colleague, Trivium’s Lead Macroeconomist, Joe Peissel. How are you doing, Joe?

Joe Peissel: Hey Dinny, I’m good, thanks, and very envious that Andrew’s having a nice lie-in.

Dinny: Aren’t we all? Joe is here to discuss China’s third-quarter GDP data that dropped a couple of days ago. But before we get into that, Andrew would never forgive me, literally, if I skipped the vibe check. So, Joe, how’s your vibe?

Joe: Well, I’ve got a cold. I don’t know if you can tell. I’m kind of over the worst of it. But equally, I don’t want to put a downer on the pod. So, I mean, bad vibes from the cold, good vibes from talking to you, Dinny, as always. How about that?

Dinny: Sweet talker. Okay, I can cope with that. As for me, I am just digging autumn. I mean, when I was in Chicago, autumn was always that sort of bit of a blink, and you miss it sort of thing. But I’m just enjoying this slow-change season in North Carolina. I mean, the summer has been so hot and steamy, you’d sort of barely want to step outside. But with the weather like this, it’s just been delightful. So, that’s my vibe, sort of just enjoying this interregnum before the winter hits.

Joe: Yeah, it sounds glorious. I mean, it’s raining here, and it’s windy, and it’s cold. So, your vibes sound better than mine.

Dinny: Yeah. Well, the listeners can’t see the sort of backdrop to where I’m doing the podcast. I mean, I feel like I’m living in a forest. So, yeah, very happy to be in this part of the world. Anyway, with that out of the way, we also have to do some quick housekeeping. So, a quick reminder, we’re not just a podcast here. Trivium China is a strategic advisory firm that helps businesses and investors navigate China’s policy landscape.

That, of course, includes domestic policy in China, but it also includes policy towards China out of Western capitals like D.C., London, Brussels, and others. So, if you need any help on that front, please reach out to us at hq@triviumchina.com. We’d love to have a conversation about how we can support your business or your fund. Or if you just have comments on the pod content, reach out to us. We always love to hear feedback from our listeners. And then finally, please do tell your friends and colleagues about Trivium, both about the business and about the podcast. It really helps us grow the company, and we truly appreciate the word-of-mouth recommendations.

And while you’re at it, leave us a rating on your favorite podcast platform. So, with that out of the way, let’s get into it. Joe, are you ready to roll?

Joe: I’m ready to roll, Dinny?

Dinny: Okay, let’s do it. Well, at the beginning of the year, China set a GDP growth target range of 4.5% to 5%. And at the time, the Premier even said that they were going to aim for higher, which in hindsight was a bit ambitious. But the range seemed reasonable and things got off to a good start. But in the second quarter, the growth slipped out of the range to 4.3%. But the latest data for the third quarter shows that it’s come back a bit. It’s now at 4.5%, right? Smack bang on the lower edge of that range. So Joe, have things really picked up? And if so, what’s driving it?

Joe: Yeah, well, headline growth has picked up, right? It’s kind of a modest improvement from Q2 on a year-on-year basis. And then if we look at the quarterly breakdown, quarter on quarter, so, how much economic activity there was in Q3 relative to Q2, that grew by 1.2%. And this is seasonally adjusted, right? To account for any sort of implications due to seasonal fluctuations. So, 1.2% quarter on quarter growth, that’s up from 0.9% quarter on quarter growth that we saw in Q2. So yeah, that suggests that the economy’s grown faster. There’s actually some acceleration of this momentum.

On the surface, it looks like a genuine pickup, right? If we look at the headline data. If we break that down into separate growth components, though, we see that nearly all of the growth is coming from exports, or more specifically from China’s record trade surplus. So, the difference between what it exports and imports. So, this grew by almost 30% year on year in Q3, China’s trade surplus. So, it’s going from one record-breaking year to another record-breaking year. This is doing all the work, all the heavy lifting for China’s GDP growth.

If we look at other areas of the economy, domestic consumption or investment, they’re doing very little. Investments fall in, consumption’s kind of bumbling along, really low growth rates. So, yes, headline growth has picked up, but in the macro wrap that we published today, we refer to as hollow growth. It’s really relying on one growth driver only.

Dinny: Well, one of the other things that jumped out at me from that note that you wrote is that nominal GDP grew at 6.0%. Now that’s much higher than the 4.5% real GDP number. I mean, that’s significant in and of itself, but it’s particularly significant given that for about the last three years, nominal growth has lagged GDP. So, what’s going on here? I mean, why is there such a divergence with the real GDP number? And before you get into that, can you just give us a quick breakdown of what the difference between nominal and real GDP actually is? Why we care about either or both or one more than the other?

Joe: Sure. So, we generally look at real GDP. That’s the headline growth. That’s the 4.5% that you see in newspaper headlines. And that’s also what the government is referring to when it says it’s four and a half to five percent growth. This is real GDP growth. What we mean by real growth is stripping out price effects. So, you can think of economic activity in simple terms is the amount of output that is produced multiplied by the prices it’s sold for.

And that’s economic activity. The issue with that measure is that if you have inflation, but no increase in volume output, then it looks like there’s been a large increase in economic activity, when in reality, it’s just an inflationary phenomenon. And actually, in terms of economic activity, the amount that manufacturers produce or the amount that consumers consume in volume terms hasn’t actually gone up. So, real GDP is important because it tells us what the economy is producing in volume terms, more or less. That’s a bit of a simplification. But this is why we generally care about real GDP.

Nominal GDP incorporates that price effect. So that is output multiplied by price. And, although we generally talk about real GDP, nominal figures are also important, mainly or primarily because they’re heavily correlated. Nominal GDP is heavily correlated with a bunch of other indicators that we care about, things like corporate profits, things like tax revenues, tax receipts. So, that’s the difference. Nominal GDP incorporates price effects, whereas real GDP strips them out. So, as you said, in Q3, nominal growth was 6%. And this is the fastest growth we’ve seen in, I think, four years since 2022.

Now, that gap between real and nominal growth, that’s what we call the GDP deflator. And that’s a measure of economy-wide deflation. As you rightly said, the GDP deflator has been negative, been in deflationary territory for the past three years. So, we’ve seen nominal growth actually slower than real growth. And over the past couple of quarters, that’s reversed. Nominal growth is now going faster than real growth, which is what you normally expect in a healthy economy. So, so far, so good.

The issue is this large gap between real and nominal growth. And that is driven more or less by price effects from the Iran war. So, what we’re seeing is higher input costs are creating this cost-push inflation that’s inflating the value of economic activity, but it’s not actually translating into any additional volume terms. It doesn’t necessarily mean manufacturers are producing more or consumers are consuming more. It just means they’re paying more for those goods and services. And we see that particularly in the September data. So, in September, PPI, producer price inflation, grew 5% year on year, really fast, really high rates of inflation.

And in fact, that is the fastest growth in PPI since the energy shock hit in March. So, cost pressure has come back in a big way. That’s why we’re seeing such high nominal growth. It’s just an inflationary phenomenon. It’s not necessarily good news for the economy.

Dinny: Okay, well, I think that’s got some implications for trade as well. So let’s go back and talk a little bit about the trade surplus. Because, as you said, I mean, this is the thing that’s propping up growth at the moment. Now, it was probably what, about 15 years ago or so that there used to be an argument, because this isn’t the first time that we’ve seen large trade surpluses from China. I mean, they’ve never been this big before, but China’s trade surplus has been kind of an ongoing source of contention for the world for at least 20 years at this point.

I think it’s maybe 15 years ago, there was an argument that was like, look, don’t worry about China’s trade surplus. It’ll eventually ride itself. China is a growing, maturing economy. And ultimately, an economy the size of China can’t grow forever from exports. I mean, it’s just, it’s too disruptive. It’s too much of a burden on the rest of the world. Everything will eventually right itself. And clearly that’s wrong because we’re now seeing China, the second biggest economy in the world, effectively drawing the lion’s share of its economic growth quarter on quarter from its trade surplus. So, what is driving this surplus?

What exactly is it that is allowing the world’s second biggest economy to extract so much value from net exports?

Joe: Yeah. So, I think going back to this idea before that China’s exports won’t keep, or China’s trade surplus won’t keep growing. There’s also this idea, as China gets richer, its consumers are going to buy more goods. And so these imports are going to go up. And that just hasn’t happened for various reasons. So yeah, as I mentioned earlier, the surplus across Q3 was another record. It was around the region of $365 billion.

That’s up almost 30% from Q3 2025. And in September alone, exports grew by over 36%. That is just mind-blowing rates of growth. That’s the fastest growth in exports in over 15 years, not including disruptions during the pandemic, which led to all these weird data distortions. So, if we kind of exclude pandemic years, September’s growth in exports was the fastest we’ve seen in over a decade and a half. Now, it’s important to note that a lot of that growth is due to increases in export price, not necessarily in export volume.

And I’m going to give you some numbers to demonstrate this. So, semiconductor exports, China’s semiconductor exports, in value terms, they increased over 100%. They more than doubled in September in value terms. But if we look at chip exports in volume terms, they increased by 2%. So, this is entirely a price story, right? Chip exports went up so much because of an increase in price, not an increase in volume. If we look at mobile phone exports, they grew 15% in value terms. In volume terms, they actually fell by 13%.

So, exporters are shipping less mobile phone units now than they were this time last year. But they’re earning more money for every unit sold because they’ve increased prices. And we see the same story in all sorts of other export categories — in home appliances, in various metal exports, where the value of these goods is growing a lot faster than it is in volume terms.

Now, this value surge is coming off the back of what is really a global AI memory chip shortage because of the AI boom. So that’s leading to a spike in the price of memory chips, which are really important components in a bunch of electronic goods like mobile phones, for example. and also high commodity prices and high energy prices from the Iran war. So what that means is that at some point, presumably, this price shock starts to fade. And when it does, China’s export growth is going to slow.

And that emphasizes or highlights that China’s GDP growth, now that it is relying on this single growth driver, is actually quite vulnerable because it’s really reliant on this huge price surge on the back of the memory chip shortage and the high commodity and energy prices. The other challenge for Chinese exporters is, of course, geopolitical tensions and trade tensions. And the EU is a good example here because China and EU recently held trade talks.

So, China’s surplus with the EU hit an all-time record in September. It was, I think, close to 35 billion. And there’s kind of growing pushback in Brussels against what they term these unsustainable trade surpluses that are hollowing out European industry. So, from a Chinese growth perspective, relying on this growth driver leaves you vulnerable, not only to a time when this price shock fades, and exporters can no longer sell their goods at an elevated price, but also to trade tensions, for example, with the EU or with other trade partners like the U.S., and so forth.

Dinny: So, what we’ve pretty much got then is a growth machine that’s being held up almost exclusively by exports, but the foundation, I mean, almost kind of the reliability of that growth from exports being able to continue indefinitely is very much under question, if for no other reasons and for geopolitical reasons. And I guess also because of the potential for price adjustments.

So, I guess the question is, and it’s something that we come back to again and again on the podcast is, is where does consumption stand in all this? Because you can’t really comfortably and securely run an economy on sort of one pillar, which is really seemingly what China is doing at the moment. So, in September, we saw retail sales growth pick up 1.1%. Now, the thing is that it’s quite good relative to August. I mean, in August, growth collapsed to sort of 0.4%. So it is a meaningful pickup in September. Yeah, it’s not much, but it’s something. I guess the question is, is this something to cheer about?

Joe: No. Next question. No, I’m kidding. No, it’s not. I mean, the fact that we’re celebrating 1.1% growth in retail sales tells us everything we need to know about China’s consumption dynamics, right? 1.1% growth, still extremely low. Despite the pickup from August, it’s still a bleak outlook for Chinese consumption. I think the more positive data point we can take from September is services consumption. So consumption of services, so things like tourism and eating out and entertainment. This rose by 5.8% in September.

So, really decent growth in consumption of services. But the issue is, both with the services consumption growth, but also with this modest pickup in retail sales, or the consumer goods sales growth, is that it’s being affected by short-term factors. So, the reason retail sales of consumer goods picked up to 1.1% is mainly driven by sales of mobile phones, which grew over 30% year on year. And that’s driven by the launch of the iPhone 18, which had this really successful product launch in China in September and led to a surge in mobile phone sales.

This lifted aggregate consumer goods sales. But that’s just a short-term, one-month boost to consumer goods sales. We’re not expecting that to carry on. Same idea with services consumption. As I said earlier, that grew 5.8%, really decent growth rate. But that’s partly impacted because China’s mid-autumn festival took place, I think it’s September 25th this year, whereas last year, it took place in October. So, in September this year, consumers have had an extra day of holiday, which is going to lead to a boost in things like tourism spending, entertainment, accommodation, transport. All of these things are leading to greater aggregate growth of services consumption.

But again, that’s a short-term phenomenon. And in fact, I expect a lot of this growth to reverse in the October data once the holiday effect drops out, once the iPhone effect fades out as well. So, I mean, to wrap all this up, the story of consumption is, yes, September’s data was an improvement, but it’s just a short-term phenomenon. Consumption is very much still in the doldrums.

Dinny: Yeah, that’s a good point about the holidays, Joe, because I mean, this year, the Mid-Autumn Festival and the National Day holiday were so close to each other that I think a bunch of people, I think it was certainly the case in our office, that people took off the days between the two holidays. And guess what? They all fell in September. So it’s not even just the formal days, but people taking additional days off to effectively get sort of an uber-long break. And as you said, this is not going to repeat. This is not going to boost the October data.

So, the bright, any sort of silver lining we had in September is going to dissipate for the data for October, which kind of begs the question, what does the run to the end of the year look like for the economy? I mean, I sort of started off by talking about the growth target for the year, 4.5 to 5%. In the next few months, we’ll get a sense of whether Beijing achieved that or not. What should we expect over the next couple of months before 2027 kicks off?

Joe: Much the same as we’ve seen so far, really. China’s supply side will do well. So manufacturing in September grew 6%, and it’s going to continue to grow strong. High-tech sectors, they’re expanded by double digits year on year. So, we can think of things like electric vehicles, ships, aerospace equipment, the higher value add semiconductor chips. Output manufacturing of these products is going to continue to grow strongly. And of course, China is going to continue to rely on exports to boost growth.

The domestic economy, domestic demand is going to stay weak. Investment’s likely going to continue declining. So very much an extension of what we’ve seen over the past couple of quarters. In terms of actual GDP growth, year to date, the economy has expanded 4.6%. So, it’s within China’s target of 4.5% to 5%. And it’s very likely the economy is going to hit its growth target, particularly with this recent policy support package. I know you talked about this in another podcast, Dinny, in late September, policymakers released a package of policy support.

So, we saw extensions of cheap credit, additional borrowing quotas for local government, a mortgage subsidy. All of these policies will help guide the economy to hit its growth target. But nothing that Beijing has released so far is actually going to fix the underlying issues in consumption and private investment, which is why we’re just going to see more of the same.

Dinny: Well, I mean, on that bright note, from where I’m sitting, it kind of feels like China’s economy is kind of in a weird spot at the moment, right? So, as you said, we finally got a bit of stimulus. We’ve been waiting for ages to see whether Beijing would sort of pump a little bit more credit or support into the economy. We finally got that end of September, beginning of October. The policy banks are being deployed to invest more in infrastructure. And there’s an extra, what? 550 billion renminbi for local governments to deploy before the end of the year. Some of it’s to supplement the budgets, some of it’s for infrastructure.

But even when you take all that together, no one’s under any illusions. I mean, this doesn’t really fix anything, right? I mean, particularly when it comes to the domestic economy, this sort of chronically weak household spending, this sort of downward slide of investment. This new support, I think, is really mostly about ensuring that growth hits the target and that investment recovers a bit. And it’s almost as though Beijing is waiting for the economy to right itself, which is kind of an idea that comes up a bit in some of the official commentary that you see in the state media. There’s this argument that China’s economy is currently occupying a gap, right? There’s this gap between the old economic growth model and the new one.

And that’s where things stand at the moment. We’re in this sort of gap. And there’s going to be pain before the economy emerges in its new form. And I think there might be an element of truth to that. I mean, at the moment, property is a drag on growth, and that will eventually change when investment stops falling. It might be another year, it might be another two or three, but at some point, when property rights itself, that will be a fill up to the economy. And if Beijing can get anti-involution right, it might be able to deliver better profit growth from new industries, and that’ll boost tax revenue and kind of give the government greater discretion on how it supports growth.

But, for whatever the reason, it seems as though we’re in a bit of a holding pattern at the moment where Beijing has just really decided to provide a little bit of support, but overall, the approach is to wait and see. Would you more or less agree with that, Joe?

Joe: Yeah, I agree. That’s their approach. I’m not convinced it’s going to work. So I think, as you said, Beijing’s effectively bet in that supply side tech growth lifts household demand and generates new growth drivers. But I think the issue is a lot of these new growth engines. So think of things like AI, high-tech sectors, high value manufacturing, often they employ fewer people. And so, we don’t necessarily, on aggregates, see an increased income flow to households. So, this transition that Beijing’s waiting for isn’t necessarily self-correcting.

And certainly, the data so far doesn’t show that this is happening. Income growth is falling, unemployment remains high and growing, actually, and consumer confidence is still in the doldrums. We wouldn’t expect any of these things to be happening if Beijing’s hypothesis that supply side tech growth lifts household demand was actually taking shape. I think maybe we’re looking at it, maybe I’m looking at it through too much of a short-term lens. And over the medium-longer term, this self-correcting idea can take place.

But certainly, for now, it’s not. Just quickly on the property downturn, I mean, it’s true at some point the property market stops falling and that’s a boon to the economy, I suppose. What we’re seeing now in the property market is a permanent deleveraging, right? As opposed to a cycle, a cyclical cycle waiting to pass. So even when the property sector does finally bottom out, which could still be years away, it’s never going to return to be a growth engine for the economy. So, the economy has permanently lost one of its most important growth engines.

Part of the stimulus “package” or support package that Beijing rolled out earlier this month was a mortgage subsidy. Are you optimistic about the impact that will have on property demand?

Joe: No. I mean, it may boost demand at the margin. This is a one percentage point interest subsidy for first-time home buyers, for homes that don’t exceed a certain price. The maximum savings, the maximum subsidy available is 50,000 RMB. I mean, that’s not going to move the needle for most buyers. It may do so in smaller markets where houses are cheaper. So think about third-tier cities, for example. But even then, buyers have these deflationary expectations. The reality is buyers expect house prices to keep falling. And so, from a first-time buyer perspective, waiting actually saves more than taking advantage of this subsidy.

And we see that now. I mean, the property markets in freefall, house prices continue to decline. So, a real fit for the real estate sector would require a much bigger fiscal commitment than this modest mortgage subsidy.

Dinny: No, no, fair enough. Well, by the sound of it, we are in a bit of a wait-and-see pattern. Although I think the real question is how long is Beijing willing to wait and see? If this doesn’t turn out to be self-correcting, at what point does Beijing do something about it? And on the other side of the equation, I mean, I guess it’s the other side of the same coin, how much pain is Beijing willing to take, and for how long? Anyway, I’m guessing this is going to be a theme of the conversations we’re going to be having for quite some time.

But having said that, thanks for all of this, Joe. It’s been really great to dive into this stuff with you, and I appreciate the time.

Joe: Yeah, thanks for having me on, Dinny.

Dinny: Thanks, everybody, for listening. Bye now.

• But fixed asset investment — long a bulwark of economic growth — shrank.

• And China’s punchy nominal GDP figure was driven by cost-push inflation from the Iran war, which inflates the value of activity without adding any volume.

Meanwhile, final consumption — a measure of household and government spending — accounted for just 46.7% of economic growth so far this year, the lowest share since 2013.

That leaves one pillar holding up the whole show: the trade surplus.

• The difference between what China exports and imports hit a record USD 365 billion in Q3.

• In September, exports grew 36.3% y/y, the fastest pace since 2013 (pandemic years aside).

But this fantastic trade performance is driven by price, not volume:

• Semiconductor exports rose 136% in value in September — but only increased 2% in volume.

• Mobile phone export values rose 14%, while the number of units shipped fell 13%.

Despite the doom and gloom, China’s economy will comfortably hit its annual growth target of 4.5–5%, with GDP up 4.6% y/y so far this year. A slew of policy support unveiled in late September will help carry it over the line.

But while China’s growth target is safe, the patience of its trading partners is another matter.

• China’s monthly surplus with the US hit USD 34 billion in September, a 20-month high, while its surplus with the EU reached a record USD 34.8 billion.

In short, China’s headline growth will be fine — as long as the rest of the world keeps buying.

Joe Peissel, Lead Macroeconomist

What you missed

US-China

Chinese and American officials are reportedly engaged in “intense negotiations” on a list of concrete outcomes for the upcoming meeting between Xi Jinping and US President Donald Trump on the sidelines of the APEC summit in Shenzhen next month.

• The US-China Board of Investment (BoI), announced during Trump’s visit to Beijing in May, is reportedly high on the list of proposals.

Econ and finance

The People’s Daily ran an essay by former IMF deputy managing director Zhu Min arguing that China and the rest of the world both need RMB internationalization.

• Zhu calls for ‘further improvement of the capital management framework,’ with no mention of convertibility, which aligns with Beijing’s preference for expanding the RMB’s global role without relinquishing control over capital flows.

The commerce ministry (MofCom) and eight other agencies issued guidelines on using technology to boost domestic consumption.

• The guidelines outline ways companies can leverage AI and emerging technologies to make products more attractive, including by providing better goods and more customized services.

• But bureaucrats are poorly placed to tell companies how to innovate. Firms selling into China’s ultra-competitive consumer market already have every reason to supply what shoppers want, and the new guidelines add little to that incentive.

Corporates

MofCom and the science ministry (MoST) released a revised draft catalogue of technologies subject to export controls, including sweeping restrictions on solar manufacturing technologies.

• The proposed controls target key technologies and manufacturing processes for upstream polysilicon, wafers, and cells — the highest-barrier segments of the supply chain where China controls ~90% of global capacity.

Tech

The draft export-control catalogue also added 23 AI technologies.

• Export bans would cover technology behind models trained on nationally sensitive “core data,” and AI tools that generate malicious code or evade cyber defenses.

The industrial ministry’s (MIIT) think tank warned in its annual embodied AI report that “bubble risk is accumulating” in China’s humanoid robot sector.

• The report called the bubble a necessary stage of development, likening it to the dot-com bust and the 2015-2018 EV shakeout, and predicted market competition to clear out weak firms within three years.

Net zero

Green fuels became the latest target of Beijing’s anti-involution drive.

• A deputy director at the macro planner (NDRC) said: “The NDRC is drafting a plan to guide the rational siting of major projects in response to investment overheating across certain segments of the hydrogen industry.”

As always, it was a busy week in China.

• Thank goodness Trivium China is here to make sure you don’t miss any of the developments that matter.

Just like MofCom’s July essay on overcapacity, the piece takes aim at the fundamental premise of Western policymakers’ complaints rather than answering them directly.

• Beijing has now taken two key economic issues that advanced economies keep raising – the currency and overcapacity – and essentially said “suck it up, we’re not changing.”

• The upshot: China is going to press this model until something breaks.

On this episode, Trivium China Podcast host Andrew Polk sits down with Dinny McMahon (Trivium’s Head of Markets Research) to unpack:

• The PBoC’s three arguments defending its currency policy – from competitiveness to the lack of any agreed way to value a currency – and why Dinny thinks there’s some truth in each, while the essay as a whole “misses the wood for the trees”

• Why capital controls complicate the case for a stronger RMB: with deposit rates thin and property and stocks sagging, how much money would leave if China let it?

• The PBoC’s proposed fix: adjusting global imbalances by having deficit countries (read: the US) tighten their budgets while surplus countries like China boost consumption, and why Dinny calls this a pie-in-the-sky solution

• Why Beijing’s playbook with Europe looks like buying time, trading small concessions for room to keep its model intact

Transcript

Andrew Polk: Hi, everybody, and welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium Co-Founder, Andrew Polk, and today I am joined again- I think this is three in a row- by Dinny McMahon, Trivium’s Head of Markets Research. Dinny, let’s keep the streak going, baby. How are you doing, man?

Dinny McMahon: Yeah, too, right, mate? I was feeling unloved, but at least now I’m back in the rotation again. You haven’t forgotten me.

Andrew: Yeah, it’s good to have you back. Well, we just had a lull in the summer days, and then I had quite a few outside guests on. We’re going to keep mixing those people in, but it’s good to have you back in the rotation. While I’m having you on today, we’re going to do another quick reaction podcast because, last week, the PBOC published an essay in both English and Chinese, defending China’s exchange rate policy and sort of pushing back on foreign calls for the renminbi to appreciate. We’re going to talk through that essay — what it argues, whether the arguments hold up, and kind of what it tells us about Beijing’s thinking, not only about the renminbi, but also about the trade surplus and the growing sort of geopolitical tensions around that.

We will do some quick housekeeping since this is one of our shorter pods. Just a quick reminder, Trivium is a strategic advisory firm that helps businesses and investors navigate the China policy landscape. So, if you need any help on any of the issues that we’re talking about today or any policy issue related to China, please reach out to us at hq@triviumchina.com. All right, Dinny, are you ready to get into it?

Dinny: Yep, let’s roll.

Andrew: All right. So October 8th, just late last week, I think Thursday, the PBOC, that’s the central bank, published this essay, again, both English and Chinese, which is definitely notable. Anytime China publishes something in English, it’s like — hello, foreigners, we would like for you to pay attention to this issue. The essay was blandly titled, “The PBOC’s Views on the RMB Exchange Rate.” But that sort of belied some more- not bombshell findings, but a little bit more sexy content than the name would imply.

Anyway, it was a defense of China’s currency policy and an attack on those foreigners calling for RMB appreciation as a way to wind back China’s trade surplus, which is something especially the Europeans have been calling for in their trade negotiations with China recently. And this, interestingly, is not the first time we’ve seen a big piece like this. At the end of July, the Ministry of Commerce also published a similar essay on overcapacity, explaining why calls for China to rein in its overcapacity were totally without merit. So, seems like this may be the start of a growing trend. Dinny, why don’t you walk us through the argument that the PBOC makes in this paper so we can kind of understand what’s going on here?

Dinny: Yeah, right. So it kind of comes down to three key arguments. The first is that the PBOC is saying, look, China’s export strength is the result of its global competitiveness, not its undervalued currency. So, all the innovation, all the industrial upgrading it’s been going through over the last few years- that’s why China’s got this massive trade surplus. It’s got nothing to do with the currency. That’s the first point. The second is they’re arguing, look, exchange rates aren’t determined purely by the trade balances. So, to foreigners who are saying, “Hey, there’s this massive trade surplus; it’s indicative that the value of the renminbi is way off.” PBOC is saying, “Look, the value of a currency isn’t purely determined by the trade balance. It’s also influenced by factors like economic growth, monetary policy, geopolitics, random economic shocks.”

And so you can’t point to any one thing and go, “Aha! The currency is undervalued.” And then the third point is that you know there is no one standard globally accepted method for coming up with what an appropriate value of a currency is. So, there’s a bunch of different methods. They don’t always come up with the same answer. So, there’s no point pointing and saying, “Hey, according to these calculations, the renminbi should be 20% higher,” because the PBOC is saying, “Yeah, but which method is right?” There is no way of kind of coming up with answers.

So, that’s sort of a summary of what the essay was getting at. As you said, no bombshells here, but it’s kind of putting everything together as a coherent rebuttal to those arguments that the answer for the rest of the world to China’s trade surplus is the currency.

Andrew: Yeah, I think that last point is particularly notable in my mind about the PBOC arguing that there’s no real well-established methodology for evaluating a currency’s appropriate level. Well, first of all, I think the rebuttal among the IMF and Western economists, and the EU would be that, well, actually there’s a bunch of different methodologies and they all say that China’s currency is undervalued by X%, call it 12% to 25% or whatever. But they all agree directionally. They might not agree exactly on the proportionality.

But the reason I bring this up is this was also a key argument in that MOFCOM paper on overcapacity, which was overcapacity doesn’t have a globally recognized definition. And in fact, we would argue that overcapacity is not even really a thing. So, sort of the old, I take issue with the premise of your complaint, or the premise of your question is sort of what they’re going with, it seems like here. Does that sound right?

Dinny: Yeah, absolutely. They’re taking on the topic for debate, you know, the actual parameters for debate. So yeah, no, I think you’re spot on.

Andrew: Well, I mean, it just reminds me, I don’t know if they’re doing themselves any favor because this is like what your most annoying friend does when you argue with them, right? It’s like, well, you know, it’s like, “I’m not going to answer your question. And in fact, I’m going to attack the very premise of your question.”

Dinny: Do you have anyone in mind?

Andrew: They know who they are. I’ll just leave it at that. All right. Well, so, obviously my feelings on the matter are somewhat out there, but would you, broadly speaking, say that these arguments have merit going through each of them?

Dinny: Yeah, on some level. I mean, there’s no denying that Chinese firms have become incredibly competitive globally. They’re selling incredibly well-designed, cheap, high-quality electric vehicles, batteries are cutting-edge. Across a host of technologies, yeah, Chinese firms have become globally competitive. The other argument that the exchange rate isn’t determined purely by the balance of trade; yeah, I mean, that’s a fair argument. You kind of look at if China didn’t have capital controls in place, then the value of the currency wouldn’t necessarily appreciate. In fact, sure, you’ve got a trillion dollars coming into the economy every year from the trade surplus.

But if you got rid of capital controls, just how much money would like gush out of the country? I mean, anybody with any savings in China at the moment, given a choice, would move their money overseas. Bond yields keep falling. Interest rates on deposits, bank deposits, are wafer-thin. The property prices are still falling. The stock market is declining or moving sideways pretty much if you’re investing in anything other than AI. I mean, if you’ve got money in China and you’re looking overseas and you’re looking at rising U.S. bond yields and you’re looking at U.S. stock markets, just looking around the world, everywhere else, you’re going to get a better yield on your money anywhere else in the world at the moment if you’re a household saver in China.

So, there’s that question of, like, yeah, sure, you’ve got all this money coming in through the trade surplus. But if you didn’t have these barriers in place, just how much money would be leaving the country? And that’s what the PBOC was getting at. Hey, it’s not just trade surpluses that determine it; it’s also monetary policy, and interest rates are pretty cool.

Andrew: Yeah, I’m laughing because that’s a funny argument for the PBOC to make, which is, well, you know, if we didn’t have these capital controls, then a bunch of money would leave the country, so maybe the currency is actually overvalued.

Dinny: I’m reading between the lines here. They’re not exactly going into detail on this particular point. But anyway, look, that’s kind of where it’s coming from. It’s got these list of three arguments, and there’s a certain amount of truth to all of them, but it kind of misses the wood for the trees a bit.

Andrew: Yeah. Fair enough. Well, it’s exactly, again, like the MOFCOM paper on overcapacity where there’s an element of truth to everything they argue, but very clearly pretty heavy spin on the ball in terms of them trying to justify their approach. But can you tie this to the trade surplus for us specifically? Because that’s obviously what everybody cares about. I mean, no one really cares fundamentally what the currency is or what the currency price is. They only care about it insofar as it distorts trade practices. So, how does the paper reflect the PBOC’s thoughts on the trade surplus?

Dinny: So, it has a solution. And we’ve heard this in other places before. I think that we may have even seen a version of this in the MOFCOM essay on overcapacity. It frames the issue not about being its own trade surplus, but it frames the problem as being about global imbalances of which China’s trade surplus is perhaps part of it. And so, when it comes to imbalances, it’s not just that China exports so much, but the other side is that the U.S. in particular borrows too much. And so, PBOC’s solution to global imbalances writ large is that deficit countries, and we’re talking about the U.S., but it doesn’t call out the US by name, but that deficit countries should consolidate their fiscal positions, raise the domestic savings rate, and strengthen industrial competitiveness, while surplus countries, China, should boost consumption and investment.

And what that really means is that China is saying, “Hey, the U.S. should balance its budget.” But of course, I mean, that would be kind of recessionary almost by definition. The other side of the equation would be that China would boost domestic demand. So, kind of in a perfect world, China would create global demand by sort of expanding household spending or whatever, just as the U.S. demand was shrinking. And that would ideally help offset those sort of recessionary forces in the U.S. because it could export to China and everything would be wonderful.

And I mean, it doesn’t sort of lay all this out in great detail, but this is sort of the implications. And of course, that’s a wonderful idea, but it’s absolute pie-in-the-sky sort of stuff because China has proven itself incapable of boosting domestic demand, right? I mean, this is not something it needs to do in concert with the rest of the world. There doesn’t need to be a global pact for everyone to agree, “Well, we’ll rebalance on our side if China rebalance is on your side.” China’s been trying to boost domestic demand since it came out the back end of COVID and has been absolutely unable to do it for a bunch of reasons that we’ve talked about on the podcast.

So, the way out, and, of course, of the U.S. side as well, to think that the U.S. can kind of rein in its deficit, I mean, the only thing the two parties seem to have in common at the moment is they’re both willing to borrow more and more. So, I mean, the idea that this is feasible at any sort of point in time, it’s completely unreasonable to think that this is the solution to anything. And that ultimately is why the currency is so important, because in the past, it’s been the tool that rebalances trade when domestic political considerations preclude making hard decisions, right?

So, in some ways, it’s ideally an automatic stabilizer. And of course, it never really works that way without political agreement. So, you kind of need things like the Plaza Accord. But that is why people are talking about it, because there is a potential for currency to rebalance things when, domestically, politicians and governments can’t make those readjustment decisions.

Andrew: Yeah, I agree with you that China can raise its consumption rate without global coordination and global rebalancing. I will say this is one where I have a little bit of kind of sympathy for the Chinese argument, which is, at least from the U.S. side, we never seem to sort of look at our own domestic imbalances or domestic economy, which is U.S. savings rate could rise substantially, right? Which is the opposite of China’s overly high savings rate, which a lot of people would say is the fundamental issue of weak consumption and overinvestment and, therefore, the large trade surplus.

And some kind of coordination on that actually might make a little bit of sense. But I do feel like when people talk about this conversation from the U.S. side, it’s just China needs to do this, China needs to do this, China needs to do this. It’s kind of like, my view is if you’re sitting at a table and somebody keeps bringing you food and you keep eating it, getting mad at them for your gluttony. So, at some point you can just stop eating it, which I guess is sort of what the tariffs are about. But anyway, I think a little bit more self-reflection from deficit countries might be worthwhile. Anyway, I’ll get off my soapbox. But where does all that sort of leave us in terms of your main takeaways from this essay?

Dinny: Yeah, well, I think that the PBOC and the MOFCOM essays, they’re similar in that Beijing is taking two issues that advanced economies have complained about and pretty much said, “Suck it up, we’re not changing.” So that, I think, in some way, is the real significance of the PBOC essay. It’s not that it’s sort of a standalone rebuttal to calls to appreciate the renminbi. It is part of a broader trend where Beijing is kind of sticking its heels in. And of course, the problem with this is that Beijing, I think, sees discussion of overcapacity and currency revaluation as an attack on China. And I guess to a certain extent, there is probably an element of that.

But I think there is also perhaps a good faith element from outside of China, whether it be the U.S., or the EU, where foreign capitals are trying to look for an issue that they can negotiate over. Because the big issue here is the trade surplus. What they’re trying to do is kind of come up with some sort of common ground whereby we can end up in a more sort of balanced trade sort of environment. And so, Brussels, D.C., they’re looking for an issue that they can negotiate over. And I think it’s interesting with the overcapacity issue because the EU only started talking about it, only raised it after Beijing started talking about it.

I think it was what, December 2023, at the Central Economic Work Conference? Beijing started talking about overcapacity as being a potential threat to the industry over the next 12 months. We hadn’t seen this in years. Within a month or two, the EU was like, “Hey, overcapacity, this is something that we really need to deal with.” And so, it was kind of the EU trying to find common ground with Beijing, something they could kind of discuss. And then, of course, Beijing stopped, for that exact reason, stopped using the word overcapacity and started using involution.

And so, I think part of the issue here is, part of the problem is that Beijing is like, we’re not going to countenance currency revaluation. Overcapacity isn’t even an issue to be discussed. But the other side of the equation is that the EU, in particular, is kind of looking for common ground. And every time it raises an issue, it gets absolutely shut down. And we’re kind of getting to a point where this trade surplus with the EU, the EU seeing its industry being potentially hollowed out, I mean, things are starting to get existential. So, the question is, I mean, if Beijing is just going to go, “Nah, we’re not going to engage on sort of every complaint,” well, it kind of suggests that we’re heading in one direction.

It means there is no holistic solution. And it means relations are just going to keep deteriorating until something breaks. And I’m not quite sure. I don’t think any of us really know what that sort of looks like, but it’s potentially something very, very different from the global trade order we have at the moment.

Andrew: Yeah, I tend to agree with you. I just want to unpack a couple of things. One is kind of this idea that China is saying it is what it is. The model is the model. Deal with it. I totally agree with that’s increasingly the message, both from this paper and the MOFCOM paper, and from the messaging I was hearing back in March around the China Development Forum. This is kind of what people, especially European officials, had been telling me that they were kind of hearing from the Chinese side.

I also think it’s really interesting that, in both of these essays, China points to, so we already talked about that we’re going to take issue with the premise of your complaint, but they also point to innovation as China’s key sort of development or key competitive edge that is driving the surplus. They’re saying, like, “You’re just upset because your citizens are buying our goods because they’re so much better. And your companies are buying our B2B products because our company, our manufacturing companies are so much better.”

And so, this is just an outcome of China’s innovation ecosystem. And I think that them making that argument, first of all, falls on deaf ears. But I think this is also one where there’s been on the ball, but also they probably believe it. I think in part, that’s a good faith argument. And they just feel, I guess, this is another piece, maybe just kind of understanding the Chinese policymaker mentality is they feel all of these arguments, I think, are really just kind of specious arguments that the West makes up to contain China, right?

Oh, you’ve got overcapacity. Oh, your currency, whatever it is, whatever the reason for the trade surplus is, it’s not because your companies are good and you have innovation and everyone wants to buy your products, it’s because of all these other things. These are things you’re cheating on or distorting the market. And Chinese officials feel attacked by that. Again, I think it’s part disingenuous, part genuinely believing in their own innovation, and part genuinely feeling attacked. And the reason I bring all that up is because I think it goes back to what you just ended on, which is it’s very hard to see common ground for negotiation under those circumstances.

I actually was really surprised, as we’re talking here on Monday, October 12th, the EU-China negotiations over the weekend seemed to have actually produced positive momentum in terms of they seem to have this agreement on China being willing to produce sales of hybrid vehicles from China into Europe. But I think, ultimately, my view is China is dug in. And even with this positive sort of cyclical turn in the negotiations, the structural part of the negotiations is China digging in, and this kind of coming to a head.

And I actually wonder if it’s kind of the Europeans taking this small concession from China and being satisfied, and China sort of hoping that that diffuses what was clearly building European frustration, and China’s just going to go back to what it was doing structurally. And then six months from now, Europeans will be up in arms and negotiating and a line in the sand again. Anyway, I’m just rambling a little bit, but trying to tie all these together from my perspective. Any thoughts on any of that?

Dinny: Yeah, mate, I don’t think you’re rambling at all. I think that’s exactly what China is doing. I think the Chinese have worked out how to engage with Europe. And I mean, one of the great complexities of Europe is that it is not a single nation. And trying to cobble together a single trade policy, a single policy on anything with so many disparate countries is incredibly difficult.

And so, I think China makes a concession now, it’ll make some parties in Europe relatively happy for a while. Others will still be upset, but it’ll buy it time. China’s played this game before. Ultimately, all it needs is time. If you kind of look at the solar sector, solar manufacturers in the United States, it’s hard to believe, but the United States once had solar manufacturers. And they took China to the WTO, and they asked for support from the U.S. government. And eventually, it got those things. And it eventually won cases, I think, in the WTO.

This isn’t really my area, but my understanding is that the remedies came so late that by the time they came through, those manufacturers had already lost so much market share and they’d already lost. And Chinese firms were in a dominant position, and there was no real way to kind of claw back the market. And so, I think China kind of knows it can play a similar game with Europe. It offers some concessions now, and then the problem gets worse in other areas, it gets worse in new areas, and it takes time and effort to kind of build up the consensus within Europe to go after the next thing.

That’s not to say that Europeans might not pivot. They might change their approach. They might get a broader consensus in place that allows them to take a harder line. I mean, all these things can happen, but I assume that what the Chinese are doing is just what I outlined.

Andrew: Yeah. Well, we will continue to follow this stuff. I guess we should wrap up here, but just one final comment from me is that the most unsurprising thing about this PBOC document is just that, on the exchange rate, is that the PBOC is not going to unilaterally re-evaluate the currency. Basically, since the early ‘90s, they’ve thought that Japan revaluing through the Plaza Accords was one of the number one things that led to the Japanese economy tanking and the Japanese bubble bursting.

And everyone knows the parallels between China and Japan, and it’s just not going to happen. They’re not going to take that, what they see as a risk. It’s not even a risk in their mind. It would almost certainly lead to a reduction in economic activity, a negative impact on asset prices, huge fallout in the trading regime. It’s just not going to happen from their side. You agree with that? Then we can wrap up.

Dinny: Absolutely. Yeah, no question at all.

Andrew: Yeah. All right. Well, we’ll leave it there. Thanks for this, Dinny. Really great to dive into this stuff with you, and I appreciate the time.

Dinny: No worries, mate. Pleasure as always.

Andrew: Thanks, everybody, for listening. Bye, everybody.

• In a recent Qiushi essay, central bank (PBoC) Governor Pan Gongsheng laid out why credit growth has to slow.

Trivium made this call back in July, when deleveraging sounded like a wild idea given how weak the economy is.

• Dinny McMahon’s take: “We feel quite validated.”

On this quick-reaction episode, Trivium China Podcast host Andrew Polk sits down with Dinny (Head of China Markets Research) to unpack:

• The three conditions Beijing needs to enable deleveraging, and why the Iran war and the export boom checked two of them

• Where Beijing is already pulling back on borrowing: policy bank bonds, bankers’ acceptances, and special-purpose bonds

• Why Beijing cares so much: a debt-to-GDP ratio of 305%, up more than 50 points since 2021, and an aging population that will require borrowing capacity in the future

• The “sprint and reset” theory: Beijing is ratcheting investment down to a new base while exports hold up, and Dinny’s verdict that it’s making hay while the sun shines

Transcript

Andrew Polk: Hi, everybody. Welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium co-founder Andrew Polk. And today I am joined, once again, but actually for the first time in a while, by Trivium’s Head of Markets Research, Dinny McMahon. Dinny, it’s been a minute. How are you doing, brother?

Dinny McMahon: Yeah, it has been a while. I’m feeling a bit rusty. We’ll see if I can get back into my stride.

Andrew: Yeah, well, you better jump in because the listeners have a high bar in terms of what they expect from you. So we will put you to the test today. We’re going to, today, do another one of the sort of shorter podcasts, quick React podcasts with Dinny. I’ll have a longer podcast with him on monetary policy next week. We actually just got a lot of content coming out, so I hope people are enjoying it.

I wanted to do this quick react podcast with Dinny specifically around this idea of China’s deleveraging, which Dinny has written about before and was really early on in terms of highlighting China’s efforts to deleverage. And then we got the clearest sign yet that is happening from a piece by the PBOC Governor Pan Gongsheng, kind of highlighting some of this stuff. I know we’re going to talk about that in a minute, Dini, but can you just remind us where that piece was in just a quick two seconds on that piece?

Dinny: So, Pan Gongsheng wrote an essay in Qiushi just a few days ago. And broadly speaking, the piece mostly just goes over his talking points from a speech that he gave at the Lujiazui Financial Forum back in June, which was mostly about needing to slow credit growth and allocate credit more efficiently. But what really jumped out at us was that he started talking about specifically the debt-to-GDP ratio. Really, for the first time in ages, any sort of senior Chinese official has really started talking about it specifically. And his take was, look, it’s risen a lot in recent years.

That’s because deflation has pulled down nominal growth, and it’s because Beijing has needed to increase debt to maintain a stable economy. I mean, he didn’t say it explicitly, but the context, of course, is that Beijing or China needs to keep borrowing to fill the hole left by the property market. So that was kind of the unspoken implication of his comments. But the key part that really sort of jumped out at us was that Pan said this. He said that China needs to avoid a situation where credit growth exceeds the needs of the real economy, causes idle and stagnating funds, further pushes up the debt-to-GDP ratio, and makes it difficult to eliminate outdated production capacity and inefficient enterprises.

And broadly speaking, he said, look, he thinks China can maintain a basically stable debt-to-GDP because credit growth is coming down. I mean, we heard that, and we felt quite validated because this is what we’ve been arguing. That China is deleveraging, specifically, it’s bringing down its debt-to-GDP ratio. And there is Pan saying China needs to do it for all these reasons.

Andrew: Totally. So, this is what prompted us to do this quick react pod today. We’ll walk through Dinny’s kind of previous argument, maybe touch a little bit more even on Pan’s essay in Qiushi. So that’s sort of the rundown for today. Of course, I also have to just very quickly do a little bit of housekeeping. Just to remind people, we’re not just a podcast here. Trivium China is a strategic advisory firm that helps businesses and investors navigate the China policy landscape. That, of course, includes domestic policy in China, like, for example, macro policy, which we will talk about today. And it also includes policy towards China of Western capitals like D.C., London, Brussels, and others.

So, if you need any help on that front, please reach out to us at hq@triviumchina.com. We’ll do a little bit more of an abbreviated version of this today. The second piece is just tell your friends and colleagues about Trivium, please. It really helps us out. We know that a lot of you are doing this and super appreciate it. Those word-of-mouth recommendations really help us to grow the podcast, and they help us to grow our business. So, thank you for doing that. Please continue to do so. All right.

So, Dinny, let’s dial back. At the end of July, we put out, and I hit that we hard, the royal we, which was really not the royal we– It was you put out a note saying that China is deleveraging. And, I mean, it was very kind of counterintuitive at the time because growth, well, and even still maybe is so, although, like we said, Chinese officials are clearly acknowledging this more explicitly now, but growth was weak and it seemed not the time to deleverage, right?

Everyone’s saying what China needs is more stimulus, more spending, more borrowing, more investment, more fiscal expenditure, of course, funded by government borrowing. But what you meant was what you already touched on, was that Beijing is actively trying to reduce its debt-to-GDP ratio. That, again, sounded a little bit counterintuitive, maybe even crazy, some would say at the time, especially with household spending barely growing, investment incredibly weak, got infrastructure weak, property manufacturing, everything contracting in terms of investment spending year on year from 2025 levels.

But you also made this argument that there were a couple of things creating the space for them to do this, and those were exports and inflation. So, just talk me through your argument from back in July to kind of level set.

Dinny: Cool. So, the idea was that ultimately to deleverage, you kind of need to fulfill three conditions, right? Or three conditions need to be in place to sort of effectively deleverage. One is you need inflation because it reduces the real value of the debt. And that’s something that China really hasn’t had for the last three years. It’s been struggling with borderline deflation for consumer prices and sort of endemic deflation for producer prices.

And so, it hasn’t really been able to bring down the stock of debt through inflation because it’s been struggling with inflation. But then we had the Iran war this year, and all of a sudden that got flipped. So for the first time in years, we had inflation and laying the groundwork or the conditions where China could conceivably deleverage. The second thing you need is you need a source of growth that isn’t driven by debt. And I mean, in China, the motors of growth over the past 20 years have been mostly debt-driven.

It’s been property investment. It’s been infrastructure investment. Most recently, it’s been investment in manufacturing. So instead, you needed something that would drive the economy, sort of help bolster nominal GDP, but it wasn’t aggressively adding to the stock of debt while they did it. And lo and behold, that’s what we’ve got with sort of the export boom that China’s really enjoyed since, what, the middle of last year, maybe a little earlier, and so with exports going gangbusters, China can generate growth without racking up the debt at the same time.

And then the other thing, the other condition that really needs to be met is that China needs to pare back the borrowing. The state needs to borrow less; firms need to borrow less. And that’s kind of what we’ve been looking for signs of happening as well then. And we’ve been seeing it. Various parts of the economy, certain groups are borrowing less, and some of that has been incredibly surprising given what you just said, Andrew. I mean, we’ve got chronically weak domestic demand in China in this environment.

You would think that the thing Beijing would be doing is looking to ramp up borrowing to sort of get the economy going, and yet some of the levers that would traditionally have pulled, we’re seeing a pullback, a contraction of debt or far less debt being deployed than would otherwise be the case, normally be the case.

Andrew: And now, thank you for letting that out, but now you feel vindicated because of what Pan just said in this Qiushi article. Walk us through that again. I know you’ve touched on it, but maybe tell us a little bit more about Pan’s side, and why do you think he’s coming out saying this now?

Dinny: Yeah, when he gave that original speech at Luijazui in June, the way that I read that was that was the first time that kind of put me onto the idea that Beijing might be deleveraging. He didn’t say it explicitly, but there was a lot of talk about, you know, it doesn’t matter that credit growth is slowing. The important thing is how credit’s deployed. We need to be focusing on efficiency. We need to squeeze out inefficient and misused leverage.

It seemed to be laying the philosophical foundations for why credit growth not just is slowing, but why it should be even slower. And so, when a few months later, he comes out with this Qiushi article, which pretty much makes all the same points, but then goes specifically to the debt-to-GDP issue, talking about how it’s rising, talking about how we can’t continue to let it rise, I’m like, okay, this is clearly what they’ve been building towards.

Andrew: Yeah. So, let’s extend that a little bit further. You said in your report back in July that if China generates 5% real GDP growth and inflation of 2%, right? Nominal GDP around 7%. Now we’ll see what the actual nominal growth numbers are. And, of course, we know there are challenges around the real GDP numbers, but I think it’s safe to say that the government is working off the official nominal GDP numbers. So let’s call it 7%. That if that’s the growth rate, then China can start deleveraging, or at least stabilize the debt-to-GDP ratio if total social financing or overall credit slows to 7% by the end of the year.

And you said that growth might be even slower than that, both on the credit side of like, we could probably look at TSF growing even at 6.9% year and year by December. How is that prediction looking on both sides?

Dinny: Yeah, I think we’re on track. I mean, as you said, the key thing here is what is China’s nominal GDP this year? Because the reason they haven’t been able to deleverage over the last few years is because nominal GDP has been so weak. What is it? 3.5%, 4%. But this year, because of inflation, it looks like we could get 7%, maybe a little bit higher, maybe a little bit lower. But whether China deleverages then or not, a big part is whether, well, is credit growing faster or slower than that pace of nominal GDP. So, if we’re aiming for 7%, can China get to total social financing TSF growth of 7% by the end of the year? Yeah, that is not difficult at all.

August, it was 7.2%. Almost every month, the pace of year-on-year TSF growth is declining by 0.1 percentage points. And so, another four months left in the year, I wouldn’t be surprised if TSF growth in December was like 6.8, even 6.7% year on year. So yeah, I think on the slowdown of the credit side of things is really coming together. I think the bigger question is, will inflation hold up? Will GDP growth achieve a minimum of 4.5% as Beijing was aiming for? I mean, that’s the real questions. Credit growth, no, it’s slowing sufficiently aggressively. That deleveraging is certainly within a shot.

Andrew: Now, we talked about this before on the podcast, I think with you, myself and Joe Peissel, our lead macroeconomist. I mean, you would expect rapidly slowing credit growth to lead to further slowing of economic growth, particularly in real terms. But there is a few things going on here. Talk us through kind of the missing link on what Beijing is expecting to kind of keep economic growth moving in an environment of weakening credit growth?

Dinny: It’s all about exports. That’s really what it comes down to. Consumption is not part of the solution at the moment. They talk about it all the time, but the consumption solution hasn’t changed since the end of COVID, which is unlocking latent demand. They haven’t done anything meaningful to really reinvigorate household spending. And if debt isn’t rising, which really is, you know, you’re not doing anything to reinvigorate investment, it’s a purely a export-led story. So, what you have is an expansion of manufacturing on one side and you have net export growth on the on the other, and those two things are what are driving the economy at the moment and what needs to continue to happen to deleverage.

Andrew: Yeah, and I would also say this is a little bit of a curveball, it’s not exactly on our map for this conversation, but you wrote about it in the past couple days, which is also Beijing is acknowledging that this environment will continue to depress investment, which they are totally fine with and are trying to improve sort of the targeted nature of investment, like what it goes towards. They want to make sure investment goes towards national priorities and boost the efficiency of investment to the extent they can, right? So, would you say that those goals are in concert with the deleveraging agenda?

Dinny: Yeah, absolutely. These are two sides of the same coin. They’re not just like, “Well, we need to reduce debt because we’re worried that it’s getting out of control.” They also have, I guess, a theoretical framework built around why they shouldn’t be investing as much as they used to be, why they shouldn’t be pumping as much credit into the economy. And so, whereas we’ve seen this real shift in the way that authorities talk about the role of investment in the economy, and specifically the role of infrastructure.

So, traditionally, investment and infrastructure in particular, they were ballast for the economy. They were the lever Beijing pulled whenever it felt as though the economy just wasn’t strong enough. And at various times, pulling that lever meant pumping more credit into the housing market. At other times, it meant pushing more credit into infrastructure. Most recently, it involved pushing more credit into manufacturing, but now the way Beijing talks about it is that the point of investment isn’t to create growth the point of investment is to raise the efficiency and productivity of other industries.

And so, that’s a real shift. It means that investment isn’t a lever to be pulled anymore. It’s far more strategic; it is about generating the productivity gains in other parts of the economy, which Beijing sees as being essential to driving growth. And so that’s a real change. They talk now a lot more about needing to improve the efficiency of infrastructure, not generating wasteful investment. And so that kind of very much goes hand in hand with sort of this deleveraging push because, on one hand, it’s like, well, we can’t afford to rack up debt the way that we used to. On the other hand, they’re saying, you know, we don’t even want to do that anymore because the point of investment has changed.

Andrew: Yeah, this also kind of aligns with a kind of piece of analysis that I was telling to our clients when I was in Shanghai a couple weeks ago, which is you’ve made the case that they’re sort of trying to take advantage of this moment of higher inflation and strong exports to sort of create this environment for deleveraging. But I would also say that exports as an outlet for growth in a deleveraging environment, those exports become even more important, right? And so, Beijing’s message or Beijing’s thinking, I think, is the stakes for this model for the export reliance are so much higher, right?

Because we recognize that we need those to keep us growing at this moment. And so, we’re not going to unilaterally disarm. And we’re going to increasingly send the message to folks like this is the model, get used to it. And also, our ability to defend our industrial policy, which is part of what underpins the export machine, becomes more and more and more important, which is why you see Beijing taking such a tough line on trade negotiations, in particular, I think with the EU. There’s additional reasons for them taking such a tough line with the U.S. But I think that need to defend the exports, need to defend industrial policy and the sort of innovative aspects of the aspects of industrial policy that support innovation.

I think the stakes are getting higher and higher and higher for their need to do that. And that’s one reason why you see them being so tough. But that’s just another point I wanted to add in. The question I wanted to ask you, the next question, is why does Beijing care so much about deleveraging? I mean, you know, I think people are pretty familiar with the arguments of why too much leverage can be dangerous. But Beijing seems obsessed with this stuff at times.

Dinny: Yeah, look, I think there’s a few reasons for it. I think it’s a starting point. I mean, what, according to the Bank for International Settlements, at the end of the first quarter, China’s debt-to-GDP ratio for the whole economy, so that includes households, corporations, government, take it all together, debt-to-GDP ratio was 305.2%. I mean, that’s really high. Not the highest in the world. I mean, there’s other countries. France are higher.

But importantly, that ratio has increased more than 50 percentage points since the end of 2021. I mean, that’s a really aggressive increase at a time where China was kind of sort of weaning itself off a debt-led growth model, right? it deliberately popped the housing bubble because the debt was kind of accumulating at a rapid pace. And so, even after the deleveraging campaign, even after deflating the housing market, we had this rapid expansion of debt relative to the size of the economy.

Now, of course, the pace of debt accumulation had slowed down, but so did the pace of growth. And so, the overall burden of debt has increased rapidly. Now, the real issue here is that what happens if it continues to grow at this pace? And realistically, it will surpass Japan’s current level by the middle of 2030 if it continues on its current pace. Now, of course, Japan is actually, its GDP ratio is actually declining at the moment. So, if Japan keeps declining, China continues on its current pace, I mean, they could cross over in the next two, three years. Now, of course, there’s nothing wrong with that. That’s not a real milestone.

But psychologically, I mean, Japan has been the poster child for indebted national economies for the last 20 years. For China to surpass Japan, I think it would be quite a hit to the way China both perceives itself and the way that it presents itself to the rest of the world. So of course, that’s a starting point, right? That’s why I think there’s like, “Mm, okay. This thing is getting a little bit out of control.” The other issue, and this is the real issue, is that at some point in the not so distant future the demands on the Chinese state, the spending demands are going to increase exponentially.

It’s because the population is aging so aggressively, and so healthcare costs are going to go up, pension costs are going to go up. At the very same moment, the population, the workforce is shrinking and shrinking, so the tax base is getting smaller. And so, regardless of what China does with the economy, it seems a pretty sure thing that at some point in the not-so-distant future, fast-approaching future, Beijing is going to have to start spending more and more and is going to have to borrow to meet those obligations.

So, assuming it’s going to have to borrow more for an indefinite period of time in some point in the future, ideally, it needs to borrow less now because every dollar that it borrows now is one less dollar it’s not going to be able to borrow in the future when it really needs it.

All right? So, if it’s borrowing now it’s all about trying to hit an arbitrary GDP target. If it’s borrowing in 15 years’ time, there’s nothing arbitrary about it. It’s borrowing because it needs to pay people’s pensions and meet health care obligations. So, that’s the real difference. And so, what it needs before that point in time comes, it needs more runway. It needs a greater space, greater fiscal space that will allow it to borrow more when it really needs to.

And so, to be in this position at the moment where the debt-to-GDP ratio has racked up 50 percentage points over the last four years, four and a half years, that can’t continue, because if it does, it’s hamstringing itself. Assuming it’s making life more difficult for itself in the not-so-distant future.

Andrew: Yeah, well said.

Dinny: Up to a point. Well said, up to a point.

Andrew: So, one last question then is, I think what everybody’s wondering is what that means for sort of traditional macro policy over the rest of this kind of economic cycle, we’ve been making now for a while that, I mean, for literally for years, like basically since we started this company, that Chinese policymakers are increasingly moving away from the old-style stimulus. You should stop expecting stimulus. I think that’s, like, now everyone understands that that’s not how they manage the cycle anymore.

But I would say this even goes further. In fact, it’s like not just not stimulus, but actually we’re putting on the brakes sort of through deleveraging. So, not only no gas, but actively kind of pulling back through the deleveraging campaign. Is that kind of how you think about macro policy at the moment?

Dinny: Yeah. So, on one level, you’ve got a slowdown in credit growth, and that’s natural, right? It’s slowing down because there’s just not as much credit demand. And then on the other side, you’ve got active government efforts to kind of slow down the accumulation of debt. And so, there’s a few really interesting places that are worth looking at. First is with the policy banks. So, the policy banks have always kind of been the go-to tool, source of, you know, sort of an avenue through which Beijing injects credit into the economy when it needs to stimulate.

And what we’re seeing with the policy banks at the moment is in this moment of relatively weak domestic demand, credit’s going in the other direction. So, the total stock of outstanding policy bank bonds, and bonds are the main source of funding for the policy banks, actually contracted 500 billion RMB in the first half of this year. That is unprecedented. At the same time, PBOC lending, the stock of PBOC lending to the policy banks, also contracted 500 billion RMB.

Now, that’s not so unusual. That PBOC lending has gradually contracted to almost nothing over the past, since 2024. But for that to be happening at the same time that the policy banks are actually retrenching their outstanding bonds, that is incredibly unusual. So that’s one thing. One of the big tools Beijing has always used to stimulate weak growth is being retrenched. Second thing that’s really interesting, but not surprising, is that the PBOC is trying to squeeze out sources of credit that are really not adding anything to the economy. And so, we’ve seen this before during the deleveraging campaign. That was the first thing they tried to do.

We’re deleveraging. This was 2016-17. The deleveraging campaign, first step is we get rid of the credit that’s not really doing anything for the economy. And so, the PBOC is trying the same trick again. And what they’re trying to do is reduce the amount of discounting of bankers’ acceptances that the banks are doing. No point going into details into exactly what that means. But we describe discounting a banker’s acceptances as low-calorie credit. It’s something the banks do when their lending volume in any given month has been particularly weak.

It’s a way to sort of boost their data. And it’s something that the banks have leaned into incredibly heavily this year to make their lending data look better than it is. So, the PBOC has effectively turned around. It’s trying to significantly reduce the degree to which that is going on. And I think the third thing that’s worth noting is what’s happening with how local governments are using special purpose bonds. Now, special purpose bonds were set up as the tool through which local governments funded infrastructure investment. And that is what they were for years.

And then a couple of years ago, Beijing started allowing local governments to use the funds raised from these bonds for other stuff, specifically to pay down hidden debt, which is… I mean, it’s paying down off-balance-sheet loans, stuff that local government financing vehicles have borrowed. So, it’s effectively a debt swap. A debt that a local government financing vehicle has borrowed, gets swapped effectively for an explicit bond borrowed by local government.

And it’s also these special purpose bonds are also being used for land buybacks. And again, this is kind of, it’s almost a debt swap thing going on as well. Local governments issue bonds. They buy back the land from developers that don’t need it. And those developers, more or less, they use those funds to pay down their own debts. And so, these bonds aren’t creating new debt. For the most part, they’re just resulting in the debt being shuffled around the economy. And what that means is that far less is being used to invest in infrastructure.

And so, that’s what we saw in August. I think only about a third of the money raised from the issuance of special purpose bonds actually went into infrastructure investment. Now, we think that’ll improve over the next few months for various reasons, but the underlying force that’s sort of driving this is that Beijing is insisting that infrastructure projects are financially sustainable. And local governments are finding it increasingly difficult to find those sorts of projects.

Beijing could relax those standards if it really wanted to. It could say, “It’s okay. We accept that you know these projects can’t pay for themselves, but in the short term, they’re important to ensure a certain degree of domestic demand and economic activity,” which is something that they’ve been relatively okay with in the past. But they’re not because their priorities have changed. And so, that’s kind of the three big areas where we’re seeing deleveraging at the moment, and we’re on the lookout for more because really I don’t expect this to be the end of it.

Andrew: Yeah, this has been great. Real last question this time is so the last “deleveraging campaign,” which I would call really more of a financial de-risking campaign that we saw started 2017, really kind of ran for three years, 2017 to 2019. Then, of course, the pandemic sort of blew everything up, right? Then kind of required a different policy response. I know they haven’t laid out official documents on this stuff, we’re just kind of at the early the front end of it, but, I don’t know, what’s your sense of how protracted this effort will be and what that might mean for growth over the next couple years?

Dinny: That’s a really good question, Andrew. I’ll be frank, I haven’t thought that far. I mean, my thinking at the moment is that, well, where is the pain point? At what point do they blink because they’re not generating the economic growth that they thought was important. I think we all kind of thought the same thing about the deleveraging campaign back in 2016, ‘17, ‘18, ‘19. It’s like, does this get to a point where they’re too worried about financial stability, they’re too worried about the slowdown in growth, and that they blink? And ultimately they didn’t, they stuck to their guns.

But this time, I really don’t know. I think, for all the reasons we’ve talked about, this is something that they want to do permanently. There’s a recognition that they can no longer lean into debt just to generate growth. Like, one renminbi of debt needs to generate, at the very least, a comparable amount of nominal GDP. That has not been the case for years. For one, additional dollar of nominal GDP has required significantly more debt than that. But that can’t go on indefinitely. So, I think ideally what they’d like to think they’re doing is they’re turning over a new leaf.

They are putting in place a new economy which does not require large amounts of debt to operate. And I think this is why they keep talking about the need for services, not just an expansion of consumer services, but business services to drive the economy. This is why they keep talking about the need for asset revitalization. The idea of taking existing assets and getting more wealth out of it rather than borrowing to create new assets. I mean, this is kind of the background noise to sort of this deleveraging.

They want a fundamentally different economy, and they think they’re putting in place the bits and pieces that will allow them to do it. Whether they can or not is a completely different question. Those sorts of structural changes typically take time. So, I think what they think they’re doing is a permanent thing. It’s just a question of whether the pressures on the economy cause them to blink at some point.

Andrew: Yeah, actually, I think that’s right. But also, let me throw something out there that I was just thinking as you were saying all that is maybe they just stick with it as long as kind of the export wave holds up, right? It could just be like path dependent. And what I mean by that in particular is I was thinking the exact same thing you were in terms of level setting to a new place. Maybe they’re trying to ratchet down investment in a way to a new base. Certainly, they are in the property sector, but maybe even in infrastructure manufacturing as well.

Once you get it down to that new base, which you can do in basically a couple of years, right? And you use the tailwind from exports to sort of reduce like unneeded credit growth and unneeded investment, then you’re at a new base of growth for that, or that new base of activity, and then you can get growth out of that new base of activity, right? You start getting year-over-year GDP growth out of investment because it’s smaller, right? In a way, maybe they’re just trying to reset. They’re trying to sprint and reset.

Not only we’ve seen them for years now doing re-rendering how property’s relationship with the economy. Maybe it’s an entire thinking about overall investments relationship with the economy and debt’s relationship to economic growth. And they think they can sprint through it while exports are strong. What do you think about that?

Dinny: I think you’re onto something, Andrew. I think that might be exactly what they’re trying to do here. They’re making hay while the sun shines, right? They’re making the most of the exports. Because, I mean, realistically, net export growth, the exports cannot continue growing the way that they have indefinitely. I mean, to think that it would even go for another couple of years, good Lord, that would be mind-blowing. But if they make the most of that now, take the pain from accepting a contraction in investment across the board, because that’s what we’re seeing.

I mean, this year we’ve seen a contraction in investment in property and infrastructure and manufacturing. I mean, for them to do what you just said, to reset to a lower level, and then once they’re at that lower level, growth can restart again, albeit at a significantly slower pace, that makes a lot of sense.

Andrew: Well, and it also means you, by definition, increase the size of your more innovative parts of your economy as a proportion of overall GDP. And you get growth from there as well as those continue to grow. So, I mean, it’s a little, I don’t know if Machiavellian is the right word. You know, if they can pull this off and this is what they are thinking, it’s actually quite sophisticated. I guess most people wouldn’t want to give them that much credit, but we’ll see.

I think it also speaks to why, when the IMF comes out and everyone else and says, “What you need at this moment is more fiscal support.” They’re like, “Bro, that’s not what we’re trying to do.” You know what I mean? I mean, maybe they don’t say it in those exact words.

Dinny: Or maybe they do. Maybe they’re like, “You know, mate, we should talk to each other more often. This has been really useful.”

Andrew: Yeah. Yeah, totally. I mean, it is, I mean, helping get my juices flowing for sure. Listen, man, I appreciate you laying this out for listeners. This was super helpful for me. It’s fall now, so we’ll get you back in rotation on the pod. Really appreciate the time today, man. Thanks for walking us through it.

Dinny: No worries, mate. It’s a pleasure as always.

Andrew: And thanks, everybody, for listening. See you next time. Bye, everybody.

• In fact, Chinese state media outlet China Daily went further, calling Amodei’s suggestion a “self-serving bid for profit.”

The back-and-forth has led to an ongoing debate around whether China takes AI safety seriously.

• Kendra Schaefer’s take: China does take AI risk seriously — but what it won’t accept is the premise that its own progress is the problem.

On this episode of the Trivium China Podcast, host Andrew Polk sits down with Kendra (Trivium’s Head of Tech Policy Research) to unpack:

• Why China’s response to the “pacing the frontier” debate looks dismissive on the surface, and why that reading misses how much AI regulation Beijing is already planning

• How pursuing open-weight models has become a geopolitical position for China, with roughly 70% of derivative models on Hugging Face now built on Chinese base models

• China’s new argument in the distillation fight: that banning it is an unfair trading practice and proof of US efforts to assert technological hegemony

• The one thing that could flip Beijing’s calculus on managing open-weight releases, a major security incident, and how China’s COVID-19 playbook suggests it would shut the door rather than share what happened

• Whether the new U.S.-China AI safety dialogue, set to kick off in November, has any path forward

Give it a listen and let us know what you think.

Transcript

Andrew Polk: Hi, everybody. Welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium co-founder, Andrew Polk, and I am delighted to be joined today, once again, for the first time in a while, actually, by Trivium’s Head of Tech Policy Research, Kendra Schaefer. Kendra, welcome back. How are you doing?

Kendra Schaefer: Hey, I’m doing good. Glad to be here again.

Andrew: Yeah, always glad to have you on the pod and excited about our conversation today. We are going to get into a conversation I’ve been actually wanting to have with you for about 10 days now. We’re going to talk about AI, and specifically sort of the AI pacing issue that has been in the headlines and, related to that, AI safety and AI governance. And we’re going to get into China’s specific views on these things because there’s obviously also this conversation about how and whether the U.S. and China are going to coordinate on these issues.

And then, of course, just a few days ago, Xi Jinping was in Washington, D.C., and there was talk about setting up an AI dialogue. Unclear exactly what that means, but you’ve written a couple of pieces recently– one on kind of China’s view on AI pacing and AI safety and AI governance, and then separately on the challenges that will likely impede a robust AI dialogue between the U.S. and China because they’re really kind of coming at these things from different starting points. So, we’re going to get into all of that today. But of course, before we do, we have to start with the customary vibe check. How’s your vibe today, Kendra?

Kendra: You know, I’m actually feeling gypped. I listened to a podcast you did with Joe last week, No Vibe Check.

Andrew: Yes, yes. So, wait, are you feeling cheated because I’m making you do it or because I didn’t make him do it?

Kendra: A little bit of both. I want to know if Joe got a special dispensation or if there was just, like, some failure of the audio and it had to be cut out.

Andrew: No. So for you and for other listeners, on our shorter quick reaction podcasts, I try to keep the intro shorter so that proportionally, I guess it takes up less of the time, and we get straight into it. So, we kind of have what I view as our sort of anchor longer podcast each week, and then the shorter quick turn, quick reaction ones, I try to keep a little bit tighter. So that’s why Joe was off the hook.

Kendra: Oh, that’s a little look behind the curtain for me. I’ll have to get booked on one of those sweet, sweet quick take slots.

Andrew: Well, the problem with the quick reaction ones is they always end up being 45 minutes anyway.

Kendra: Of course. It was a good podcast.

Andrew: Yeah, I thought it was great. Joe did a good job. Unfortunately, we were going to do a follow-up, and it’s just because of the holiday in China, we couldn’t quite have him back on. But we will be talking about outcomes from the Xi-Trump meeting on the AI front today. And I’m sure we’ll be talking about all those issues on an ongoing basis. For my part, I am just, again, a little peek behind the curtain, in a weird headspace because, we’re going to lose listeners because of this, but I’m a Manchester City Football Club fan. It’s an English Premier League team.

Kendra: Appalling.

Andrew: They just got handed down a monumental fine, effectively, for financial cheating.

Kendra: Oh, really?

Andrew: This has been the big news in the soccer world over the past week or so. And I’ve been listening to a lot of analysis on what it will mean. And as a fan, as a supporter, it’s very complicated feelings. And I’m sure for the players, it’s even more complicated. But anyway, I’m emotionally conflicted. And that’s the energy I’m bringing into this podcast.

Kendra: Good, good, good.

Andrew: Well, whatever that means. If I say anything weird, you know, listeners will know why.

Kendra: I’ll know it was them.

Andrew: Exactly.

Kendra: I’ll know it was soccer.

Andrew: Exactly. Before we get into the meat of the content, we also quickly have to do the housekeeping as well. Just a reminder up top, we’re not just a podcast here. Trivium China is a strategic advisory firm that helps businesses and investors navigate the China policy landscape. That, of course, includes domestic policy in China along a range of issues, including AI and technology, which we will talk about today, as well as policy towards China out of Western capitals like D.C., London, Brussels, and others, which we will also talk about today. So, we’ll kind of cover the gamut on the AI policy front. But if you need any help on that front on any of these regulatory issues, please reach out to us at hq@triviumchina.com. We’d love to have a conversation about how we can support your business or your fund.

Otherwise, if you want more Trivium content, please check out our website. Again, triviumchina.com. We’ve got a bunch of subscription options for people to stay on China policy developments. Kendra and her team write an excellent daily tech policy update. It keeps you clued in to everything that’s happening in the China tech policy front. And then we’ve got markets’ notes. We’ve got general China watcher notes for people in business who need to just kind of stay up to date on what’s going on in China. So, check that out. You’ll definitely find the China policy intel option you need on our site.

And finally, please do tell your friends and colleagues about Trivium, both about the business and about the podcast. I say it every time, but I can’t say it enough— It really helps us grow our company and to grow the listenership. And these word-of-mouth recommendations from current clients or just people who know Trivium, people who heard the podcast mean a lot in terms of getting other folks interested in our work and helping us to grow our listenership and grow our business.

So, we really do appreciate those. Please do keep those coming. All right, Kendra, are you ready to get into it?

Kendra: Yeah, let’s get into it.

Andrew: So there’s obviously, I think I can say obviously, I over rely on the word obviously, but I think it’s true that anyone who’s been paying attention will have seen this explosion of conversation around AI safety, you know, and the so-called need to pace the frontier, which was in large part sort of kicked off at least this recent episode by sort of almost infamous Pacing the Frontier Letter released by, I think, the CEO of Anthropic, which essentially argues that AI development is moving so fast it could pose existential risk to humanity and kind of trying to call on the other U.S. labs to work together to deliberately introduce friction into their own processes so that they can ensure that the guardrails around AI keep up with the innovation, and that regulators also step in and take a look. Have I got that basically right, Kendra?

Kendra: Yeah, that’s right. I mean, the response to that, I mean, that was just one tiny part of what happened over the last two weeks. There was a massive sort of response to the Pacing the Frontier letter. Obviously, the Trump administration loudly and roundly rejected the very idea of regulating AI, essentially said he would not sign off on any kind of pacing, did not intend to regulate, and ultimately said that the U.S. couldn’t afford to slow down because China’s not slowing down.

And then China sort of entered the chat and came after Anthropic, came after the U.S., came after many of the ideas that had been put forward. There was a sort of diplomatic statement by China rejecting the idea of a coordinated slowdown with the United States or with U.S. labs. State media outlet, The Global Times, hit back against Dario Amodei’s letter, sort of casting doubt on the motivations behind him posting that letter.

China Daily released an op-ed calling the letter, “Self-serving bid for profit,” by a U.S. tech elite. And then what was also really interesting was that China’s intelligence services, the MSS, had a couple of interesting releases, or MSS-related bodies and people also publicly posted on this. Most notably, Spymaster Chen Yixin, China’s minister of state security, published an essay on AI risk in which he kind of addressed some of these existential risk, and in which she kind of also obliquely sort of poked it at U.S. labs and criticized them of being sort of hypocritical. So, just sort of an outpouring of discussion on this issue from all corners.

Andrew: That’s right. Yeah. And then, of course, just to further lay the groundwork in terms of developments that have happened that we’ll be reacting to today, there was also, as I mentioned, the Xi Jinping-Donald Trump meeting in Washington, D.C.

Kendra: Not to be forgotten.

Andrew: Exactly. And a lot of speculation that sort of there might be some more substantive discussion between the two on AI safety. That didn’t really seem to happen, I think, in part because there wasn’t actually much substantive conversation in the meetings. Joe and I talked about that, a lot of sort of more ceremonial type developments, but not a lot of really deep policy discussion. That said, Scott Bessent, the U.S. Treasury Secretary, and He Lifeng, the vice premier in charge of the economy, who’s also the lead negotiator with the U.S., effectively have established this U.S.-China AI safety dialogue that they announced, I think, a couple of days officially before the Xi-Trump meeting.

And one of the outcomes of the Xi-Trump meeting was that that dialogue will have its first official meeting in November or around November. And the idea is that it will, we think, in a minimum report, be a reporting channel for AI safety incidents. Does that all sound right?

Kendra: Yes. Yeah. So there was a ton of drama, right? The result of all that back and forth is that I think we now understand much more clearly what China’s emerging positions are regarding issues like AI safety, cooperation with the U.S., distillation, etc. It’s just a lot clearer where Beijing stands now than it was even a couple of weeks ago. And of course, understanding Beijing’s positions on those issues are really important because those are the positions that Beijing’s going to, you know, they’ll evolve, of course, but they’ll take those positions into any future dialogue with the U.S.

In November, these positions will have solidified a little bit, and that is what negotiators will come into the room thinking. So, it’s been very interesting to see some of those sort of Chinese talking points around AI and AI safety evolve.

Andrew: Yeah, for sure. I think it’s hugely important for all of us, and the U.S. in particular, to understand the priorities in Beijing around these issues, to understand kind of where they’re coming from, what they’re trying to achieve. We, of course, don’t have to agree with those priorities or goals, but that will sort of help us understand the space for coordination, the space for negotiation, and the limits around any dialogue or the possibility space for any dialogue.

I think also we’ll talk about today, I think a lot of folks probably incorrectly think that China isn’t interested at all in AI safety. I think that really couldn’t be further from the truth, but you will talk us through that, and then we will kind of end up talking about some of the challenges that we foresee for the AI dialogue overall. But we’ll start with this piece that you wrote, really outlining China’s emerging positions on AI safety, and boil down China’s view to a few really key points. So why don’t you walk us through your piece, and we’ll kind of go through all of that.

Kendra: Yeah, for sure. That’s a great segue and introduction. You mentioned that there’s quite a bit of conversation around the fact that maybe China doesn’t necessarily care that much about AI safety. I mean, one of the most confusing aspects of the Chinese commentary on AI safety has been a very sort of contradictory positioning on it. Some of those commentaries appear to sort of brush off the idea that AI represents an existential risk to humanity or even a consequential risk to national security and the economy.

Right? Some of the articles that we saw come out, some of the conversations we saw come out over the last couple of weeks when they were talking about Anthropic’s view on AI safety- that it does present an existential risk, that it does need to be addressed immediately, that regulators need to step in, that governments need to sort of, you know, immediately coordinate and take emergency measures was pretty dismissive.

The Global Times essentially said, “Tech companies have strong incentives to portray AI as more powerful, mysterious, and even dangerous than it actually is.” So that makes it sound like, no, we don’t think that we think all of these AI safety conversations are overblown. But meanwhile, you look at other Chinese official commentaries and what they do is sort of dwell on the risks represented by AI and sort of outline them and spend a lot of time sort of hyping them up. So, a similar kind of hype cycle, also from sort of official sources.

I mentioned that the MSS, sort of spymaster, had written this piece and his piece effectively, I mean, you know, he spends all his time doing threat assessments, I’m sure, but his piece enumerates a laundry list of major AI risks that he thinks China has to guard against — Risk to national security, risk to critical infrastructure, risk to party ideology, risk to personal data, risks to social stability.

And the state sees social stability as essentially a fairly existential concern. And so those are fairly extreme risks. So these kind of statements, when they’re taken out of context or when they’re viewed in isolation, sort of make it difficult to assess where the state, the Chinese state, the top leadership of China stand on AI risk and how they are guiding, intend to sort of guide China through this next five, 10 years of AI development.

One risk in particular is kind of at the top of everybody’s mind, which is, you know, there’s a segment of the AI safety community, I think particularly Anthropic is sort of representing that segment of the community, that believes that releasing the weights of, you know, near frontier models, as Chinese labs do, right? Chinese labs sort of have these open weight and open source models, represents a sort of more significant threat than closed models from a safety and security point of view.

And they want China to regulate the release of those model weights. They essentially want Chinese regulators to step in and prevent Chinese labs from releasing open-weight LLMs unless they have gone through some kind of safety assessment and that they have been checked to ensure that they don’t help develop biological or chemical weapons or they can’t be used as cyberattack tools, etc. So, I mean, that’s an understandable concern, considering the fact that in a sort of open-weight model, once it’s released, you can’t be recalled, right? There’s no take-backsies.

And so even if it’s later discovered that that model is dangerous, that’s kind of, well, whoopsie-daisy, there’s very little you can kind of do about it. Even if the state puts out a regulation at that point, it’s like too late, right? But at the same time, it’s also kind of undeniable that if Chinese regulators step in to regulate AI model safety in that way, it will slow down Chinese labs and it would place China’s current sort of AI development momentum in danger. So, given all of that, China appears to have totally rejected the invitation, verbally and vocally rejected the invitation to sort of yank the leash on open-weight releases.

It is not interested in, you know, at the behest of a foreign model maker essentially telling its labs to stop. And in fact, several state media outlets sort of threw cold water on the Pacing the Frontier letter and were expressing distrust of Anthropic’s motivations for taking that position, right? In response to their post, Global Times said that Anthropic’s position is “Less about safety than about consolidating control over AI technology.” And the next day, Chinese foreign ministry spokesperson took the podium and sort of waved off Anthropic’s warning as fear-mongering.

So, that makes you think China’s not taking AI risk seriously at all and that it’s ignoring all of it and that it’s kind of walking away from the entire idea. But we think that’s a totally incorrect interpretation.

Andrew: Yeah, let me jump in there. I think I don’t want to front run you here, but one of the best points you’ve made, I think, in your piece, which I think we’ll bring up now is, I mean, the U.S. labs and the US government are basically saying one way to keep AI safe is to not let China have it. Right. Basically, right? So, if your starting point on AI governance and AI safety is China doesn’t lead the frontier or even come close to the frontier in AI, then obviously the Chinese are not going to sign on to that vision of AI safety.

And then you can also, I think, understandably see from their point of view, if a fundamental view of the U.S. labs is that open-weight models are not inherently safe. And the open-weight models, that’s China’s angle on its attempt to be at the frontier. That’s also sort of implicitly saying China’s approach to AI is inherently unsafe. So, talk to us about how those kind of ideas fit in. And then you can tell us, is China taking AI risk seriously or not even kind of beyond those definitions?

Kendra: Yeah, you’re exactly right. I mean, I think what China is rejecting when it says all of these things about Anthropic or when it says, you know, this is fear-mongering or we don’t sign on to those ideas, what they’re actually rejecting is the suggestion that China’s progress in AI is problematic or that any attempts to… and they’re basically saying that an attempt to block or restrict Chinese development is a violation of its rights to develop technology and develop its economy. And that’s essentially the argument that China is making.

And Global Times essentially said that in not so many words or explicitly said that rather. They said, “Amodei’s proposals seek to portray China’s legitimate development in AI as a threat and further fuel confrontation between China and the U.S. in the field. Such rhetoric is inappropriate, groundless and hostile.” So, the idea is, listen, no matter what the next step is in terms of U.S. and China AI cooperation, whether or not we ought to cooperate on the technicals, and we can get into that in a minute, even though we recognize the risks presented by AI, that’s a no-go of a starting point, right?

Us not being allowed to develop it, or our development of AI being risky, that’s not a position from which we’re willing to cooperate with you on that. So no, thank you.

Andrew: When you say us, you’re saying this from China’s perspective, right?

Kendra: Yes, this from China’s perspective, exactly. But that doesn’t mean China doesn’t recognize the risks presented by AI or the risks presented by open models. And I mean, over the last several years, I think Chinese policymakers have kind of attempted to raise awareness about AI risk. There’s lots of policy documentation, including, probably most notably, there’s a new AI safety governance framework. It’s Chinese. It gets updated every year. It’s put out by this sort of cybersecurity body, TC260.

And every year we read it, it’s this about, you know, 150-page document. And it outlines sort of China’s vision on where risks are and what safety is and what are the particular issues and domestic AI safety. And so, they have listed things like loss of control of AI systems as a critical risk to the technology in that document, right? So, they’re certainly aware of the risk and they’re certainly concerned about it. They’re also 100% guaranteed to take actions that, in their view, will make AI development safer, at least for domestic networks.

And they’ve actually been extremely explicit about that, right? Xi Jinping has kind of said just a couple of months ago at the World Artificial Intelligence Conference, he kind of made a note in his speech that, “Yes, China supports AI, they support AI development, they intend to develop AI, and then he had a whole other paragraph about, and yet that doesn’t mean that we won’t write laws. We are going to regulate, we will control the risks of that technology, etc.” We’re not just reading the tea leaves from a couple of lines from Xi’s speech, we’re actually reading policy documents where they’re starting to outline exactly what kind of regulation they’re thinking about.

One of the more interesting regulations, for example, was this kind of potential plan to issue sort of network identifiers, basically IDs, you know, can China’s networks be, essentially their DNS networks, be modified to sort of issue IP addresses to individual agents that are acting online? So that’s a way to sort of control and trace and track the behavior and activity of agents as they sort of proliferate across the internet.

I mean, we expect there to be a situation where there’s more agents online than humans, blah, blah, blah, blah, blah. So, there are a lot of sort of pathways towards regulation China has taken and is already taking. And I think what all this boils down to is when we say we can’t slow down AI because China won’t slow down AI, what the Trump administration means by that is we cannot place a single solitary regulatory burden on any technology company because China won’t. And that is patently untrue.

China is one of the most regulated digital environments on Earth. They will absolutely domestically regulate artificial intelligence. In fact, if the U.S. fell off the face of the earth tomorrow morning and did not say another word about artificial intelligence, five years from now, China will have placed an eye-watering amount of regulatory burdens on their AI companies to prevent essentially the state from losing control of those networks and platforms. That is what the state does. So, I think that that probably means China probably thinks that kind of regulation will function as part of a pacing mechanism over time.

That for China, pacing is we are going to institute regulation, as we always intended to do, in a rational way that corresponds to the stack of regulations, that fits in with the network regulations and Internet controls we have already instituted. That’s just one of those points where I think it’s a false equivalency. I think it’s probably just two kind of governments talking past each other when one says, “Well, we can’t regulate because China’s not going to.” It’s like China’s actually going to regulate quite a lot.

Andrew: Yeah. As I think anyone who’s a China watcher knows, the fundamental priority of the Chinese Communist Party is to stay in power. And that there’s a lot of like things that flow from that. For the most part, you want social stability. It’s not a democracy, but you’re responsive to your people because that’s one way you stay in power. Another way you stay in power is not creating a technology that’s so powerful that’s going to take down your own government. Right?

Kendra: And letting it run wild. Like you want to harness the power. I mean, the state has always tried to harness the power of a technology while mitigating the risk. And that actually leads me to another really interesting point, because China has a conception of risk in terms of what risks digital technologies outside of AI represent that have existed for the last 20 years that have been implicit and inherent in every sort of digital regulation that has kind of come out of the state.

And that is the thinking that they will also apply to artificial intelligence, right? I mean, the state has always been concerned about things like cyber threats to critical infrastructure, the use of digital tools to violate personal privacy or leak state secrets, being dependent on foreign countries for digital technologies and services, psychological harms of digital technologies. So, those things have been true for all digital regulation.

China will prioritize that type of risk when it comes to AI. And then it will also have to sort of, when the regulation comes in, the state has to figure out its way forward in terms of dealing with the specific risks that AI represents that other digital technologies do not represent. That’s things like loss of control, hallucinations, opacity, and sort of unexpected behavior, cyber threats and vulnerability discovery, algorithmic bias, that sort of thing. Again, all of that stuff is definitely coming regardless of what the U.S. does.

And China has been pretty kind of clear on that. And I think what we’re often seeing is the U.S. side has its own understanding of how it wants China to think about risk right now. And it keeps kind of lobbing this definition of risk over the fence and going, ”We need you to adopt this definition of risk right now immediately and come sit down with us and talk about it.” And China’s like, “No, go away.” Right? And it’s this kind of mess.

Andrew: Yeah. Well, I mean, the reason I bring up the CCP’s ultimate goal of maintaining power is just sort of like that, it strikes me, that that’s a place sort of maybe to start the conversation from the U.S. side to say, “Listen, we know that you want to control this technology for reasons of social stability, regime safety,” all of that stuff. How do we then apply that beyond the borders of China? Like, what is the Chinese conception of AI safety mean in terms of where there’s overlap with the US conception of AI safety? And maybe that’s a starting point. It’s not an ending point by any means, but maybe kind of conceding.

Yeah, we understand you’re worried about this technology too. Let’s figure out where we can overlap. Might be a starting point. Maybe I’m being too naive there. But then you also made the point about there’s one thing in particular you think that could really push the Chinese side into overdrive in terms of its willingness and incentive to control, especially open releases, much more aggressively.

Kendra: So, I mean, I think in terms of what you just said, I mean, we’ll probably, maybe we can come back to that later, I think probably the best way for the U.S. and China to sit down and cut through all of the nonsense here is by just sticking to the technicals. There are lots of technical safety risk that can be solved and should be solved and must be solved between two parties, and can be solved without focusing on these sort of ideological concerns. But unfortunately, some of those technicals are becoming ideological concerns. And one case in point is on the issue of sort of open weight models, right?

I mean, we really noticed that in a lot of the Chinese rhetoric, open source models or open weight models, open tools essentially, had become a sort of techno-political position. China appears to basically be leaning even harder into open source as a way to, one, to sort of gain global market adoption for Chinese technology, but also as a sort of geopolitical instrument. And what we’re basically seeing is that with increasing frequency, Chinese officials are sort of pointing to China’s provision of open models as evidence that China is acting in the common interest of global innovation and scientific discovery.

And then it’s contrasting that with the U.S. approach and essentially painting that closed approach as sort of monopolistic or, you know, problematically hegemonic or something like that. I’ll give you a quote here. I wrote down a little quote from the Ministry of Commerce, who was actually addressing, I thought this was pretty interesting, was actually sort of responding to U.S. accusations that Chinese models distill from U.S. models as we know that they do. And essentially what MOFCOM said was, you’re attacking us for distillation, but U.S. companies distill from our open models.

And they said, “Regarding artificial intelligence, China encourages open source, open collaboration, and sharing. China’s open source models are shared with global companies, including U.S. companies, facilitating the development of related models. Reports from U.S. companies on their model development also reveal that they extensively distill Chinese models. Conversely, the U.S. has repeatedly and unilaterally accused Chinese companies of engaging in industrial-scale distillation.” And I’ll come back to that distillation issue in a second.

But what’s interesting there is the politicization of open source, right? And we saw an even more significant and even more kind of vocal example of this in Minister Chen, the minister of MSS, his letter. He said, “Some countries, leveraging their accumulated advantages in basic artificial intelligence theories, model architectures, and core computing power, use the pretext of maintaining national security to restrict the introduction of cutting-edge technologies and equipment,” blah, blah, blah, blah, blah, “by means of entity lists, technology controls, monopolizing industry standards, and creating closed source ecosystems.”

That was the first time I ever saw closed source be likened to some kind of non-tariff barrier to trade, which is essentially what he’s arguing, that it’s this sort of like trade barrier to decide to close off your software, which is a little bit, which is a little ridiculous, of course. But at the same time, it’s not really the point of whether or not it’s correct. The point is, this is such a more politicized view of open source than we saw even a few years ago when the state was already broadly supportive of open technologies, but hadn’t sort of hitched its wagon to that position so thoroughly. Right?

Andrew: Well, and I actually wonder if this is frustrating to the Chinese labs, because I talked with Linghao, a member of your team before. You know, his position was sort of like the Chinese labs might go more towards closed weights down the road to increase their profitability. Right? So, this sort of you tying yourself so politically to this, I think, cuts off that avenue, probably for the Chinese models.

Kendra: A hundred thousand percent. A thousand percent. I think it’s actually going to create a real problem for the Chinese labs, right? So, it’s like a big financial strain to keep training open models, particularly because, as the compute requirements for sort of staying at the frontier, move ahead and move ahead, it becomes, you know, more and more of a strain. And Chinese labs keep doing it. I mean, I’m kind of arguing now that they’re kind of in an involutionary period.

They keep doing it because all their competitors are doing it. Whoever steps out of the open-source playing field in the Chinese market first is going to lose.

Andrew: Yeah, I don’t even know if you can politically at this point, right?

Kendra: Well, that’s the point. It’s like if you remove the politics from this issue in China entirely and you just let the labs do what they were going to do, the cycle they were in was they were all going to try to stay open as long as possible to drive their competitors out of business. And then they were probably going to start falling off with some of them closed sourcing and probably some consolidation, which many in the Chinese tech ecosystem have said is probably healthy, like a healthy place for the market to end up.

So right now, the decision to go closed in China, I think, again, without politics, is already a decision to kind of exit the front-runner race for the moment. Maybe not forever, but for right now, that means you’ve tapped out. You’ve been wrestled to the ground and you’ve tapped out. But that still would have been an easier decision if the state had not hitched China’s star to open source at this point, right? And so now, not only do you have to contend with, gosh, am I really ready to kind of step back from this? Can I find a closed-source path, maybe in a particular industry vertical or in a series of like, you know, using some kind of proprietary data or something like that that people are willing to pay for?

Now it’s a political position. And now an open source model needs to persist within China probably longer than it otherwise necessarily would have.

Andrew: Yeah. Well, I want to sort of circle back to something I raised earlier that we didn’t quite get to, but I think it’s related to all this, which is something that might change the calculus for the Chinese government towards open-weight models, towards the governance of open-weight models, towards like tying their masts to open-weight models, is if there is some kind of major security incident from an open-weight model that was released.

And then whatever happens may be beyond the control of the lab that released it. But as the U.S. labs are saying, like once you release it, it’s beyond your control. Can you talk to us about the risk of that and how that might impact how Chinese leaders think about like how they’re conceptualizing AI safety?

Kendra: Yeah, I mean, I think the primary thing to remember there is that nobody, not the U.S., not China, not the best minds on the planet who are all feverishly working to try to figure it out, have a foolproof global standard for AI safety checks. That has not been determined. So if our best and brightest minds don’t have it, the regulators definitely don’t. And so, there is a desire, both in the U.S. and China, for there to be some kind of safety testing mechanism, which regulators, both in the U.S. and China, have tried to sort of voluntold, you know, companies are getting like voluntold to go through quasi-governmental safety. It’s a bit of a mess, right?

Andrew: MM-hmm.

Kendra: But even if the state came in and said every single model that is released in China or the U.S., every single model that is released starting tomorrow morning has to go through a significant, stringent series of safeguard tests and they have to meet the following criteria before they can be put out, what are those tests and what’s that criteria? That just has not been decided. So, it’s a little bit of a circular problem, right? It’s like, yes, we all think there are risks here. We don’t 100% know how to mitigate them.

Even our best closed-model AI companies are experiencing misalignment issues with their models. So, I’ll put that on the table first. Even if regulators wanted to control it, they kind of couldn’t. What they could do is say, you can’t release open-weight models publicly. Or you cannot take an open-weight model, what a Chinese regulator could theoretically say is, “Labs, you may no longer release open weights above a certain power threshold on the public internet.” That would present a massive problem to China’s development potential and momentum right now.

China’s backing of open technology and the provision of open-weight models by Chinese labs, I would argue, is proving to be one of China’s most effective, not only market positions, market products, but also sort of geopolitical positions in recent memory. There is real global market demand for open models that is translating into real soft power for China. I would argue that is the first time that’s ever happened, particularly in a sort of frontier greenfield technology like this.

So, regulators are having to contend with the idea that, you know, do we really want to kill the goose that’s laying all these golden eggs? So, we already know that sort of behind closed doors, there is a mechanism by which the labs are being asked to verify or check these models with the state before they’re being released. It’s not an official mechanism. It’s not official regulation. There’s no clear guidance, but there’s some kind of checks and balances going on. But like I said, that certainly doesn’t mean that those models are safe because they can’t be because we don’t have the test for them because we don’t know what those tests are supposed to look like.

So, to your original point, the only thing in that scenario that would immediately and urgently cause the Chinese government to stop equivocating about whether or not global momentum is more important than safety or are these safety risks really that risky, and does that equate to that because they’re weighing the risks of we lose our opportunity to be sovereign in this technology forever because we fall so far behind the united states that we cannot kind of keep up versus we cause some major international safety incident that gets a bunch of fingers pointed at us.

Those two questions are very difficult to weigh, so if there was a major incident, obviously that will kind of likely result in some kind of knee-jerk response from the state to kind of shut it down for a minute.

Andrew: Well, and the second question I was going to ask you about this, which sort of relates to the AI dialogue between the U.S. and China, which we’ll get into more in a minute, that was prompted by a discussion from the Brookings podcast, the Brookings China team, Ryan Haas, Jonathan, Kyle Chan over there, great podcast, people should check it out. But I think it was Jon was mentioning, if there’s an incident from a Chinese open-weight model, I think the experience of the pandemic would suggest that the Chinese state may not be exactly transparent with the rest of the world on what happened, right?

And that would just compound the problems exponentially, I think. I don’t know if you have any thoughts on that.

Kendra: You have no idea what a good equivalence, I think, that is. And I’ll tell you why. Because China has taken a whole bunch of steps, just like during COVID, we’re going to we’re going to run with this analogy farther than I’m sure you’re comfortable with, but just like during COVID, right, China had its own ecosystem to control the spread of the virus internally. Its primary concern, its number one concern, was keeping its own population safe. So, whether that meant shutting the borders, quarantining people, whether they wanted to be quarantined or not, kind of rolling out these quarantine control systems that were pretty unwieldy, it instituted a domestic ecosystem of checks and balances and controls designed to keep its population safe.

And China’s domestic internet is also designed with many more technological checks and balances than the U.S. internet or most internets, right? The internet in most countries. There are controls on who can log into social networks. In the U.S., anybody can log into a social network and can anonymously set up an email account and anonymously sign in and set up a social media account and start posting content without verifying that you’re a real person, right?

Andrew: Yeah.

Kendra: Happens all the time. In China, you can’t do that. You have to show a ID, like a real ID, in order to get your account. So, there’s a sort of technological choke point there where an autonomous actor would have trouble acting in that network environment in a way that it would not have trouble causing quite as much havoc externally. So, I actually have had this thought. I mean, this is just something I’ve been percolating on for a couple of days. China’s networks, due to some of the censorship and control mechanisms that are in place in some of the network architectures, might actually kind of be safer from some of these attacks than international networks.

And therefore, I do think there’s a risk that if there was a major incident, China would just be like, closing the door.

Andrew: Yeah. Totally.

Kendra: Shutting down incoming flights. Like, we’re good in here, you know.

Andrew: Yep. Totally. I think this is a fundamental challenge with discussing AI safety with the Chinese.

Kendra: A hundred percent.

Andrew: Like I said, they have their definition, and it’s AI safety for us, not necessarily AI safety for all. And that is going to be a big challenge to break through. We’ll get into more of that when we circle back to the dialogue, but that’s all good points that I think are well taken.

Before we come back to the safety dialogue, though, I just wanted to pivot real quickly to another one of the issues that all these kind of public statements by various actors on the Chinese side have been zoning in on as well, which you have also highlighted a bit, which is the distillation issue. So, can you just talk to us a little bit more about how the Chinese are thinking about that, how they’re teeing up that as a, I guess, a back and forth between the U.S. and China.

Kendra: Yeah, well, I’ll recap it really quickly for anybody who doesn’t spend all day online reading about distillation disputes. So, Anthropic and OpenAI sort of recently accused Chinese labs, including DeepSeek and Moonshot and Alibaba and Zhipu and sort of all the main labs have undertaken these large-scale campaigns to extract data from higher quality U.S. models. In other words, what the labs do is they make tens of thousands of user accounts on, say, Claude or something like that. And then they ask Claude questions designed to extract sort of chains of reasoning or answers that will help them train their own models. And so there’s no dispute over whether or not that’s happening. It’s happening. Nobody has said that’s not happening.

The Chinese have kind of acknowledged that it’s happening and the U.S. labs have provided fairly significant evidence that it is happening. But the dispute there is how should that be treated under the law, right? Anthropic has kind of characterized it as industrial scale IP theft. And U.S. officials, and Scott Bessent in particular, have sort of signed on to that characterization, and they’ve threatened, I think he threatened on Twitter to sanction — still calling it Twitter. Oh, my God, I’m sorry — threatened on X to sanction Chinese labs for kind of doing that.

I think there’s an international debate around whether or not distillation constitutes IP theft or if it rises to the level of a national security concern that requires a sanction. I mean, that’s kind of, I don’t know if the law supports that. I mean, you could argue the law supports that. I’m not sure if that’s totally true. But it’s certainly true that it violates the terms of service of those, you know. I mean, Claude doesn’t allow that. In its terms of service, it says don’t do that, right? So, you’re not supposed to do that.

And the Chinese government has previously sort of defended distillation on the grounds that, listen, everybody does it. It’s a common AI industry practice. U.S. firms distill from Chinese models. I personally think those arguments are shaky because it’s like a government defending a contract violation. That’s a weird position to take. It’s true, U.S. firms do distill from Chinese models because Chinese open models have open licenses that say you can distill from them. So, there’s no contract violation. And like companies can set whatever conditions they want on their product.

It’s like closed is closed. So, I think the interesting piece of this is that China’s new position, which has emerged over the last couple of weeks of conversation, is that the law should say that banning distillation is an unfair trading term, which is wild. They’re not the only ones that have made that argument. There are quite a few people in the U.S. tech community who have also said you should probably just allow distillate, right? to prevent bans on distillation because what they’re doing, I mean, that shared human knowledge, much of which wasn’t paid for.

That was like scraped from the open internet in many cases. So, saying that that’s yours, right, there’s all this kind of debate about whose data is that. Anyway, MOFCOM explicitly said, “We’ve noted that some USAI companies are abusing their competitive advantage by including broad geographical restrictions and other unfair terms in their user agreements.” In other words, they’re blocking Chinese users from logging in, right? “The U.S. accusations regarding distillation appear to endorse these unfair trading terms. The U.S. approach is a typical example of using the pretext of combating distillation to exercise industrial monopoly.”

Now, that argument is still very tenuous. Of course, if you think a trade term is unfair, you should litigate it. You don’t just blow over the top of it, right? I mean, I think that’s the rules we’ve kind of…

Andrew: I don’t know.

Kendra: I don’t know. I mean, put it this way. I think if the rules were reversed, if the U.S. was doing that to Chinese companies, I don’t think Chinese regulators would be quite as fond of the practice as they seem to be going in this direction. But the rightness or wrongness isn’t the point I’m trying to make. The point I’m trying to make is the Chinese official discourse is now kind of starting to tie distillation to a broader narrative of the U.S. tries to prevent distillation because it is engaging in technological hegemony, which is a very interesting narrative. It’s an interesting point to take. So, I’m curious to see if that point sticks around.

Andrew: Well, I mean, I think, you know, the smart part about that is that it feeds into the broader Chinese positioning of we’re creating an open technology for the world to use.

Kendra: Right.

Andrew: And I mean that I’ve talked with Eric Olander on the pod. That’s very clearly the approach. We want the rest of the world to take up our technology because it’s open and it’s cheap and then we’ll figure out the business model afterwards. But we want to ensconce ourselves in the sort of AI foundational layer, AI supply chain, whatever you want to call it. And then we’ll figure it out from there. I mean, it’s not a bad strategy.

Kendra: It’s working. Actually, what’s really interesting about that is that when Chinese regulators first started supporting open source, it was like a fringe idea, really. It was sort of a fringe policy idea. There has been general support for open source tech, particularly open source tech that could help China overcome U.S. dominance in certain technological areas for many years. And there are many, a few, probably three or four, really, standout Chinese open source projects. There’s an open source blockchain network that China has kind of developed. There are some open-source semiconductor, kind of firmware, basically, like chipset architectures. I think there’s even a couple of open databases.

There’s OpenHarmony, the mobile operating system that was originally developed by Huawei and that, I think, donated to an open-source foundation. So, there’s been a couple of like small projects that have gained some ground over the years. We’ve watched them five, six years, kind of seen them take a couple of steps here and there. But nothing like this. The thing is that all of those open source projects were competing in an arena where there was already a dominant U.S. player that had essentially taken over the stack.

If you’re working with mobile operating systems, you’re still working with either Android or iOS for the most part or some fork thereof. You’re still mostly on U.S. origin chipset architectures. There really isn’t that much room left. But here we have it. Last month, Hugging Face published new statistics on how many derivative models, models that people kind of spun off, were based on Chinese models versus U.S. models versus EU models, etc. 70% of derivative models globally are based on Chinese open models.

So, it’s actually working, which is part of the reason why I think they’re getting so… you know, now it’s like, oh, my gosh, this thing that we kind of did on the side, didn’t really care about, didn’t really think about has suddenly kind of taken…

Andrew: It’s finally happening.

Kendra: Yeah, and it’s happening. That’s exactly it. That’s exactly it.

Andrew: Amazing. Well, I mean, that’ll definitely shape the back-and-forth for sure between not only the governments, but the labs going forward. I do want to pivot to the AI safety dialogue, to the extent that, or the AI dialogue at all, to the extent will exist. I think, as a starting point, I think you made the keen observation that basically China’s starting point is that the U.S. is going to have to pick a lane, which is we can prioritize AI safety, or you can prioritize AI containment of China.

But the coordination on AI safety or AI containment of China, but the two together are largely incompatible. Why don’t you walk us through? We’ve touched on it a little bit, but walk us through kind of what you see going on there.

Kendra: I mean, this is the message that I think a lot of our listenership and particularly anybody who’s worked in an MNC in China will be extremely familiar with. China sends this very consistent message to the U.S. government, also to U.S. companies and U.S. companies doing business in China: you can enjoy the benefits of China’s sort of manufacturing ecosystem and large consumer market. Or you can advocate for measures to contain China, but you don’t get to do both of those things.

You’re going to get slapped with some kind of retaliatory penalty if you try to do both of those things. You can enjoy a good relationship with China and your Chinese regulators, or you can have Taiwan listed as the separate company on your website, but you cannot do both of those things. You need to pick one, right? And so, they’ve kind of been fairly successful, I think, at sort of laying that, it’s like using that strategy. I think that type of messaging is essentially now being extended into the AI space. And I’ll quote actually Global Times, who once again put it quite succinctly, talking about Anthropic here.

“On the one hand, Amadei acknowledges that global efforts to pace AI development would ultimately require cooperation with China. On the other hand, he advocates for restrictions on chips, computing power, and models to slow China’s AI development, while explicitly seeking to widen the U.S. technological lead over China.” So, the message there is pretty clear, right? It’s like U.S. labs and officials have to choose which goal they want to prioritize. If they think that cooperation with China is the fastest path to ensure a safer world for all, then they need to cool it on the rhetoric.

And if they think that advocating for China containment measures is a sort of swifter path to safety, then they should just abandon any hope that there’s going to be any kind of cooperation, significant cooperation on safety in one way or the other.

Andrew: I think that’s a fairly reasonable standpoint from China, to be honest. Again, people will beat me up for saying that kind of thing, but from a logic standpoint, it holds up. I would just say, though, the obvious question from that is the key question, which is, given those realities, is there really any path forward for cooperation between the U.S. and China on AI safety?

Kendra: I think there is. And as I said earlier, I think the issue is really to… I hate to just push a narrative that China sort of outlined. And that’s not what I’m trying to do. But I do think that we’re not going to solve the U.S.-China tension. We’re not going to solve capitalism versus communism. We’re not going to solve every market issue we’ve ever had with Chinese companies’ behavior in the global market. Those issues have been ongoing for 20 years. Right? But the technicals of AI safety are solvable in the near term.

The issues around where does risk actually sit? Where does liability actually sit? When do we need to call you when there’s been some kind of safety incident? At what point do we need to notify you or through what kind of channels do we need to discuss when the AI that we’re developing has done something scary? What does scary mean? A lot of the time what we’re talking about, well, this week anyway, is recursive self-improvement, which is models that build themselves and improve themselves.

That’s this kind of threshold that we’re running towards where it’s not human developers making models better and releasing them. It’s models sitting in a box deciding how to improve themselves over and over and over so rapidly that we don’t know what is happening anymore. Do we need a channel? What are the markers or technical engineering measurements at which we would say, “Uh-oh, the model has done this. We need to now, we need to talk to you or shut off this training pathway.” So, those kind of conversations, if we could keep the other stuff out of them, which I’m not particularly optimistic about, but if we could keep the other stuff out of them, I think that is actually a pathway we could choose to pursue.

Andrew: Okay, where does that leave us then? I mean, we’ve got this meeting that’s supposed to happen in November to kick off the AI dialogue, but is any kind of cooperation dead in the water in your view, or should we have some kind of optimism that the two can figure it out?

Kendra: Oh, I always hate these questions because it’s like I feel both optimistic and pessimistic about it at the same time. Again, I do actually think here and maybe now it’s my turn to be naive, but I do actually think there’s a path forward. And that path forward is that we focus on the specific things that we want to resolve on the technical level.

Let me give maybe a more concrete example. Instead of the U.S. messaging that China developing open-weights, China should stop developing and releasing open weight models because China’s development and release of open weight models is dangerous and irresponsible and China should stop, blah, blah, blah, blah, blah. Maybe we have those conversations focused on the potential for those models to be leveraged for nefarious purposes without oversight, which is to your point earlier, right? That’s a loss of control issue for the Chinese state, right?

Just as much as it is for us, for the development of bioweapons, for cyber attacks, right? For like loss of control issues. So, if you focus on instituting, if you press China to institute domestic effective regulations on those particular threats for models, right? Because a bioterror threat is just as scary in China as it is anywhere else, right? Within the boundaries of its own existing sort of digital regulatory regime, that’s probably a more actionable message that will push regulation in China forward than sort of push regulators to institute controls on those models, right?

Then sort of focusing on the method by which the model is being proliferated, basically saying, you know, you shouldn’t do open weights is, like we said, kind of off the table unless there’s an incident, or at least for right now. If you focus on the technicals, you could even make room for really interesting discussions, right? Really interesting pathways forward that maybe regulators don’t even need to be involved. The government doesn’t even need to be involved. What if, for example, I kind of thought, NVIDIA is about to buy Hugging Face. They’ve already announced they’re buying Hugging Face. That’s the model distribution platform.

Why don’t we run safety checks that every single model that gets uploaded to that platform, regardless of origin, receives? You have a bunch of engineers all going through this one single portal. I think, if you really care about AI safety and not the geopolitics, there are actually ways, I think, to push safety forward in China, even if China is a little bit reluctant to cooperate. On the other hand, China will have to enter those meetings and have to fight against its own lack of transparency.

It’s really hard to cooperate on technicals even if China is unwilling to share the reality of its own technicals with the U.S., which it will be very reluctant to do that. So, I think the technicals are probably the best path forward, but I don’t think…

Andrew: Even that’s not easy.

Kendra: Even that’s not an easy task, yeah.

Andrew: Well, I guess we shall see. Something tells me that this is a conversation that we will be having on an ongoing basis until humanity is extinct. So, it could just be a couple more months.

Kendra: I, for one, look forward to the nap.

Andrew: Yes, it’ll be… At least we can all rest.

Kendra: Yeah.

Andrew: Well, Kendra, great to see you. Great to have you back on the pod. Thanks for enlightening us all on this. It’s been super helpful. I really appreciate it.

Kendra: Yeah, good to talk to you.

Andrew: And thanks, everybody, for listening. We’ll see you next time. Bye, everybody.

Fast forward a decade, and it happened exactly as he predicted.

• Joerg’s very blunt take: “China, in essence, is kind enough to tell us when and how they’re going to roll over us.”

On this episode, Trivium China Podcast host Andrew Polk, along with co-host Cory Combs, sits down with Joerg – now a partner at DGA-Albright Stonebridge Group – to unpack:

• Why “China Shock 2.0” isn’t really a shock at all, but a systemic feature of how Beijing plans its economy – which was written out in black and white years in advance

• The shipping container math that captures the trade imbalance better than any dollar figure: one container now leaves Europe for China for every four that come back

• Why Wuttke thinks a stronger renminbi, not tariffs, may be China’s real concession on the table before October’s EU-China trade negotiation deadline

• The key Chinese tech sector Wuttke says Europe should consider closing its market to (and it’s not the one you’d guess)

• Why demographic collapse, not trade policy, might ultimately be China’s biggest vulnerability – and Europe’s unlikely opportunity

This episode is another banger, y’all. You won’t want to miss it!

Transcript:

Andrew Polk: Hi, everybody, and welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium co-founder Andrew Polk, and I’m joined today once again by Trivium’s Head of Supply Chain and Critical Minerals Research, Cory Combs, who’s going to be co-hosting with me today because we once again have an excellent guest who I’m really, really excited to have on.

I’ve known this gentleman for a long time. I have a ton of respect for his views on China. He is a longtime president or was a longtime president of the EU Chamber of Commerce in China and former chief representative of BASF in China. Now he’s a partner at DGA Albright Stonebridge Group in Washington, D.C. Of course, I’m talking about Joerg Wuttke. Joerg, welcome to the podcast.

Joerg Wuttke: Thank you. And I’m glad you do it in German.

Andrew: That will be the next go-around. The next iteration of the podcast will be the German version. Cory, how are you doing today?

Cory Combs: Very well. Just really excited to have this conversation with Joerg.

Andrew: So, today, we are going to talk about EU-China trade relations, which have been increasingly fraught, shall we say. Last week or a few days ago, we had on Evan Medeiros to talk U.S.-China. So we thought a great way to pair that would be talking with Joerg about EU-China going through all the sort of ins and outs of the latest moves. Of course, this comes as the EU’s goods deficit, trade deficit with China has widened to roughly 1 billion euros a day. Brussels and Beijing are both squaring up ahead of an October deadline to make “tangible progress,” whatever that means. So, we’re going to get Joerg’s read on all of it. But of course, before we do, we have to start with the customary vibe check. Joerg, how’s your vibe today coming into this podcast?

Joerg: Excited. Excited to participate here. I’m a big fan of your podcast.

Andrew: Well, thank you so much. And thanks again for coming on. Cory, how about yourself?

Cory: Likewise. It’s been really fun. I mean, we know what we have to say. And so, the best part of this to me is just getting to hear what experts, especially in regions where we don’t specialize. So, really excited to have this conversation again.

Andrew: Yeah, same. I have to say, for my part, I am coming into this well-rested. I never take naps, but I’ve been running a lot. So, I’ve been getting increasingly tired during the day. I sat down to have a late lunch and just passed out for an hour right before this podcast. So, I am well-rested and ready to get into it with Joerg. Of course, before we do get into the meat of it, we have to quickly go through the housekeeping.

Just a quick reminder, we’re not just a podcast here. Trivium China is a strategic advisory firm that helps businesses and investors navigate the China policy landscape. That, of course, includes domestic policy in China on a bunch of different issues, whether that be technology, macro markets, you name it, we do it. But it also includes policy towards China out of Western capitals like D.C., London, Brussels, and others. So, if you need any help on any of those fronts, please reach out to us at hq@triviumchina.com. We’d love to have a conversation about how we can support your business or your fund.

And otherwise, please do tell your friends and colleagues about Trivium. The word-of-mouth recommendations really, really mean a lot to help us grow our business, get the word out about the podcast, and what we’re doing here so we appreciate those recommendations all the time. All right, Joerg, with that, are you ready to get into it?

Joerg: Yes, definitely looking forward.

Andrew: All right, I think we just start with the big narrative that everyone’s talking about right no,w which is China Shock 2.0, which I think you can loosely define as sort of this deluge of tech-intensive goods, especially clean tech, batteries, EVs, even machinery and chemicals as well, though, replacing the old labor-intensive model of low-cost goods being sold out of China and to other markets.

From where you sit, do you think that framework is the right one to use? I mean, I know it’s coming to vogue. We’ve, at Trivium, I think we have a few different views on it, but I just want to start there. Tell me how you think about the China Shock 2.0 framework.

Joerg: But China Shock 1.0 was basically shortly after WTO recession. We have to keep in mind that China was 4% of global GDP in 2000. Last year, they were about 17%, 18%. So, we talk about a completely different China. Second, China was nowhere in manufacturing and exports, in particular 20 years ago, 30 years ago, but now they produce 25% of all the goods that are floating around in the world. And their plan is clearly communicated, and China has a plan. They want to go to 30%.

So, in a way, where’s space for other countries? I’m not talking about Europe and the U.S. Where’s space for Turkey, Thailand, and others? Because the miracle of China Shock 2.0 is, it’s not just leaving some items, socks and bras and shoes behind, 95% of the fire lighters are still coming from Hunan. So, in a way, China is expanding without leaving certain areas, and they’re expanding, unfortunately, exactly where the OECD countries were strong.

Andrew: Yeah, it’s obviously sort of getting more and more attention from businesses and policymakers. I know you talk to policymakers a lot in the EU. How would you characterize the mood there? I’ll kind of take my stab at it. Every time I talk to European officials, they seem more and more ready to go toe-to-toe with China. Is that tension ratcheting up from what you see? Am I reading that right?

Joerg: Well, we are in the perfect storm as Europe. First of all, we have a war across the border, which has jacked up our energy prices tremendously, and there’s no end to the war. Second, we have Washington-Gaga, meaning we are in a trade war and every agreement that Europeans sign with the Americans seems to be signed by the Americans with a pencil. So, how long is it valid? And then, of course, there’s China. And we are part of that.

We are, as a foreign direct investment, deeply embedded in China. And that’s the policy problems that we are facing. Is a Volkswagen built in China with 98% local content, the design is not in Shanghai, is that a German car or not? It is a German-branded car. So, policymakers see that basically the divergence from added value from actually a shareholder value that companies derive from China.

So, in a way, it is very hard. And hence, they get a lot of fire from trade unions and public opinion. At the same time, everybody knows if policymakers would get real about the toolbox that they have built up, China would retaliate, and that might be even more painful.

Andrew: Yeah, well, we’ll get into the toolbox a little bit here in a minute. And I want to bring in Cory as well in just a second. But when you think about sort of broadening out to all of the volatility going on globally, there’s obviously U.S.-China tensions. And we just talked about how EU-China tensions are ratcheting up. How does the U.S.-China tension in those negotiations play out for Europe? Do you think that helps Europe in its negotiations with China at all? Does it hurt? Does it just not matter?

I mean, there’s obviously tensions between the U.S. and Europe, as you just alluded to, but I’m just wondering how you think about sort of how that three-legged stool interacts.

Joerg: No, U.S.-China tensions are not good for us. First of all, the U.S. started a trade war, which they lost. And they lost because the Chinese found the magic of rare earth licenses. And guess who didn’t get to rare earth? Primarily Europeans and Indians, you know. And so, we have the U.S. withholding technologies, export controls, trying to squeeze the Chinese technology-wise, and they have the unattended consequences of actually making the Chinese stronger.

So in a way, the policies coming out of the United States have, to a large extent backfired, and they have put a lot of pressure on our politicians and business leaders because the U.S. says, “You have to be with me or you have to be against me.” But there’s no middle way. And we don’t want to be anywhere like this. We, meaning Europeans, but also Southeast Asians, we don’t even want to get asked. So, in a way, this kind of behavior that we have realized has made our supply chains very, very difficult. All of a sudden, we cannot import things that have certain Chinese components in the cars or in electronics, for example.

And the Chinese do exactly the same. So, the Europeans have to produce three versions, one for China, in China primarily, one in the U.S., hopefully in the U.S., and in Europe for the rest of the world. So, it doesn’t make it more easier. It makes it more complex, hence more expensive.

Andrew: Yeah, that makes a lot of sense. I want to follow up a little bit on the China Shock 2.0 narrative. we did a podcast with one of our colleagues a few weeks ago, Cosimo Ries, who I asked about the China shock 2.0 narrative, and he said, he thought it was kind of overblown, and we got a lot of comments on that narrative. His basic thesis was that, he’s Italian, that the Europeans didn’t do enough to sort of invest up front to sort of stave off, you know, the Chinese take over of clean energy and things like that.

We’ll get into the overcapacity piece just after this, but I was wondering what you make of that argument. Do you give any credence that European policymakers and European companies sort of under-invested and didn’t prepare? Or obviously, the flip side of that is that China was subsidizing and making it uneconomical to invest in these things for a long time. But just wondering if you had any thoughts on that view.

Joerg: Well, you have a shock when you are surprised. And I think COVID was part of this, that actually this non-travel, the kind of not actually seeing China developing disconnected with headquarter led to complacency in Europe. We looked inside, and basically we didn’t see the technology revolution that happened in China. And so, when, for example, the top executives came in early 2023, they couldn’t believe what they saw on the streets of Shanghai, for example.

And the showcase was more pronounced when, for example, they were given keys and hunting the race course and said, “Would you please get in the cars and drive these cars?” now car companies normally have the attitude of buying a competitor’s car take them apart to see how it’s going. And I think that’s exactly what happened. They bought Chinese cars shipped them to Germany, and they were taking them apart instead of driving them, getting the feel for it, how good these cars are. So, the shock built up over three years of non-meeting, so to speak, and then there it is. And shock is always when you’re not prepared.

And again, Europe has been incredibly complacent, as pronounced by the Draghi Report. Only 11% of the report has been implemented. So sometimes it’s a good thing. It helps us to focus. It could be a Sputnik moment, and maybe we get better because of this. But if we stay the way we are, we’re going to be duped.

Andrew: Yeah, I mean, that’s a great perspective. Cory, I want to bring you in. What are your thoughts on all this and any questions for Joerg there as well?

Cory: Absolutely. I really appreciate that framing of it. And I’d love to ask a bit more about the internal politics between member states within the EU. If I’m not mischaracterizing, push back if appropriate, but my understanding is China shock 1.0 and 2.0 have rather different characteristics. First of all, the 1.0 was obviously focused on lower value-added goods. And it really hit, I would argue, Italy, Spain, Portugal a lot harder than, say, Germany, which I don’t want to say is a net beneficiary, but the export growth of vehicles and machinery at that time, I think Germany came up pretty well.

From where I sit, it seems like Germany is the most exposed to the second shock, right? And so, thinking about the dynamics within the EU across the member states, I’m curious to hear how you would characterize and what that means. Is there unity of response across the EU? What do you expect based on the dynamics you see right now?

Joerg: Oh, no, we never have unity. Dream on. That is the base mode, the absolute situation. So, we have, of course, different opinions. But, you know, Jean Monnet, the father of Europe in many ways, a French politician more than 70 years ago, said, “Europe will be forged in crisis and will be the sum of the solutions adapted for those crises.” That is an optimistic outlook. And I hope it’s going to be true. And I hope that actually we find politicians that actually can voice it and communicate this, that we are in this situation. Unfortunately, and that’s where we have a crisis, is we have not strong, street-smart politicians.

We have possibly the weakest lineup across the whole of Europe, with a notable exception maybe of Denmark. The Danish leader is very strong. The Finnish president is very strong. But the others don’t find the language in order to get their countries to actually realize there’s a problem. And they still sort of see that as a zero-sum game, and it’s not. And, of course, wants to be more political and always looks like power grabbing. So. there’s this fight going on.

But, you know, the data is so clear that something has to happen. We have a billion euro as trade deficit a day. And that doesn’t even start to describe the magnitude of the problem. Because the interesting thing is that from 2015 to 2025, the tonnage in million tons went from 2024, 44.8 million tons, to 2025, 58 million tons, meaning 20% increase. So the overcapacity of China, the price erosion that we’ve seen, doesn’t really indicate in the dollar or the euro denominations of how big the challenge is.

Jens Eskelund, my successor, head of Maersk in Beijing, had a great example. He said 2019, one container went to Europe and 2.7 came back. In 2022, it was one container, and 3.4 went towards Europe. And I guess now we are at one container going to China and four coming back. And the interesting difference to the old days is also that 20%-25% of those things in the containers are made by European brands. And so that completely changed. And so, for us, it is a real challenge.

Andrew: I want to dig in a little further on the overcapacity piece specifically. You and others have argued, and I would agree, that overcapacity is sort of a structural feature of the Chinese economy. You’ve got companies that don’t fail, and of course subsidies, and sort of just a political economy that incentivizes local governments to overinvest. Do you see anything in the policy landscape that would make you think that China is getting in any way serious about addressing the issue of overcapacity? There’s, of course, the anti-involution campaign. We talk about that a lot. We’ve seen a patchwork of moves on that front. Nothing really building up to a major policy push yet that would address the root causes. But where do you see in terms of appetite among Chinese policymakers to do anything about this?

Joerg: Well, during the time of the great financial crisis, 2008/ 2009, my first term as president, I made a study called overcapacity. Now, the good news is that China grew out of it, out of overcapacity in steel, aluminum, because they just took off, you know. And then there was again overcapacity 2015, 2016. And I had the great privilege of knowing quite well the former SASAC chairman that runs the state of enterprises, Chairman Li Rongrong.

He was fired by Wen Jiabao because he wanted to reform SOEs. Bad idea. And so, in a way, Chairman Li stayed friendly with me. And I went to see him, he says overcapacity is a big problem in trade relations. He said it is not a big problem in trade relations. It could well be, but it is harmful to our domestic industry. And he was basically the report I launched in 2016, he was basically a little bit of my inspiration and ghostwriter. Because he outlined to me why overcapacity is systemic. Basically, he framed it like this. Whatever China plans has overcapacity.

Why? Because we project demand. Then we keep the foreigners out. We finance it. So, everybody knows there’s going to be the demand story. And replicate 31 regions. And he said, “Now comes the problem because we do not only have 100 SOEs, the big ones, but we have 150,000 regional and local SOEs.” And believe me, nobody’s going to leave the battlefield. They’re going to continue until never ever day because they get funded by local governments. So, he says, “Have you ever realized there are overcapacities in socks and underpants?”

And I said, not to my knowledge. He said, “Yes, because they are private companies. They go belly up.” But if you have overcapacity in other areas where SOE money is in there, they will definitely hang in. And so the report came out in ‘16. And I, then, because of the success, asked him to help me on a report made in China 2025. That came out in March 2017, so nearly nine years ago. And the messaging there was basically, again, on his story, there will be overcapacity in EVs, in batteries, in wind parks, in solar panels, as well as basic chemicals, you know. So, China, in essence, is kind enough to tell us when and how they’re going to roll over us.

So, when you look at the 15th five-year plan, again, Chairman Li passed away 2020, unfortunately, so I can mention his name, he basically would say, you know, look into biotechnology, keep an eye on robotics and AI because these are the plans that China has in order to fight off basically the demographic disaster they’re facing. So, in a way, we have to see as companies where we are getting challenged and we might do a portfolio rearrangement. Say if the Chinese plan this, maybe I sell it now. And second, we, as policymakers, have the privilege of knowing exactly where the Chinese are going to hit us five years from now.

Andrew: Yeah, Cory, I know you’re doing a lot of work on these industries that Joerg just mentioned. How do you think it all fits together?

Cory: No, absolutely. And for one thing, it’s very validating to hear because that is effectively the methodology we’ve taken in trying to understand if there were a made in China 2035, what could it look like, and what lessons could we draw and what can we not draw? So, everything you just said, I mean, you mentioned that China projects demand. And part of that is it has remarkable ability to create demand, not as much as it has to create supply. Right? So, I mean, I have one question for you, which is, how do you effectively push back on that?

Or how do you correct this? In particular, does the EU have the ability to create demands the way that China does? I mean, not to the same extent, but that’s kind of a background question, I suppose. But in terms of where we’re looking right now, I think the diagnosis you’ve had is spot on. I mean, we see when we look at new R&D, we look at investments in fixed asset investment, a lot of it is in biotech, biomanufacturing, but China would call embodied AI. So, robotics and humanoid robots, all that stuff. So, it’s exactly as you said.

And I think something that maybe is a bit of a misperception among kind of non-China specialists is that this is tea leaf reading. It’s a structural feature of what industries can create, what types of value do we need, when. And there’s a certain timeline. Yes, quantum would be lovely, but it’s not right on the horizon, right? So, what is humanoid robotics, right? And so that’s kind of what I think Chinese authorities are doing. I think it’s what you’ve been reading. And it’s how those of us who learned from those studies carry it forward.

And I think that’s reliable because as much as we talk about, us learning from China. I mean, I think you and others have made this point very clearly in a lot of work, but the central authorities have to communicate plans and intentions to the rest of the country. So of course, it’s going to be available if you know where to look. So, anyway, that’s just a tip on that. But back over to you.

Andrew: Well, let me pick up on the point you made there, Cory, or the question I guess you had for Joerg, which you alluded to earlier, Joerg, which is the expanding toolkit of the Europeans. So, I guess double-barrel question here. One is, talk to us about that toolkit as you see it beyond just the tariffs piece. But then, if you would answer Cory’s question, does Europe have the wherewithal or the desire to also kind of create a domestic demand play? Because taking that page out of China’s book would seem like a pretty strong industrial policy play that the Europeans could follow as well. So, talk to us about the toolkit.

Joerg: Well, the toolkit has been built up over the last 10 years. And I give you one example. As a BASF manager, I was part of a group that constantly lost bits, M&As globally. Syngenta was gone. Adisseo and other [inaudible 00:20:47]. Definitely Michelin lost its bit on Pirelli. They all had Chinese owners. And I found this very unfair because the company that bought these from mentioned firms was technically bankrupt.

I know from Li Rongrong, he asked us to look into this, ChemChina. And he was of the same opinion. How can they possibly bid $34 billion for Syngenta and make it happen? Turns out to be they went bankrupt and Sinochem took over. Sinochem is a good company, but still, it was gone. I went to Brussels and said, you know, “We have to do something on this one. That is like 1988 Olympics.” It’s Carl Lewis against Ben Johnson. It’s 100 meters for all of us, but one guy has red eyes, you know, and he runs on steroids. And again, no freedom of capital.

You know, a shareholder wouldn’t take it and so forth. I went to Berlin and the vice minister of economics said to me, “We have to find a screening process to make it fair and square for everyone.” And that’s what I proposed. And I was absolutely surprised that within two years, this screening mechanism made it through the European Parliament is implemented. So, this nonsense of bankrupt companies being subsidized and buying up trophies in Europe has, to some exten,t stopped. And the Chinese have now turned more to generally greenfield things. We have, of course, a toolbox anti-coercion that looks into, if we are getting hammered, we exclude China from procurement and so forth.

But the space, the wiggle room is very, very small. Because Europe, in essence, unlike the U.S., is based on regulations and not on whims. And we don’t govern by exclamation marks. So, in essence, we take our time to make investigations and then come up with a result. And you see it coming and takes one or two years, and then maybe it’s already too late. The Chinese are much smarter about this one. They act, and the U.S. has been more brutal about this one. They just do it. So why are we so reluctant? Well, because we take our time. We have the bigger market. We have 500 million people. And we always thought that China depends on us. To some extent, yes, it’s an export market.

But they have rare earth. They have legacy chips. So basically, the pain that we inflict on China will take months, if not years. They can basically shut down our factories within months. And that’s the difference in the problem that we have, that China has politicized rare earths. And of course, the Nexperia implosion last year has shown us how close our factories, particularly the three big customers of Nexperia, which is Bosch, ZF, and Continental, got to a standstill, which would have then meant that Mercedes-Benz, BMW, and Volkswagen won’t have these pieces they need to.

A small piece makes that. So, in a way, that’s the impact assessment Berlin, Paris, and Brussels have to do. Where can we actually do something? So, there are lots of dumping cases up. The most famous recent one was on Beijing Duck. I’m not kidding you. It’s poultry. And so far as I can see, there was no retaliation. But a broadband U.S. style is not possible because A, we’re Europe. We squabble about it. And B, we have the fear that our factories will have a ripple on effect and basically have more damage than we have healed in our economic landscape.

Andrew: Yeah, I mean, I think as someone, one of the few free traders still left in America, and someone who appreciates the rules-based order that everyone worked so hard to develop post-World War II, I appreciate the deliberative nature of the European approach. It does seem like it is hamstringing the response both to the U.S. and China. And so, the question is, how do you maintain the commitment to those principles and the system that you’ve built, the rules-based system that you’ve built, while also having the capacity to fight back in an effective way?

Joerg: Well, I mean, again, I have a label for three countries that I deeply care about. USA, where I live, China, where I live 35 years, and Russia, where my wife is coming from. These typically autistic nations. They find it very difficult. We have to realize that. We are 28. We try to have a compromise and we talk to each other. They don’t care. And so, in a way, we have a situation where we have to realize that we have partners which we cannot influence.

Hence, we can only influence ourselves. That’s what I’m saying. Again, where we can fix ourselves is something where we can get more competitive, deregulate, get the venture capital more prominently going, knock down the domestic protectionism that we have within the European Union. And the other thing we have to do is we have to reach out to like-minded countries. And Brussels does this really, really well.

We have a free trade agreement signed now with Canada, with Mercosur. I mean, 30 years of negotiations, thanks to Donald Trump, we got this over the line. We have a free trade agreement, I can still hardly believe it, with India of all countries, which is far more protectionist than China, I would say. But still, we opened the door. We created room for European companies to operate easier, also with other countries. So, in a way, unlike the U.S., which basically is burning bridges, we are building bridges. But again, with the Global South. And there we meet a competitor called China that has a different attitude towards these countries.

So, in a way, we have to talk to China. We have to talk about the renminbi. Again, we have a devaluation of the renminbi towards the euro over a certain period of time. But the biggest problem that we have is the deflation in China and inflation in Europe. We have a differential every year of 5% over certain years. You add up a 20%-30% disadvantage. How can you possibly compete outside Europe with China? So, we can maybe with our toolbox protect ourselves in Europe, but we are losing the market in other places. I give an example— Exports from China to Africa increased by 50%.

I learned this on your podcast, by the way. And 40% of machinery in Nigeria and Kenya are coming from China. That used to be our market. How can you possibly compete against a weaker renminbi, deflationary companies struggling with overcapacity? So hence, we realize an industrial hollow out effect in Europe and other nations. And that’s why free trading games are so important to us.

Andrew: Yeah. I want to bring Cory in because I know he’s got some thoughts. But I’ll just quickly mention to you, you might think this is interesting, Joerg, increasingly, some of the work we do, especially when it comes to private equity firms, is private equity firms that want to buy European industrial players, usually mid- to small players. And they want studies done on what if China comes into the market, not in Europe, but in other jurisdictions.

Do the economics that the private equity firm is assuming for profitability, market share, all of that stuff hold if a Chinese player comes in and presumably really crushes margins? And so, that’s a new thing that we hadn’t heard in the past 10 years of us doing this work. But increasingly, we get those kinds of inquiries, which just shows you that this is really on people’s radar.

Joerg: Yeah. Well, the interesting thing that my firm does, we hardly overlap, by the way, Rhodium and Albright Stonebridge Group. We’re a little bit more in the machine room, I would say. Companies get in trouble in Africa or in Southeast Asia or China. We are there to do communication work or to explain how things are. It’s not just what we know, that’s where you’re strong, but who we know.

Andrew: Yeah, yeah, yeah. No, you guys are excellent at what you do.

Joerg: A new development I see is, you know, when you are a European company, and you’re Chinese-owned, then all of a sudden you’re in deep trouble in this country.

Andrew: Yeah, yeah.

Joerg: Syngenta was kicked out of Arkansas. We have two senators going after Mercedes-Benz because Mercedes-Benz has more than 50% Chinese shareholders.

Andrew: I saw that.

Joerg: Even though they have a footprint like there’s no one else in South Carolina as well as Alabama, all of a sudden they get threatened of basically getting kicked out of the United States. And at the same time, I realized in Europe that Chinese companies are going big and buying out European companies. When I was briefing our minister of economics before she left for China, I told her, you know, “Once you are Chinese, you might actually have some benefits,” meaning better access to the Chinese market, in particular when you are based in China as a company already.

But at the same time, you might have to kiss goodbye to the U.S. market, you know. And so, I think that there has to be an awareness, in particular the small and medium-sized companies that are targeted by the Chinese, high-tech companies. Some of these companies have a global market share of 70%-80% in their respective area. They’re called hidden champions. So that is a new development where we are trying to basically help these companies to stay in the U.S. and get a waiver or get licenses and so forth.

And at the same time, of course, we have companies that are targeted in China all of a sudden because they are participating in investigations in order to dump in cases and so forth and so forth. And we have to basically tell them, A, where the problem is, and B, how to get out of that situation. So, the U.S.-China trade tensions actually really make it far more difficult to operate. Supply chains are threatened, and it’s very complex. And again, at the end of the day, you know, when you see that USMCA is coming up and possibly it’s local for local, and they will desensitize Canada and Mexico, guess who is next in line who gets hammered? It’s the European Union.

Andrew: Yeah. Well, it’s fascinating stuff. I mean, the issues that companies are increasingly facing, the companies you’re working with, the companies we’re working with. I try actually not to say to clients like, “Oh, this is a really interesting problem,” because for them, it’s just a problem. They don’t care if it’s interesting. But Cory, you have some thoughts here.

Cory: Well, I have questions, always have questions. And I think that’s a good segue. So, I’d like to kind of step back and ask your view on there are multiple challenges here, some of which are really corporate and commercial questions and some of which are not. And you can obviously push back on the framing here, but I think we have obviously the trade issue, right? So, we have like the steel regulation trying to control how much Chinese steel comes in. So, it’s really a trade issue and trying to protect the existing industry. But it’s not industrial policy in terms of renovating, revitalizing or advancing that industry.

So, the separately industrial policy comes back to competitiveness. And then you have, I’d argue, the security element. And so, a lot of overcapacity obviously is commercially focused, but there’s also issues of when China holds 80%, I don’t have the actual numbers, so don’t quote me on this, but holds a very, very large portion of the subsea cables that are going to the EU, is that a security issue? In rare earths, for example, that is partly commercial, but also very much a military security issue.

And the problem with that is it’s just not a financially attractive industry. And you’re not going to find any secret technology that makes it suddenly attractive to private equity, except for the Pentagon giving a bunch of contracts. So I’m curious, in your view, and this can be compare-contrast to the US versus the EU, which have very different ways of handling the relationship between the trade, industrial policy, and security. But mostly, I’m curious to hear what you think the EU is/should be doing when it comes to these issues? Does it need to do more on protection, on trade protectionism?

Does it need to do more on really trying to advance industry in ways that make it more competitive? Or are there some things where the EU really needs to double down and do basically what the Pentagon’s doing with rare earths and saying, look, we don’t care how much it costs. We’re just going to pay for rare earths that are American. You know, there’s only so many resources. How do we prioritize?

Joerg: Yeah. Well, I think that for the European Union, the idea has to be, and I was trying to allude your industrial policy question, Andrew, there has to be a protective and defensive element in there, but very targeted. So, we don’t fall into, this is China, that’s security, let’s close borders, that makes us complacent, that makes us internationally not competitive. So, we have to sort of really get scientific about this and find where’s the damage, how big is the damage, and then act upon it, you know. I think Europe has done a good job in 2024 in September by outlining what kind of stacked up subsidies the EV cars had.

They spent, I think, 100 people, months, and came up with 9% to 28%, you know. And I think that’s the way how to do it. And you have to explain it to the Chinese that this is going to happen. You have to play defense, definitely, but also you have to play offense. Industrial policy is part of that. And again, we have to learn from China on the kind of demand story. The resource pooling, the kind of things that they have done in a wonderful manner. And we have a good history on this one. We used to have basic crappy planes until a politician, Franz Josef Strauss, in the 70s, emerged Airbus, created Airbus.

And all of a sudden, we are now airline producer number one with Boeing, more or less. So that is a success story of industrial policy. We have to basically pool and stop having 27 solutions to one problem in Europe. And at the same time, we have to also recognize the base of why we are getting weaker and why China is better in this respect. You know, China became so innovative over the last years. And my definition of innovation is demand meets brain.

You know, they have just the scale of market possibility. 1.4 billion people, and we have maybe some patchwork of 500 million people. So, we have to fix, again, according to Draghi, our domestic market. And second brain, you know, there is clearly an incredible pipeline of engineers in China. In chemicals, basically 50 of the top 100 universities are based in China. In instrumentation, 44. So if you want to be top, you go basically where the brains are and where basically these engineers are constantly, which are labeled, fitness center. You know, this was basically picked up also by the Prime Minister. China’s a fitness center.

No credit for me, but no. So, in a way, you know, if you have so many engineers and you basically put them at work all the time, that’s the demand story. And you basically then have a situation where you can build cheaper, faster, and the Chinese are more risk-saving in the first place, you know. We have to learn from them. And we have as multinationals to be in China in order to be in that situation that we can plug into this knowledge and maybe replicate this outside.

This is going to be dangerous for U.S. companies if they don’t do this. They basically fall behind and don’t realize it and then have a China shock 3.0, you know. So, in a way, it’s very interesting to see that in China now, not only kindergartens and maternity morts are closing, but also finance and marketing institutions, you know, teaching. Kids are moving away from accounting and from this kind of work to engineering. The engineering institutes in China are overwhelmed by the demand of students, you know. Why?

Because the students see clearly that I have to be an engineer to get a good income. And if I’m in finance or in marketing, I might be replaced by AI. So it is something where we have to learn in Europe that we actually really focus on that one. And now for us in Europe, of course, again, we are between a rock and a hard place on AI. Are we going to go Chinese, or are we going to go American? The Americans basically have threatened to close some software for us in AI, Anthropic, I think it’s called. And the Chinese are open-source. But if we install a Chinese AI, do we actually open a can of worms? Or is it beneficial because it’s also much cheaper?

So, in a way, Europe has to realize that AI is something where we are lagging behind. So maybe we have to sort of make it an effort with money, with demand. Again, the Chinese story of growing its demand story, not necessarily subsidies, by the way, in order to get less dependent on these two big nations.

Andrew: Yeah, I will say, I know the premier didn’t give you credit, and you have a long and consistent history of one-liners about China that get quoted over and over. But China is a fitness center for multinational companies is the most quoted China-relevant statement that I’ve seen over the past two years. So, I think you’re doing pretty well on that one, I got to say.

Joerg: I had a great coach. EU Commissioner Peter Mandelson came over and I admired his eloquence. I did not admire his money-grabbing, but he was a very intelligent man, charming man. And he said to me, “Politics is repetition.”

Andrew: Yeah, very much so. I want to pick up a little bit on everything you just said to ask, you know, you’ve talked about, I think it made a very eloquent case about how companies need to be in China to be able to compete the whole fitness center idea. I fully agree with that. I think you made a great point. American companies too, I think, in the U.S., we tend to have reductive thinking where it’s like, “Oh, well, China’s a threat. Let’s just extract ourselves from their market. Let’s extract them from our market.” It’s not that simple. And there’s a lot of unintended consequences, and not even unintended, but you can end up in even a worse place.

I think you’ve also talked a little bit about targeted self-sufficiency. Are there any areas where you think Europe should, I mean, is it the rare earths, should be a little bit harder on really focusing in on EU self-sufficiency in certain areas? Anything you can point to there that you think differently about?

Joerg: Well, I said I had dinner in Berlin, briefing our Chancellor Merz Friedrich in February before he went. By the way, very interesting story. I went in the room, and I said, “Chancellor, when have you been the last time in Beijing?” And he said, “When you were hosting me as chairman of the German chamber.” I said, “Holy moly, you know, that was 2001. How would you manage to stay away from the capital of China for 25 years?” You know, he’s very focused on the West. I think that we have to find allies, like-minded countries.

And at one stage, I hope that the U.S. again turns and signs deals with a ballpen. We have to realize that we have a long period of time ahead of us before we become sufficient in refining of rare earths. You know, despite the name rare earth, in most cases, it’s not rare. We have to realize that it’s the toxic dealing with rare earth that we have seen in Inner Mongolia, the kind of nuclear impact that it has, the kind of chemicals that created these lakes of chemistry in Inner Mongolia. You know, we outsource pollution to China by letting them do the refining process.

So, we have to learn how they do refining, and we have to learn to do it in a way which is more environmentally sensitive, or we have to do it where it doesn’t harm too much. We cannot do this in Luxembourg. of course. and we cannot do this in Switzerland. But maybe we do it in another country which has the facilities for it or has the water, and the energy and has all of the above and the ability in order to actually digest a bit of environmental penalty.

This is something where we cannot, as European, expect anything over the next five to ten years, maybe in ten years. We have to spend a lot of money on technologies we have to work with the Japanese in order to see how far they get. They’re normally very good at this because they learned the hardware already in 2010, 2011. And then, of course, we have to realize in some areas, we will never be self-sufficient. And maybe we don’t have to be. I said to the chancellor, on solar panels, so let it rip. If a country has 90% and the price fell by 80% over the last five years, happy-go-lucky.

They help us in our transmission. But just make sure that the datasets don’t end up in wrong hands, and that cannot be switched off from Shanghai. So, these are things where we have to sort of see where can it damage us, a real security threat, and take it serious. You know, Archimedes wind turbines, a security threat, certainly for the jobs of those that work for Siemens Gamessa, and for Vestas, but clearly not for the people actually running it. They can prove very easily with third-party checks that it is something where you can basically use Chinese wind turbines, which are very good.

But there’s one case where we might have to reconsider, and that is Huawei. I’m privileged in a project, you can imagine which company, that was bidding on 5G in southern China. And, to our surprise, turns out to be that Nokia was the most cheap and efficient, energy efficient, and quality-wise, best one. So, I said to the Nokia guy, “How is it possible that you guys, Ericsson and Nokia, after all,” we have still telephone companies like that, telephone equipment companies, “that you can basically not succeed in China?” You know, China is absolutely crucial because it’s 50% of the global 5G market.

So, if you have a percentage as they used to have 10 years ago, 30%, now they’re down to 0.2%. How is that possible? He said it’s very easy because Chinese companies were not very keen to actually bid for this project I was talking about because they would be undercutting their normal price level. So, China Mobile and Unicom actually agree on paying a premium so that Huawei and ZTE and all the others actually can go global, and with that kind of hidden subsidy, undercut Ericsson and Nokia that don’t have this privilege of having this huge, huge supply-demand story, particularly for these two providers.

So, in a way, they’re not necessarily saying, okay, Huawei is a security threat. Since forever, nobody has proven it, I think. But it’s an unfair business model that they’re driving. And that’s why, on 5G or maybe on 6G, we should actually really consider that, A, they open up their market more for these two players in China, because again, it’s 50%, or that we say, “Sorry, guys, you’re closed, we’re closed.”

Andrew: Yeah. Well, that’s actually a great segue into sort of the current talks, because it does seem, as we started off the conversation with, that Europe’s getting tougher. And it sounds like, you know, you say, you’re putting on the table, hey, maybe we need to close our market outright in some areas if they’re not going to open it. Can we just talk a little bit about where things stand currently in terms of the next few weeks?

I mean, we’ve got this October deadline that the two sides have said they want to make “tangible progress.” What is a realistic good outcome over the next few weeks? What is tangible progress? What is your expectation of any kind of breakthrough at all?

Joerg: Well, from now until I would say 15th and 16th of October is really its D-day. First, Ursula von der Leyen does a State of the Union speech on September 15th. And I know that she will weave in a China story. And we have to see what the language is all about. I will be in Brussels next week, so maybe I can sort of inspire some people. I get some inside knowledge of how this is going to work out.

And then EU Trade Commissioner Šefčovič, Mr. China, in the commission, will fly and meet He Lifeng in Beijing in the early days of October. And then basically comes the big one, it’s 15th, 16th, European Council. That’s where the Chancellor, the French President, and everyone, Meloni, they all show up two days, and China will be part of these two days. And then we have to see what kind of courage they have and what kind of concessions the Chinese have done in order to actually do something that the Europeans remain open.

My sense is the Chinese, in particular in run-up of a Party congress in 2027, in fall 2027, normally the Chinese don’t want to have chaos or trade wars or any of that. So, they just want stability. And Xi Jinping is anyhow in a situation where he’s possibly not going to exchange a quarter and a third of his Central Committee. He might go for a half of it. And during this period of time, there will be a lot of attention from the president on in-house, you know. So, he wants quiet and peace. That’s why I believe Busan will be extended. And I think there will be some Chinese concessions towards Europe.

And again, the discussion will move on, on the renminbi. Again, it’s partly driven by the central bank, but also partly by local government leaders to say, “Listen, guys, we have to have a stronger Renminbi. We are a net exporter as a nation, but as Chinese individuals, we are net importers. So in a way, we have to basically give our companies more financial firepower to go global. At the same time, we have to sort of use this as a weapon in order to flush out those guys that we also don’t want in our domestic industry,” meaning overcapacity. I think the renminbi will gradually, and the Chinese don’t make big jumps, I think, will expand in value. So my bet is on the renminbi.

Andrew: Very interesting. Yeah, that’s one I wanted to get in more on, that issue of the currency. Maybe next time you come on, we can talk a little bit about it. I think it’s getting more and more attention as a key element of the imbalance in terms of China’s trade surplus. I mean, it’s kind of obvious in a way, and yet also it doesn’t quite feature in a lot of these discussions.

Joerg: I mean, if you have a trade surplus of 1.2 trillion US dollars, you know, where’s the money going? I mean, if you repatriate this, there must be a huge demand for renminbi, meaning it has to drive up the renminbi, you know. Surprise, surprise, it’s never coming. I mean, Logan Wright from Rhodium does fantastic work on this one. So I guess that now companies are being asked to repatriate the money into the motherland. And that might be sort of the initial start of a softly appreciating currency.

Andrew: Yeah. Actually, that seems like a little bit of optimism, unexpected optimism from your side, Joerg, that maybe the Chinese are ready to move on that side. And that could be something they put on the table in these conversations with the Europeans.

Joerg: Yeah. Well, I’m deeply influenced by my Russian wife. Of course, there’s a saying in Russia that says, “An optimist is a badly informed pessimist.”

Andrew: I like it. I like it. I know we’re right at time. If I can just ask you one final question, you’ve been very generous with your time, so I don’t want to take up too much more. And I know in a way this is kind of a silly question because there is no in-state. It’s not like we get to some equilibrium level between Europe and China, U.S. and Europe, US and China, where everything’s just kind of static, and everybody’s happy. These are evolving systems, and they always will be.

But what would you see as sort of best-case sort of temporary equilibrium? Where would you like the relationship, the economic relationship between China and the U.S. to be in a few years that you think both sides could live with?

Joerg: I think your podcasts make it very clear is that whoever believes it’s going to get better is a dreamer. It’s not going to get better. I think the baseload in this country is more or less very anti-Chinese. Donald Trump is basically putting the lid on, and he’s giving TikTok the go-ahead and so forth. I think this will disappear. We have to see how the midterm elections with a possible change of leadership in the House as well as in the Senate might play out.

He’s in office for the next two years. Xi Jinping will do everything to have a good relationship with Donald Trump. He’s an ideal president for him. He’s severing the ties with allies. He’s questioning the situation in Taiwan. he has no ammunition anymore to the extent that the Chinese have to fear it. So in a way, you know, they will not provoke Donald Trump too much. Busan 2.0 will come, of course, but then the game is going to change afterwards, and that is something where the Chinese, as Logan writes, have peaked, and might go into a more challenging situation and with the debt burden, with the fast aging, and so forth, and the U.S. might recover. The U.S. has an incredible recovery ability. They do everything wrong until they get it. We Europeans don’t have that, unfortunately. We are slower and more studious in a way. But it is something where it’s race against time.

By the way, one of your podcasts, I learned about the demographics, but there was one figure I picked up elsewhere. You know, 250 years ago, we’re here in an anniversary year, in 1776, 8.2 million Chinese were born. And last year, it was 7.9 million Chinese. Just imagine what it does to a country that goes down this fast. So, in a way, there’s a wonderful book that I can recommend is what aging and demographics do to innovation. And that will hit China badly. And that basically would leave us on the desk with my recommendation to the chancellor— Keep our borders open for smart people.

Smart people in particular that used to go to the United States but are rejected. Now there’s this exodus back to the Chinese university and jobs. But I know exactly that, you know, a lot of millionaires, lots of people want to actually leave China. And in Europe, we have to keep the door open with red signposts saying, you know, welcome, welcome, because we need these engineers, we need these venture capitalists and everything. So, we have a unique opportunity in Europe to take advantage of the fact that the U.S. doesn’t want Chinese and the Chinese basically politicize so much, and the tax man’s breathing down their necks that maybe all of a sudden, you know, Germany might not look that bad after all.

Andrew: Well, I don’t know whether that is ending on an optimistic or pessimistic note, but certainly the future is going to be very complex. And I think there are opportunities for different countries, different companies to take advantage of all the different ways these play out. And that’s a really smart recommendation. I hope that for Germany’s sake, the chancellor listens to you. So, we’ll see how that plays out. But Joerg, thank you so much for the time today. This has been fascinating. As always, really appreciate your insights today.

Joerg: Thank you, guys. Wonderful to be on your podcast and let’s do it again at another time. And again, I’m a big fan of yours.

Andrew: Thank you so much. We really appreciate it. Great to see you. Great to talk to you. And Cory, thank you as well, man.

Joerg: Thank you, Cory.

Cory: Thanks so much, everyone.

Andrew: All right. And thanks for listening, everybody. We’ll see you next time. Bye, everybody.

The upshot: Exports are still picking up the slack.

• But an increasing chunk of China’s export growth is simply down to price increases, not rising volumes.

• So even that stalwart economic prop is starting to wobble.

On this quick-reaction episode of the Trivium China Podcast, Andrew Polk sits down with Joe Peissel (Trivium’s Lead Macroeconomist) to unpack:

• Why the gap between factory output and consumer spending just hit a three-year high, and why Beijing’s own policy playbook keeps worsening the imbalance

• The hidden story in China’s “booming” exports: value is up 25%, but volumes for things like semiconductors and appliances are actually falling

• The one semi-bright spot in the monthly macro-econ data: infrastructure investment is declining at a slower pace (hurrah!)

• Why Beijing’s new interest-rate subsidy for consumers is aimed at the wrong problem entirely

Putting it all together: China’s economy will continue to decelerate into year-end.

Give it a listen and let us know what you think.

Transcript

Andrew Polk: Hi, everybody. Welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium co-founder Andrew Polk. And today, I am joined once again by Trivium’s Lead Macro Economist, Joe Peissel. Joe, how are you doing, man?

Joe Peissel: Hey, Andrew. I’m good. Thanks, man. And happy to be here as always.

Andrew: It’s great to have you on. We are doing another of our shorter quick reaction podcasts. And this time it’s going to be a version of our monthly macro update with Joe. Part of the reason we’re keeping this one shorter is because not a ton has changed since last month. But as I just told Joe, doesn’t mean that everybody remembers what we talked about last month or that the story isn’t interesting. So, we’re still going to run down all the key themes, and Joe’s going to tell us the latest. So, are you ready to get into it?

Joe: Yeah. Macroeconomics is always interesting, Andrew. I don’t know what you’re talking about.

Andrew: Yes. This is my coaching from just before we started. You got to keep it fresh. Good work, Joe. All right, man. So, the title of your piece this month was Same Imbalances, Deeper Cracks. So, why don’t you talk to us about what got worse in August. So, this is the August data we’re talking about. It’s mid-September now, but the August data just came out a couple of days ago. So, if the cracks are deeper, which cracks are deeper and which ones matter?

Joe: Yeah, maybe I can just briefly start by saying what got better, which helps explain what got worse. So, what got better is China’s, surprise, surprise, China’s manufacturing output. I mean, it’s not just growing strongly, growth actually accelerated. So, manufacturing output grew by over 6% in August. That’s the fastest growth rate in six months. So, factories are producing output at an ever-increasing rate. The issue is Chinese consumers are consuming at an ever slower rate. So, retail sales of consumer goods, which we’re kind of taking as a proxy here for China’s domestic consumption, imperfect proxy. That increased by 0.4%, tiny, tiny increase. The previous month, it grew by 0.6%.

The month before that it actually declined. So, retail sales of consumer goods have effectively been flat over the past three months, even as manufacturing output grows at an accelerating rate. And this gap between manufacturing growth and retail sales growth, this discrepancy hit its highest or its widest mark in over three years in August. So, there’s a 5.7 percentage point difference between how much manufacturing grew by and how much retail sales of consumer goods grew by. 5.7 percentage point difference, that’s the largest divergence between the two series in, as I say, over three years.

And that’s really the central tension of the report that I’ve written. Production is racing ahead while the consumers that are meant to buy this stuff are actually pulling back, and this, of course, exacerbates China’s structural imbalances, this demand supplies mismatch that we’ve talked about.

Andrew: Yeah, I just want to pause on that for a second because, like we said, or we started the podcast with, the dynamics haven’t fundamentally changed, but they’re deepening, as you call them, deeper cracks. The widest gap between retail sales and manufacturing output in 40 months.

Joe: Yeah.

Andrew: That’s crazy. I mean, it just means these dynamics that have been evolving over the last three years are getting more and more and more intense. And it seems like policymakers are basically doing very little about it. I mean, we’ll get more to that point in a second. But is that how you see it?

Joe: Yeah, I think if anything, China’s short slash medium term stimulus policies probably exacerbate it because China traditionally relies on manufacturing or supply-side measures to support the economy, right? Even short-term stimulus. So, you can think of things like… well, channeling economic support through manufacturers is like Beijing’s playbook. And so the economy slows. Beijing supports manufacturing growth even more, but exacerbates this divergence between manufacturing and domestic consumption, which is what we’re seeing, which ultimately leads to kind of that ends up weighing on economic activity at some point, this discrepancy. And that causes Beijing to provide even more supply-side stimulus.

In the report, we graph this discrepancy between manufacturing and retail sales. And it’s pretty interesting because you see this percentage point difference, which is what we’re tracking, has just steadily grown over the past few years, which is a really nice way of trying to visualize this demand supply imbalance.

Andrew: Yeah. I’ve got some, what I think are interesting observations from my trip to Shanghai last week that I think are relevant, but they’re most relevant to the next element of this that we’re going to talk about, which is the export piece. So, I’ll kind of bring some of those in in a minute, but obviously the natural outcome of this supply-demand imbalance is basically ever-growing exports. So, exports grew 25% in USD terms year on year in August. So, that’s even faster than July. Normally, you’d say that’s good news, right? Is that actually good news in this instance?

Joe: It’s a symptom of China’s domestic issues that manufacturers have to rely on exports to offload this plus production. What’s quite interesting is in value terms, as you say, 25% growth, really strong growth, and it has been the whole year, really strong export growth. But when we look at China’s exports in volume terms, it’s a much more sobering picture. So, some good examples from August data: semiconductor exports in value terms, more than doubled year on year.

Huge growth. In volume terms, they actually fell. So that’s a price story. It’s not a volume story. It’s all price. We see the same pattern in mobile phone exports. The price is heavily influenced by memory, by memory chips, which have soared. So input costs go up. The price exporters charge goes up. In value terms, mobile phone sales have surged. In volume terms, they’re actually exporting less mobile phones now than they were this time last year. Same idea with household appliances.

We see the same. And so exports in nominal terms, yes, growing really strongly. And that matters. That’s still good. That’s good for the economy. That’s a positive contribution to GDP growth. That can still benefit exporters’ bottom lines. But in real terms, if we strip out the export inflation and really look at things in volume terms, it’s not as positive a story as it seems.

And that matters because although nominal export growth is important, we also really care about export volumes because manufacturers need rise in export volumes to absorb this output, this growing output we just talked about that domestic consumers won’t buy.

Andrew: Well, I want to get into some of the drivers of this. This is what I teased earlier, which is some of these discussions I was having on the ground in China. And one of the key observations that one of the guys I was presenting alongside in Shanghai made in his presentation deck was, he kind of had this chart of all the breakdown of key export areas, key export goods from China over sort of, say, the five-year period of 2019 and then the post-pandemic period, so 2020 to 2025.

And they were pretty strong, but then also had year-to-date growth of 2026 and all those. And for almost every single category, they exploded in 2026. It’s just like the speed with which the exports have accelerated this year in particular was striking by this chart. And I hadn’t quite put that together. The only category that was really seeing kind of very rapid growth before was NEVs. So NEV exports have been growing for a while. And so, my question was sort of what to him was what’s driving this. And it was, he was kind of unclear. He didn’t exactly know. But, you know, as part of that question, I said, is part of what’s going on here just the global and, in particular U.S., but AI build out, particularly data centers, right?

Chips are coming out of China. Other AI data center inputs are coming out of China. And that’s a big part of it and would explain kind of, at least partly, the accelerated export pattern in 2026. And that kind of makes sense to me, that there’s this demand component that just simply wasn’t there prior to this year. But then he also said it doesn’t explain all of it. So, like refrigerators and washing machines are also going gangbusters. And the question is sort of why did exporters all of a sudden of those segments start to accelerate even further this year?

So, it’s a two-part question. What is driving this? Three-part question. What is driving it overall, you think? How much of what is driving it is the AI piece? And then the last part is for these other categories that aren’t related to AI, do you think it’s just that domestic producers suddenly realized that they could get such a better margin externally? Or what’s driving that last piece? A lot of different threads there. So, what do you think?

Joe: So the monthly growth we’re seeing, the main driver is the AI buildout. That’s the main driver. And you see this if you look at disaggregated export data, the semiconductors, computer hardware, AI-related hardware, is growing the fastest of all China’s export categories and accounting for an increasing share of China’s exports. But it’s true, it’s not just an AI story here. So, the growth in things like household appliances. Well, I think a lot of this, as we just talked about, is export inflation.

And that’s driven by increases in memory chips and commodity prices. And so, exporters are forced to raise prices because their input prices are rising. The other thing we’ve noticed, and we talked about this actually earlier, Andrew, before we started recording, is we’re seeing a lot of companies relocate production to China, right? So EU companies manufacturing in China and then export into the EU. That’s a growing trend as well. And that’s kind of another tailwind for China’s exports. I mean, it’s very hard to pin down a single reason. More generally, I’d just say China’s got an ultra-competitive industrial manufacturing base across all areas of industry.

So, kind of a good anecdotal example is Volkswagen, their largest R&D center outside of Germany is in China. And that’s not necessarily to do with Chinese manufacturing per se, but to do with China’s entire industrial base and all the industrial services, producer services that support it as well, kind of the whole ecosystem. And so, that’s kind of another part of the story is there’s lots of manufacturers relocating to China because China is so competitive.

The irony being, even as certain Chinese manufacturers actually offshore to other countries to try and evade tariffs. So, I think this all speaks to kind of the structural advantages in China’s manufacturing export base.

Andrew: Yeah. Okay. We have to stay on this for a second because, I mean, the reason I’m asking these questions is sort of everyone kind of goes back to, “Well, China can’t maintain this level of exports because trading partners are going to push back. And also, trading partners are complaining more and more and more about the deluge of exports from China.” But if you look at the data, a lot of, as you just said, the biggest chunk of growth in Chinese exports is due to this basically brand new demand segment, right? the AI build-out, the data center build-out. So, the margin of the biggest chunk of marginal growth is not Chinese exporters just slashing prices and finding new markets.

It is that there is a new demand driver built around AI. And so, from that standpoint, from a policy standpoint, Western policymakers have much less to complain about. I won’t say they have nothing to complain about, but we’re buying a bunch of stuff from China to build the data centers to input into the AI build-out, the data center build-out. And that happens to be the one segment of the economy that is basically driving U.S. growth at the moment, for example. So just throwing that out there, that Chinese producers are just meeting this surge in demand, and I think that undercuts a lot of our complaints about the current export dynamics from China.

It doesn’t totally undercut them, but undercuts them to some extent. What do you think about that? What’s your reaction to that?

Joe: Yeah, I mean, that narrative should help to reduce some trade friction, right? Because these are essential inputs into AI build-out that Western economies need. That’s the point trying to make more broadly, is that China’s exports, even though they’re growing fast and displacing domestic industry for other countries, they’re also essential inputs. So, the EU’s green transition can’t happen without cheap Chinese solar. The U.S. AI build-out can’t happen without competitive AI inputs, so on, and so forth. Of course, that’s a somewhat legitimate argument that China’s consistently made. Its export is almost a service to the global economy. And to an extent it is. Of course, the counterpart that Western economies will argue is, well, actually they want to be manufacturing these inputs themselves. The issue being they can’t do it as competitively.

Andrew: Yeah. Well, that’s the second point, which is you alluded to it already, but a lot of my conversations in Shanghai, so I was talking to a bunch of different companies, and in particular, the European companies would kind of hushedly say, “We may or may not be doing this now, but our company is increasingly considering exporting more from China back to our home market because basically it doesn’t make economic sense for us to produce XYZ industrial good in Europe.” And I think from my standpoint, that is not a well understood point for EU policymakers that a bunch of the “problem” is coming from their own companies producing out of China and exporting to Europe.

And I would say that this seems to be sort of an increasing trend in the multinational space, which is China for the world. So for years and years and years when I was there, everyone was increasingly localizing. It was China for China. And now, more and more companies are thinking, how can we use our manufacturing and industrial that we’ve built up in China to service global markets. And so, also, I’m not saying again that it undercuts Western arguments, but it certainly complicates them. And I would say at least it makes the approach from Western policymakers broadly, but the EU in particular, more complicated because you can’t just say, “Stop exporting to us.” I think the only option in that case is to say to China, “Fine, we’ll keep buying your exports, but you need to buy more of our exports as well.” And then you get to the question of what does China need that it doesn’t produce? And of course, there’s import substitution, all that stuff.

But I talked to a bunch of my friends in China, and they’re like, “I would never buy anything from overseas because everything I have, I can easily get on Taobao from a local producer.” Talk to me about those dynamics.

Joe: I think having foreign companies embedded in China’s economy actually provides Beijing with structural leverage when trying to push back against any sort of Western complaints or efforts to decouple. It makes decoupling kind of more politically costly for Western governments. And I think this trend of foreign companies relocating to China, one can argue from a macroeconomic perspective, it’s bad for these domestic economies. Where it gets politically tricky is from a shareholder perspective, it’s massively beneficial, right? Because companies are utilizing more efficient supply chains, cheaper manufacturing inputs increase in the bottom line.

So, there’s a trade-off, I think, from a Western policymakers’ perspective, what may, kind of, in the medium to long term, be damaging to one’s domestic economy by this de-industrialization, having your manufacturing base hollowed out as companies relocate to China. Certainly in the short term is beneficial for a lot of shareholders. And who are the shareholders? It could be suffering wealth funds. It’s almost certainly going to be pension funds for one’s citizens. So yeah, this is why I kind of said, I kind of think of almost a structural leverage for China when entering these trade negotiations. If there’s already foreign companies embedded in China’s economy, China has a lot more clout, a lot more weight in trying to push back against any sort of trade measures against Chinese exports.

Andrew: Yes, those are all good points. And I will say the other piece of leverage it has, should Chinese officials choose to employ it in a full-blown trade war with the EU, is that because there are so many EU companies with large domestic presences in the Chinese market, that’s also a point of leverage that they can apply pressure to these companies or in various ways mess with them. And I, unfortunately, that was one of my messages to the company that I was talking to was you potentially have a lot to lose. You’re very exposed here if things go really south in EU-China trade relations, which increasingly it seems like they might.

Mostly what I’m just trying to say is this export picture is more complicated than just China selling too much to the world. But we’ll talk more about this. We don’t have to dwell further on this. I do think it’s important for listeners to think about. Last thing on the export piece is you’ve talked about how there are signs that the export juggernaut might actually be weakening, at least on a sort of a cyclical basis. What are you seeing there?

Joe: Yeah, I mean that goes back to the volume story I mentioned earlier so export volumes in certain categories have declined. This is very tentative. I’m not arguing China’s exports are now on the down and down at all. But I think it’s definitely worth readers and listeners being aware that there’s very much a huge difference in China’s exports when you look at price versus quantity. Quantity of certain exports, as I mentioned earlier, home appliances or mobile phones or semiconductors, they declined in August in volume terms.

The caveat being, it’s from an incredibly high base. Exports in volume terms are already very high. And so, like a 5% or 6% year-on-year decline still means exports in volume terms are very high. But I just think it’s important to distinguish between value versus volume. It’s definitely anyone who’s following China’s economy should be tracking that discrepancy very closely because it does matter.

Andrew: Yeah. Well, and something we’ve talked about, this is kind of, I think, the reverse that we’ve talked about maybe in previous discussions on the macro economy, but there’s a macro versus a micro. Again, I’ll go back to part of the reason prices are surging for components related to the data center build-out is because China can’t make them fast enough. And so, there are shortages, at least in relation to the surging demand, which makes the price go up. And while, like you said, from a macro standpoint, you would like to see volumes growing, from a business standpoint, if you’re selling the same amount for a lot more money, that’s totally fine. Right?

Joe: Yeah. We talked about this last time actually. Yeah, from an individual company, I don’t think I necessarily care, right? That their profits go up, their profits go up. But yeah, from a macro perspective, China needs factories to continue producing lots of goods to employ lots of workers to sustain the unemployment rate, and try put up a pressure on wage growth and all this sort of stuff.

Andrew: Yeah. Well, it’s a dynamic picture, so we, of course, will talk about this a lot more, again, at the risk of repeating myself too many times. I think the export picture is more complex than people often boil it down to. But let’s go to the next piece of the economy that you highlighted, which is actually if you squint, maybe the one sort of bright spot here, which is that you flagged infrastructure investment saw a genuine improvement last month. Talk to us about that. What’s happening there?

Joe: Yeah, you’ve really got to squint to frame this is a positive. Infrastructure investment fell almost 7% in August year on year. Huge drop. The reason why it’s kind of a positive is that there’s a huge slowdown from what we’ve seen over the past few months. So, infrastructure investment in May, June, July declined by double digits.

Andrew: A slowdown in the decline.

Joe: Yeah. Decelerating decline. A double D, if you like.

Andrew: Yeah, you know we’re in bad shape when we’re saying the decline was only single digits and we’re happy about that.

Joe: Yeah, in and of itself is a grim print, but I think relative to what’s been happening over the past few months, it’s an improvement in the decline. And it coincides with a bunch of policy support towards infrastructure. And so, that suggests, well, maybe policy support is really starting to gain momentum and is going to have an effect. So, we’ve talked about this, and I’m sure you’ve talked about this with other guests on the podcast. There’s China’s Six Networks Initiative, this huge infrastructure investment pipeline of projects in a bunch of different networks, like telecoms and water and gas pipelines and stuff. That’s gathering pace.

Over the next four months, China’s policy banks are going to issue $800 billion in seed funding for infrastructure projects. There’s going to be a whole new fresh wave of funding to support infrastructure spending. And over the last quarter, so from October onwards, there’s really favorable base effects infrastructure collapsed in the final quarter of 2025, these huge double-digit declines. So, kind of putting that together, This Six Networks Initiative, plus a bunch of policy bank seed funding, plus favorable base effects, I’m confident that that infrastructure print is actually going to start growing again across Q4.

And so that the decline slowed significantly this month, I think, also kind of backs up this idea that things are changing. There’s kind of an inflection point in infrastructure spending. Now, the caveat here is, firstly, even if there’s strong growth in Q4, infrastructure spending full year is still going to be down. And other parts of investment spending, so manufacturing investment or property investment, that continues to slide, continues to decline. So, the overall picture is still negative, but there’s kind of one potential tailwind in the coming months. That is infrastructure FAI.

Andrew: Yeah. And for listeners, Joe just wrote an excellent note for our readership on the dynamics within overall investment. The three main categories being infrastructure, manufacturing, and property, and sort of walking us through the three narratives, the three dynamics in each category, and also kind of doing an outlook for each category and thus for overall investment going forward. So, certainly, encourage people to check that out. If you’re not a market subscriber, you can sign up free trial on our website. So, little plug there.

Joe: Great plug. So organic as well. Yeah, the report has, and it wasn’t just me, it’s me, David Zhang, and Wenye Sun. So, it’s very much other colleagues as well that I should mention here. So I’m not taking credit for all their work. As much as I’d like to, they won’t let me get away with it. But yeah, we provide full-year forecasts as well for FAI growth, which is from a macro perspective is so important, right? Fixed asset investment is still one of the key drivers of China’s economy.

And so, understanding or having forecasts of what’s going to happen to investment can really help investors kind of gauge what’s going to happen to China’s overall GDP trajectory.

Andrew: Yeah, and I’m actually glad that you highlighted the six Networks Initiative in terms of helping to stabilize infrastructure investment. We actually haven’t really talked about that much, if at all, in the pod. So that might be something that we need to revisit with potentially you and Dinny and some others on the team. But it is a very important element of what’s happening in that space. So something to keep an eye on. Let’s now end with the consumer. So, there was a small move from Beijing, from policymakers to support consumption over the past few weeks, which was an increased interest rate subsidy for consumers. But you’re pretty skeptical it won’t help much. Talk to us about the dynamics the consumer is facing and what’s happening on the policy front there and whether or not it’ll matter.

Joe: Yeah. So there’s two things on the policy front. The first is this expansion of interest rate subsidies for consumers. So, the Ministry of Finance pays a portion of the interest rate consumers pay on loans. Idea being this lowers the cost of credit. And so, consumers, it’s going to increase their willingness to borrow money and spend. The reason I’m skeptical about it, and I talk about this in the report that went out today, September 17th, I guess the podcast is going to go out a couple of days later, is because China’s weak consumption isn’t a function of expensive credit.

It’s not a credit problem. Rates are already low. The reason this weak consumption is far more structural, it’s to do with slowing wage growth, kind of this structural long-term slowdown in consumer confidence and their willingness to spend. And of course, all of that is tied to the negative wealth effect. So, property prices down almost 30% from their peak five years ago. Interest rates already low, meaning fixed-term deposit, the return on fixed-term deposits or wealth management products is low. Return on government bonds is low. China’s stock market is super sluggish.

And think about that in contrast to Western equities, which this year have absolutely soared. So cheap credit doesn’t fix any of those things. It doesn’t repair household confidence. It doesn’t somehow translate into higher wage growth. So, without addressing the structural problems, interest rate subsidies are going to do very little for consumption. The second policy we saw in August was a bunch of county-level supply-side measures. So, what that means when I say supply side, consumption supply side measures are really all about trying to either improve the quality or increase the quantity of goods and services that exist in the market.

The idea being if there’s more things that consumers can buy, then they will buy them. And so, supply side measures that were released last month include increasing the amount of charging points for electric vehicles. So consumers maybe want to buy electric vehicles because they’re easier to charge. Building new shopping centers, upgrading existing local consumption facilities that can be like storage warehouses or upgrading shops, things like this. But we talked about this at the beginning of the pod. Beijing always relies on supply-side initiatives to try and boost demand. And it ain’t going to work, Andrew.

Andrew: Yeah. Well, you know, your typical rational consumer, not that consumers are always rational, is not going to look at their financial situation and say, “My employment prospects are somewhat shaky. My wages are growing more slowly. My confidence in my economic future is not particularly high. Maybe now’s the time to take on a bunch of new credit to buy stuff I don’t necessarily need.” Now-

Joe: Yeah, at this new shopping center.

Andrew: Yeah, exactly. Now, I was going to say, there might be some American consumers that think that way. I do think that maybe we’re built a little different over here, and not necessarily always a good way, but Chinese consumers and most consumers in the world, and even most American consumers do not think that way. And so, it’s just making it easier to borrow as a consumer in these circumstances. I agree with you. It’s not going to have much impact.

Joe: Yeah.

Andrew: Let’s wrap it up. This was a good breakdown. Thank you for that. I think to wrap it up, I mean, the really $10,000 question that everybody wants to know is, okay, put it all together for us. And what are the prospects for the economy? What’s the trajectory? We’ve talked before, we don’t really do GDP forecasts per se because the official GDP numbers are a political target, blah, blah, blah. But so you got weak consumption, as always, or not, you know, as has been for several years now. You’ve got booming exports, but maybe a little of the shine coming off. You’ve got weak overall investment, but maybe infrastructure turning a bit from a low base.

What does it mean for the next six months? Is this an economy that’s decelerating or accelerating or staying flat? I mean, we understand the supply-demand mismatch dynamics, but what about the overall kind of momentum of the economy?

Joe: It’s an economy that’s decelerating. It’s an economy that’s trapped in a, I guess I could say, like a narrowing growth model. So, it’s an economy that relies on manufacturing and exports. And as you said, some of the shine on the exports is starting to fade. So the growth drivers just get narrower and narrower. All the while, domestic demand, so whether that’s consumption or property, or private investment, just keeps deteriorating. So, if one’s interested in the six-month outlook economy, we need to ask ourselves, what changes this trajectory? And the answer is some sort of demand-side reset.

And there’s nothing on the policy front that suggests that’s coming. So without any sort of demand-side reset, the economy keeps drifting towards slower growth, propped up by manufacturing and exports. I mean, particularly exports, that’s also cyclical in some respects, driven by this AI build-out. And so even that’s not necessarily a structural strength. It’s a cyclical one. All of that means it’s an economy which is decelerating and faces a growing number of challenges.

Andrew: Well, on that pessimistic note, I mean, it’s hard to talk about the Chinese economy and not really be pessimistic at the moment. And yet, more and more foreign companies are doing more and more production there. So, it’s an interesting dynamic. But we will continue to cover these details, these dynamics on the Chinese economy going forward. Joe, really appreciate this breakdown this month, looking at the most recent data. Thanks a bunch for the time.

Joe: Yeah. Thanks for having me on, Andrew. It’s good fun. As I said, macroeconomics is always interesting.

Andrew: There it is. Love it. And thanks, everybody, for listening. We’ll see you next time, everybody. Bye.

• But Eric Olander, co-founder of the China Global South Project, says that framing is wrong — because a race implies a finish line, and this competition doesn’t have one.

• Eric’s view is that Chinese AI companies aren’t necessarily looking to out innovate US closed-weight models.

• Instead, the goal for China is to become Android to America’s Apple — 10% of the profit, but 90% of the world’s users.

On this week’s episode of the Trivium China Podcast, Eric discusses China’s approach to building AI offerings in the Global South with host Andrew Polk — but only after the two run through the flurry of travel and diplomacy Xi Jinping is undertaking throughout September.

The two discuss the implications of Xi’s travels, then turn to China’s AI strategy in the region, touching on:

• How Xi turned a single stop in Egypt into a four-birds-one-stone diplomatic play, touching on the Iran war, the Israel-Palestine conflict, Africa-China relations, and the dynamics around Xinjiang all at once

• Why the India-China thaw is real but fragile, and why Xi and Modi’s sideline meeting at the upcoming BRICS summit matters more than anything on the summit’s official agenda

• Why China’s AI push into the Global South won’t really be about the models themselves — but about enabling those models with Huawei servers, support contracts, and services sold on top of free, open-weight code

• Why the “China is less secure” pitch against Chinese AI companies doesn’t land in a Global South that trusts Washington about as little as it trusts Beijing

• Why nobody in the Global South expects much from Xi’s Washington visit, and why the mood in Beijing right now is just as hardened as it is in DC

Strap in — we cover a lot of ground in this one!

Transcript

Andrew Polk: Hi, everybody, and welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium Co-Founder, Andrew Polk, and I’m joined today by a very special guest. He is the Co-Founder of the China Global South Project. Joining us from Ho Chi Minh in Vietnam, it’s Eric Olander. Eric, how are you doing today, man?

Eric Olander: Great to be here. Long-time listener, first-time caller, first-time guest, you know, but big fan.

Andrew: That works. And for those who don’t know, we’ll talk a little bit about the China Global South Project in just a sec. But Eric and his team are also a member of the Sinica Podcast Network. Their work is excellent. You should definitely check out their podcast. They’ve got a whole suite of them.

Excellent, excellent work on what China is doing in the Global South.

And the reason I’m talking to Eric today is because that’s exactly what we’re going to go over. We’ll get into Xi Jinping’s recent run of diplomacy with sort of Global South entities, having been at the Shanghai Cooperation Organization, having trips to Kyrgyzstan and Egypt, and then in the next few days, participating in the BRICS summit in India.

Then we will talk about China’s AI push into the Global South and what that means for global AI competition. I say global, but really between the US and China. And then we’ll close maybe with Eric’s thoughts on what to expect from Xi Jinping’s upcoming trip to Washington and the EU-China trade talks as well, because I know he spends a lot of time speaking with European policymakers and businesses as well.

But before we get into that, we have to start, of course, with our customary vibe check. So, Eric, how’s your vibe today, man?

Eric: Oh, the vibe is uncertain. You know, when you live here in Southeast Asia, you’re getting pulled in all these different directions. On the one hand, you’re looking at the economies that are looking at 8%, 10% growth. Can you imagine 10% growth anywhere in the world? But in Southeast Asia, they still talk about those kinds of numbers. And at the same time, there’s this precipice of disaster right in the South China Sea, or it’s the Thailand, Myanmar, you know, has the Thailand, Cambodia, and the Myanmar civil war and, and all these things.

And obviously AI and Trump and the disruptions. And so, every day in this part of the world, you wake up with a kind of a split view of the world, which is one incredibly optimistic, surrounded by vibrant young people who are just busting their asses to improve themselves. And at the same time, a geopolitics that feels incredibly dangerous.

Andrew: Yeah. Well, uncertainty is one way, certainly an aspect of it. So, I’m in Shanghai reporting from Shanghai today. I love being back in China. I love being back in this part of the world. The part and parcel of uncertainty is just energy and vibe and people like striving and possibility and all of those things and the chaos. I miss all of that about being in Asia.

Eric: There’s an energy here that you don’t get in other parts of the world.

Andrew: A hundred percent.

Eric: And I mean, it’s the kind of thing that on a Sunday night at seven o’clock, and I don’t know if this is a good or bad thing, but kids are getting out of English class at seven o’clock on a Sunday night. And you just get this sense that there’s a drive to hustle, a drive to improve, a drive to really take advantage of the moment. And it contrasts with Europe where people talk about going to a four-day work week, a 35-hour work week.

And it feels weird in Europe because you see how hard they’re working out here. It may be, I’ve been out here in this part of the world for too long. This feels normal to me to basically have a six-day kind of drive. There’s a little bit of slowdown on Sunday, but not much in these parts of the world. So, it is a contrast, it’s also with the U.S. as well.

Andrew: Yeah, well, we’ll talk about all those aspects, that energy, that chaos, that striving as part of our conversation today. So, love that vibe that you bring to the podcast. It’s matching mine today. But before, of course, we get into the content, got to quickly do some housekeeping. Just a reminder to folks, we’re not just a podcast here. Trivium China is a strategic advisory firm that helps businesses and investors navigate the China policy landscape.

That, of course, includes domestic policy in China along a range of areas, tech, autos, minerals, consumer goods. You name it, we do it. But it also includes policy towards China out of Western capitals like D.C., London, Brussels, and others. So, if you need any help on that front, please do reach out to us at hq@triviumchina.com. We’d love to have a conversation about how we can support your business or your fund.

And otherwise, please just tell your friends and colleagues about Trivium. The word-of-mouth recommendations really, really, really help to grow our business and to grow the listenership for the podcast as well. I want to get into the content, but one last piece of housekeeping today. Eric, I’d love for you to tell folks. So, we’re going to put this podcast out on your channels and our channels. But for folks on the Trivium channel who aren’t familiar with the China Global South Project, can you just tell people a little bit about what you guys are doing?

Eric: Yeah, I appreciate it. We’ve been around for 16 years now.

Andrew: Wow.

Eric: And it’s funny that we go back to the early 2010s. We started podcasting and creating this. And we started with this idea that we don’t look at China as good or bad. And so much of the discussion about China has been so hyper-polarized. We look at China as complicated. And so, on a Monday, you’re going to see some critical coverage. On Tuesday, you’ll see some more favorable coverage. On Wednesday, it’s critical. And it just goes back and forth because we’re following the complexity.

And so, what we look at is China and what they’re doing in Asia, Africa, Latin America, West Asia, which is the broader Mideast Persian Gulf, Central Asia, critical minerals, looking at tech, looking at the diplomacy. So, what we’re going to talk about with Xi Jinping today in Egypt. This is the stuff that we do every day, whereas the New York Times, for example, will have a big article that came out this week on China and the Chancay Port in Peru. We literally have a service based in Peru that covers this in Spanish every day.

And so that’s what we do. And you really can’t understand the full breadth of the China story in 2026 if you’re only looking at U.S., China, China, Taiwan, and China domestic issues. Just as it was in the first Cold War, the competition between the U.S. and China is not going to be played out in the U.S. and in China. The competition is going to be played out in Brazil. It’s going to be played out in Vietnam. It’s going to be played out in Kenya, all over the world.

And unless people have this full understanding of the landscape, you’re missing big parts of it. And that’s the gap that we try and fill with our team. And our team is all from the Global South. I’m the only one not from the global South, but I’m living in the global South. So, we try and bring that out of D.C., out of Brussels’ view of the world to try and give people a different way of thinking about these things.

Andrew: Love it. That’s awesome. And so, everyone should check out the China Global South Project. They’ve got subscription products as well that you should check out that really keep you up to date on what China is doing in the Global South. And then also an excellent YouTube channel with a bunch of content as well. So, check that out. Great. Well, Eric, you ready to get into it?

Eric: Let’s do it.

Andrew: All right. Well, so we’re going to start with diplomacy. I mean, Xi Jinping is on a bit of a tear. He’s been, I would say, he’s kind of at the start of a really real journey around the world. We’re recording today on September 10th, but from August 30th to September 3rd, he had a five-day trip where he attended the 2026 Shanghai Cooperation Organization Summit and then had state visits in Kyrgyzstan and Egypt.

So, we’re going to start there. Can you just talk to us a little bit about kind of what you saw coming out of the SCO?

Eric: Yeah.

Andrew: Xi talked about, his big speech was, at least the part that Chinese media is particularly highlighting this “push for an equal and orderly multipolar world.” I think there’s some real, I don’t know, hopium in that. But anyway, interested in kind of your take on how the SCO went.

Eric: So, it’s not surprising that the president of China or the, in this case, the leader of China, the head of the Communist Party, is traveling abroad. It is surprising that this particular president and this particular general secretary is starting to travel again. If you recall over the past several years, really since the COVID pandemic, Xi’s travel schedule has fallen considerably. And he’s really relegated a lot of that to Li Qiang, the premier. So, that he’s gone on so many trips in such a short period of time is something notable and something we haven’t seen in several years.

So, that is very interesting that he’s getting out. I think Xi sees a moment in all of these trips, and there’s a linkage among all of them, between the SCO, Egypt, BRICS, and the Trump visit that, of course, the Chinese like to talk about changes not seen in a hundred years, but this is an incredible moment that we’re in right now, where the power dynamics are shifting. And Xi clearly sees an opportunity to try and push that more into China’s favor. So, I think that this is the context that you have to look at these trips and his messaging at each of the different stops, which had some similarities to it.

Again, another baseline point, you know, we hear this in the U.S. quite a bit, that the Chinese want to displace the United States as the global hegemon, that the Chinese want to overthrow U.S. institutions. That is just not backed up by the facts. And that’s not backed up by the scholarship and also what the Chinese themselves are saying. The Chinese have no desire to be a global hegemon. They don’t want to pay for it. They don’t want the burdens of it. And they don’t want the responsibilities. Xi is first and foremost focused on making China great again. He is a nationalist through and through.

And so, when we see the rhetoric, when he’s talking about a multipolar world and he’s talking about community for common destiny, that’s the umbrella structure of all of this. All of that is to give China more room to move in the international system to achieve its own objectives, but to the point where it doesn’t overthrow the existing institutions that it has benefited from enormously over the past 40 years. It doesn’t want to overthrow the UN. It doesn’t want to overthrow any of these institutions, but it does want to create these new parallel international governance architectures like the SCO and like the BRICS.

So, I think that’s a scene-setting that is really important, I think, to understand. We can go into the particulars of what he said. But I think that it’s vastly misunderstood and misframed in a lot of the Western discourse on these types of engagements.

Andrew: I totally agree. And I want to pick up on that, another just kind of scene-setting point for our audience who are all over the place, but many of them are in Europe or the U.S. and come at this through that lens. Again, I’ve already mentioned, you talked about the global initiatives that Xi Jinping is putting forward. And then I talked about this sort of equal and orderly multipolar world that Xi Jinping is talking about. I think people in Washington, where I live, hear that and they have one of two responses.

One is never going to happen, people don’t want to follow China, or they just generally kind of roll their eyes. But as you know, from living in the global South, or maybe I’ll ask you in case some are wrong, I mean, there is a receptive audience for that kind of ideas in this part of the world, right?

Eric: So, there’s two things that are going on simultaneously. And again, unfortunately, our discourse in the U.S., and to some extent in Europe, is reductive and binary, and it lacks the nuance to understand these two things that are going on at the same time. You cannot overstate the depths of frustration and anger and resentment that many people in these countries have towards the U.S. and Europe for the way that they have run the world for the past four or five hundred years.

Okay? And this is part of the discussion that Europeans don’t get because they don’t talk about colonialism in their education, the same way we don’t want to talk about slavery in our education. It makes them uncomfortable. But when you go to Africa, you’re in here in places like Southeast Asia. The resentment is very close to the surface. Now, here’s the thing. You’ll see that Americans get treated very well when they go to these parts of the world. And because there’s a custom in Southeast Asia, in the Middle East, and in Africa that you treat visitors with respect.

And so, you’ll get this rhetoric from American diplomats say, “Well, we really prefer working with you.” You hear this all the time. You know, an American cabinet secretary will come back from an African country and say, “You know, they told me that they would rather work with us than the Chinese.” And you know what that guy is telling the next visitor that comes in, “I’d rather work than the Americans.” So, we get blinded by that. And so, we have this kind of us versus them.

In so much of these countries, the choice is not the U.S. or China. It’s a both and combination. They don’t feel that they are in the position to be able to choose one or the other, and they want to engage them all. Vietnam, of course, is the best example of this. Bamboo diplomacy, friend to all, enemy to none. That is the pronounced policy and the announced policy of the Vietnamese government that a lot of developing countries adopt.

Notice that within a week of Xi Jinping leaving Egypt, the Egyptian government announces a new billion-dollar NVIDIA AI data center. This is the dynamic. So, it’s not an either-or, and I think that’s a very important thing. So, the resentment towards the West is deep, is growing more so, and China kind of fills in then and says, “Hey, listen, we’re here.”

And so, you see in a lot of these pollings from Pew, Afrobarometer, Arab Barometer, the Institute for Southeast Asian Studies — China is ticking above the U.S. more and more. What the posters, and we’ve interviewed all of them on our show, what they’re telling us is that the depth of support for the Chinese tends to be quite shallow. In many ways, it’s a protest vote against the U.S. So they go, “I don’t like the U.S., so I’m going to vote for the Chinese. Yeah, I like the Chinese.” And then they’ll go back and they’ll ask people in secondary questions saying, “Why do you like the Chinese?”

And people oftentimes don’t have an answer. They’ll be like, “Well, they’re not the U.S.” Okay? Well, so then China’s support in these countries is quite low and it’s kind of superficial. And again, that is a takeaway. And it’s a current discussion going on in foreign affairs right now that really the U.S. is the stronger soft power in the world. I would be cautious of that because, again, when China comes out with these new governance initiatives and says, “We want to have you to have a seat at the table.”

And I was in Europe a couple of weeks ago with some senior-level stakeholders and I challenged them. I said, “Name me one European governance institution or one European initiative that puts Togo,” and I just picked a random country, pick any country, “puts Togo as a member at the table with you.” Okay, I’ll wait. Okay? There isn’t one. So, we can say all of these things that the Chinese are doing- SCO, BRICS, New Development Bank, Asian Infrastructure Investment Bank, the Global Governance, Security, Civilization, AI- all these initiatives are just a bunch of vaporware.

But when you are Togo, or you are Keny,a or you are any of these countries who have been excluded from the system for so long, and China then says, “Hey, we want you to have a seat at the table.” So, Kenya signs on to the World Artificial Intelligence Organization as a founding member. That has never happened in a U.S. or European institution, in contemporary U.S. or European institutions.

Andrew: Yeah, great point.

Eric: That’s very powerful. So, when we look at the Global Development Initiative, and some 70+ foreign ministers were there as founding kind of supporters of it in 2022 on the sidelines of the UN General Assembly, and yet the New York Times doesn’t even send a reporter to it, you start to see our blind spots on this, that no one’s forcing the Saudi foreign minister to go to a global development initiative thing. They’re going because they think it’s interesting and there’s something there for them. What is it? When does it pay off? Nobody really knows, but they like the rhetoric, and they like the tone, and they like the both/and of it where they can sit down with the Americans and they can sit down with the Chinese.

And also, this emphasis that the Chinese have on multilateralism now is something that resonates in this part of the world because, again, we’ve lived in a system where the Americans got to pick the head of the World Bank, the Europeans got to pick the head of the IMF, and then there were five countries at the top of the UN, and everybody else is basically told to sit on the sidelines. And so, this new multilateralism, if you’re India, Nigeria, Indonesia, Brazil, you have power today, real power, and you want to be respected in that.

Last point that I’ll make on this is that S. Jaishankar, the very outspoken external affairs minister of India, he famously said, “Listen, we tried to get into the G7, and they wouldn’t let us. So we made the BRICS.” So, this sense of exclusion that many people in these countries feel from the existing institutions is something that is fed into what the Chinese are doing. And the Chinese are leveraging that, leaning into it. Some say exploiting it, but it’s good politics.

Andrew: Totally. Well, and the cynic would say, “Well, this just serves China’s interests,” but that’s just smart politics. Exactly.

Eric: But it is. Of course, it serves their interests.

Andrew: Yeah, yeah. Both can be true at the same time. Yeah.

Eric: I mean, come on, this is the game we’re in, you know, just the same way that in the post-war era, us creating these institutions, these governance institutions served our interests.

Andrew: A hundred percent.

Eric: And for 75 years, it served our interests. Marco Rubio says it doesn’t anymore. I think a lot of us would disagree with that. But here we are. So, we can’t blame the Chinese for pursuing initiatives that are self-interested. That is the nature of politics.

Andrew: Yeah, totally, totally agree. Well, excellent analysis on sort of the contextual part of this. Let’s get into some of the details. Was there anything from the Shanghai Cooperation Organization meeting that jumped out at you?

Eric: Well, yeah, so from SCO, first of all, it’s not surprising that he went because Central Asia holds a very special place in Xi’s kind of worldview. Remember that it was Central Asia where he went in 2013, less than a year after he was general secretary, to launch the Belt and Road Initiative. He’s seen Central Asia as one of the few uncontested spaces around China’s periphery that isn’t affected by great power competition or by rivalries like with India, for example, and whatnot.

And so Central Asia has been this space that he really likes to go to. In fact, after the pandemic, it was at the C+C5, the China plus the Central Asian five were the first leaders to come to China. So again, he has this special place. So, it didn’t surprise me that he went to Bishkek. The rhetoric was very much what we expected. Again, it’s a security organization. You know, the SCO has struggled in these current issues because of India’s relationship with Israel. Iran is a full member.

And there was this very awkward picture of Xi and Wang Yi, the foreign minister, with the Iranian delegation and the Iranian counterparts. I don’t know if you saw that picture where some people looked at it. It was like, yeah, the Iranians positioned it as — we had a sideline meeting with the Chinese — and everybody were looking at it going, “Well, that didn’t really look like a sideline meeting.”

Andrew: Standing meeting.

Eric: It was a standing meeting and Xi has this very standoffish approach if he doesn’t like somebody. His body language is always very interesting to watch. You know, when he’s with a Japanese prime minister, he just looks pissed off. He just puts the dead fish handshake. He’s like, I just want you to get away from me. And then when he’s with the Tanzanian president, he’s just so effusive and smiling. I think we were somewhere in between on that one with the Iranians, where he wanted a picture to show that he’s not isolating them and abandoning them. But at the same time, he also didn’t want to get too close.

That, in a microcosm, shows you the complexities of the SCO for China. And so, on the one hand, remember that the SCO has struggled on the Iran wars because India has had this very close relationship with Israel. In the June 2025 five attacks from the U.S. and Israel against Iran, the SCO didn’t issue a statement. And then when they issued a statement, they did it without India. And then India came up and said, “Wait, whoa, no, we did not agree to this.” And it shows you the fissures within these organizations.

This brings up the point on the BRICS as well. What do these organizations actually do? If you cannot issue a statement after one of your members is under full attack by rivals, what’s the point, right? I come back to that these are forums that allow for these leaders to get together for Modi and Xi. In this case, Modi didn’t meet with Xi, but it allows a space for this interaction. That’s number one, which wouldn’t happen otherwise. It allows for the articulation of these frustrations and grievances with the legacy institutions of the international system. That’s really important.

And grievance is something that I think is underappreciated as a political force. Grievance is what drove the AfD to win in Germany. Grievance is what powers Trump. Grievance is what powers Nigel Farage. Grievance is the currency of our politics today. And so, the SCO and the BRICS don’t actually produce much in the way of tangible outcomes, but they do allow a forum for grievance. And Xi spoke to that when he talked about his displeasure with the current security system. That is an expression of grievance.

And so, I think if we look at it on the level of grievance, then these institutions start to make more sense. And I’ve heard people in D.C., MAGA people in D.C., dismiss grievance as a force. And I’m just like, wait, what? I mean, you’re literally in power because of grievance. So, they dismiss it when they see it from people that they don’t understand or they don’t like. But when it’s their grievance, it’s legitimate.

Andrew: Right.

Eric: And so that’s, I think, the most important things that come out of these SCO and BRICS summits.

Andrew: Yeah, that’s a really, really good point. Really well put. I think the tendency is to look at these things and say they’re nothing burgers. You know, people kind of put up this sort of false expectation. Like, if there’s not a $40 billion worth of commercial deals or something concrete you can hold in your hand, that it was a flop. But that’s not the point.

Eric: No, that’s dumb. That’s an old way of looking at it. And think about this. If these institutions or whatever they are, these forums were nothingburgers, why is it that dozens and dozens of countries are lining up to join them? Vietnam has plenty of things to do with its time besides go to the BRICS. But yet the prime minister is going to the BRICS summit.

Why?

Now, is it because they’re going to get big trade deals out of it?

No.

Is it because they’re going to get some type of financial benefit?

No, because the BRICS has been around for 15 years and has produced barely anything.

So, in that sense, yeah, it’s a failure.

But it puts the Vietnamese prime minister in the room with Modi, with Xi, with any number of presidents, prime ministers, and others who are very much aligned with him in terms of that worldview. Now, it’s not all grievance. There is productive things that do come out of these things. And also, it’s a de-centering of the West. This is really important. The West is not invited to these clubs. They’re not even invited as observers. This is not their party. And that is very empowering for people, again, who’ve been marginalized for as long as they’ve been marginalized, and saying, “You know what, you’ve got your things, we’ve got ours, you can stay over there.”

And notice how sensitive it gets, how people in Washington are becoming increasingly sensitive about this. As much as Trump and the MAGA folks want to say these are nothing burgers, Trump turned around on multiple occasions and threatened 100% tariffs on any BRICS country if they go through with the BRICS currency. Okay, on any number, you know, he didn’t even know that China was part of the BRICS, which I think is laughable. But again, you can tell that there’s a little bit of anxiety about this. It’s a nothingburger, but we don’t like it. And you’re like, “Well, if it’s a nothing burger, then what do you care?”

Andrew: Totally. Totally. Well, again, I think those are really good observations and super helpful for, I think, how we think about these things. We’ll talk more about the BRICS piece of it in a second because that’s upcoming. But in the meantime, after the SCO, Xi went to Kyrgyzstan and Egypt for a state visit. Definitely want to talk about Egypt. I don’t know if you have any thoughts on the Kyrgyzstan visit.

Eric: Well, so Kyrgyzstan is important because that’s really the heart and soul of the Belt and Road Initiative. This is where it started and this is where the beating heart thrives. So, when we look at the big infrastructure projects, we look at the energy projects, you look at critical minerals, Central Asia is right in the middle of all of those. So, the announcements again on progress, on the big railways, these are railways that are connecting China to Europe. And so, a lot of air conditioners went through these countries on the way to Europe this summer.

Again, these are railways that are probably going to become more important in the future as waterways become potentially contested and weaponized. So, railways will play a more important role. So, the fact that they made announcements on the rail systems, I think is something that we should watch. Also, you can’t take away anything when it comes to Central Asia and the competition between Russia and China. Russia still sees that as its traditional sphere of influence. China clearly feels the upper hand over Russia.

Basically, in many ways, in my view, there’s nothing that pleases the Chinese more than seeing Vladimir Putin walk up the steps of the Great Hall of the People, you know, of like, “You work for me now,” right? And so that plays out in Central Asia. I think, again, taking advantage of the moment. Russia may be stronger one day. Russia’s relationship with China may be more contentious. Historically, it has been that way. And so, I think the Chinese are taking advantage of the moment that we’re in right now by exerting considerable influence in Central Asia while Russia is focused on Ukraine and Europe and all the other things that are going on and its ability to exert influence in Central Asia is diminished.

That’s always been a big part of it. Again, China’s periphery, its neighborhood diplomacy is supreme right now in its strategic thinking. And Central Asia is absolutely central, no pun intended, to that. So, I think you have to look at that all in that context of Russia, neighborhood diplomacy, supply lines, the Belt and Road. That’s what makes this visit to Bishkek so important. And all the visits to Central Asia and the engagements with Central Asia are so important. It doesn’t get a lot of attention outside of the kind of BRI press, if you will, these kind of small communities like us, who obsess over these things. But it’s one that I recommend people to follow closely.

Andrew: Yeah, I know you’re an avid reader of BRI Monthly, your magazine. So, well, then what do you make of the Egypt trip?

Eric: Okay, so this one was really interesting. And at first, I was scratching my head as to, okay…

Andrew: Why?

Eric: Why? But then when you sit and think about it, it was a masterful stroke of diplomacy. So, ostensibly, the reason they’re going is to mark the 70th anniversary of diplomatic ties between Egypt and China. Blah, blah, blah. There’s always those anniversaries. You know, it’s the 60th anniversary, the 70th anniversary. Xi doesn’t go to those. Egypt, though, is a country, because of its location, that ticks so many boxes. So, let’s just go through the list right now. North Africa.

So, this is the second visit since 2024 that Xi has made to North Africa. Remember, he made a stopover in Morocco on the way back from the U.S. And that by itself indicates that MENA and we call, you know, so North Africa is treated separately like it is for the U.S. It’s not part of the sub-Saharan Africa in the Ministry of Foreign Affairs. They count North Africa as part of their MENA division. So, MENA holds a very special place. And if you look during the pandemic where vaccines went, disproportionately, they went to North African countries much more than they did to sub-Saharan African countries.

Andrew: Interesting.

Eric: When you look at investment now, huge investment flows into the Moroccan auto industry.

Why?

Because Morocco is one of the few countries that has a free trade agreement with both the U.S. and Europe. Makes it very, very important. Egypt now is one of the major magnets of Chinese auto manufacturing. So, First Automotive Works, SAIC, any number of these companies have huge investments in both ICE and new energy manufacturing there. There is a big Chinese investment zone along the Suez Canal. And so, the Chinese, more than anything, when it comes to BRI price connectivity.

And so, Egypt, because of its strategic location at the intersection of sub-Saharan Africa, North Africa, the Middle East, and the Persian Gulf, make it strategically very important economically. But that’s not the reason why he went, because a lot of countries fit that. China is concerned that they are being relegated to a secondary position in what comes after the Iran war. That they are not a primary actor in shaping the outcome of this. And that’s by their own choice, by the way.

They don’t want to get involved in the security. Remember, Trump on many occasions said the PLA Navy should join the U.S. I mean, we’re in a different timeline, Andrew. But, you know, I mean, can you imagine this? A joint naval operation between the U.S. and the PLAN, you know, to patrol the Strait of Hormuz? I mean, like, but that’s where we are in 2026. I mean, that was his request. I mean, not once, but on multiple occasions that the Chinese should do it. The Chinese naturally saying, “No, we don’t do that. We’re not going to get involved in other countries and other regions militarily.”

So, there is a concern as to when the dynamics in West Asia start to settle down that they may be positioned on the outside. So, Xi wants to still be considered an actor in the political discussions related to West Asia. But he can’t go to the Emirates because the Emirates is right in the middle of the U.S.-China competition. He can’t go to Iran, obviously, because, well, that would mess everything up. The Saudis, I don’t think, want him there right now. It’s just too difficult of a time. They don’t want the Trumpers there either, okay?

I mean, they’re trying to figure it out. Egypt is one of these countries a little bit like India, which has a tense but deep relationship with the U.S., always a suspicious relationship with the U.S., and at the same time is welcoming to the Chinese. So, there’s a political dynamic there. Remember, so that’s box number two in terms of thinking about the Iran war and the politics of the Iran war and having some presence.

Andrew: Sure.

Eric: Box three is the Palestinian-Israel conflict. And China has seen itself as a long ally of the Palestinian cause from going back to the 60s in Yasser Arafat. And obviously, Egypt is right on the front lines of that. This conflict has been a topic of discussion between El-Sisi and Xi. The Chinese at one point when they were high on their mediation success in terms of bringing Saudi Arabia and Iran back together. They even talked about, you know, maybe they could step in to mediate the Palestinian conflict.

They brought all the Palestinian factions to China in ‘23 or ‘24, which was quite a move. They fancy themselves as being an ally of the Arab street on this, if you will. The Arab street, for those who are not familiar, is public opinion that is shaped out of Cairo. And the Palestinian cause is central to that. And the Chinese have been avid defenders of the Palestinians at the United Nations. They’ve been avid defenders of the Palestinians, obviously, in China and the diplomacy. And going to Cairo allows you that opportunity to talk about that.

The last part, and this did come up in the conversations, and there’s the one that’s poorly understood is Xinjiang. So, in the early ‘20s, remember I said about the Arab street, there is a convergence between China and Egypt on combating Islamic terrorism and Islamic radicalism. This is their words, not mine. So for El-Sisi, it’s about cracking down on the Muslim Brotherhood. And for the Chinese, it’s obviously talking about Xinjiang. So, in the early 20s, Wang Yi goes to Cairo and lays out the policy on Xinjiang and says, “This is what we’re doing.”

And they famously go and say, back then it was like six years, we’re up to about 10 years, “We have not had an attack by an Islamic extremist in six, seven, eight, nine.” They always put the number every year. That resonates in Cairo. And the Chinese get the blessing of the Egyptian government on this. And it legitimizes China’s policies on Xinjiang. And so, they love going to Cairo to talk about human rights, Muslim extremism, and the successes that both the Egyptian and the Chinese governments have had in combating Islamic extremism.

It’s a safe space for them to talk about that. They get no criticism. There’s no protest in Cairo on this. And let’s not forget that the Egyptians have been deporting Uyghur activists back to China and repatriating them. So, there’s been very much an alliance there.

Andrew: That makes sense. Oh, sorry. Go ahead.

Eric: The last box. Sorry. I mean…

Andrew: No, that’s great.

Eric: I get really excited about Egypt, about China politics.

Andrew: No, I love it.

Eric: The last box to tick. And again, this is why I said it was a masterful stroke that, in one trip, he could do all of these things is that, and he referenced this in his speech that Egypt is a part of Africa. Africa is an important part of China’s diplomacy in the Global South. And it allows him the leverage to say, “I am back in Africa again.” And again, this is something that Donald Trump will never go to Africa for obvious reasons. Biden barely went to Africa, only in the last month of his presidency when he was lame duck. Same with Obama. This is a part of the world that the U.S. doesn’t take seriously, has not taken seriously, and there is no indication they will take seriously.

And so, Xi benefits from that by saying, here I am back in Africa again. And I think he used the word Africa quite a bit in his remarks. And that was intentional to direct those remarks to sub-Saharan Africa and to the continent of Africa, not just to the MENA, West Asia, Mideast, Persian Gulf dynamics of it all. So, that’s why Egypt was such a masterful diplomacy for them because they got to do a lot in a very short amount of time. I’ll pause there.

Andrew: No, that’s really well summed up and makes a ton of sense terms of checking all those boxes. I was just going to ask an additional question on some of the comments that he made. It jumped out to us that he proposed this four-point approach to “building a new Middle East security architecture.” And I just wanted to get your thoughts on that.

Eric: So that speaks to what I was talking about, how they are concerned about being marginalized in the post-war dynamic. They want to try and have some space in that. I find it hard to believe that anybody in the region will take them seriously on this, that they don’t look to the Chinese as a provider of security. They don’t see the Chinese as having any leverage on this. They don’t see the Chinese as using what leverage they do have to exert changes. That’s just not the way the Chinese operate. And I also would argue, and I think I’m channeling now a lot of the great Middle East scholars and West Asia scholars that we talk to who say that China’s leverage in these regions is significantly less than most people actually think.

They really don’t have a lot of leverage because none of these countries are going to make national security considerations based on Chinese input on trade. When it comes to national security, that’s above and beyond everything else. So, I don’t think the Chinese actually have a lot of leverage, but they want to be seen as somebody having a role in what comes after this. Now, there may be a tremendous opportunity for the Chinese in the Gulf at the end of this. We are looking at a scenario where a lot of scholars are forecasting that the era of U.S. permanent military presence in the Gulf states may be coming to an end.

And that has been a main priority for the Chinese is to see a retrenchment of U.S. military presence around the world, not just in the Western Pacific, but also in places like the Gulf. Now, the Chinese may not be happy with what comes out of that. They’ve been freeloading off U.S. security for decades to benefit from those supply lines that made oil pass through those regions for a long time without them having to worry about the transit of that energy. So, we don’t know what comes after this. So, it’s not a guarantee that the Chinese win just because the U.S. has lost.

Andrew: Well, that’s what I was going to ask is I want you to clarify that point a little bit, because I think a lot of people hear that. I kind of it was my initial instinct is, “Oh, they want the U.S. to pull back so they can go in and provide the security.” But it’s not that at all. Yeah.

Eric: No, absolutely not. 100% you are not going to see… First of all, the Chinese have a foundational philosophy. It’s back to the Zhou Enlai era of not putting bases in foreign territory. Djibouti was the exception to that. They are showing some flexibility on that. Again, is the Ream Naval Base in Cambodia a base for the Chinese? Is it not? There’s a little bit of both. We don’t know. But there is a lot of resistance within the body politic in China for a large basing presence around the world because it would make them look like freaking hypocrites for them accusing the United States of having a global military presence around the world.

So, I mean, for 10 years, the Pentagon has been putting in their annual report that the Chinese are looking to put bases around the world. And yet, beyond Djibouti, we haven’t seen it. Djibouti was a really exceptional case because of its just incredible strategic location at the mouth of the Gulf of Aden and in Africa and all the different, and right near the Red Sea. And because of the presence of so many other foreign bases, it gave the Chinese some cover.

Whereas you’re not going to see a military base in the Emirates or in Qatar. There’s no evidence that that’s going to happen. And I know, I can imagine some of your listeners right now are rolling their eyes and being like, you know, “Eric is so naive. He doesn’t get it.” And all I just say is decades now have gone by with people forecasting that this is going to happen and it hasn’t happened. That doesn’t mean they’re not going to project security. There’s different ways of doing this today, but they’re not going to follow our way of doing things. That much we know. And we’ve seen that now over the past 40 years of China’s evolution to where it is today.

Andrew: Yeah, I fully agree with you that that is not their intention. The one caveat is I don’t think it’s them potentially looking like hypocrites that will keep them from doing it. I’m sure they’re perfectly happy to look like it.

Eric: I think they can get over it. They have no problem getting over hypocrites. It’s just also you have to understand on a basing thing, and this is why I get into so many fights on social media and folks in the Pentagon who are convinced that the Chinese want to put a base in West Africa. And just let’s go through the logic of this very quickly. And this could be anywhere in the world.

To have a base, you need a supply chain that can service that base. You need to power that base. You need to protect that base. It would be so easy in the event of a conflict for the U.S. to cut off that base. Okay? Just to cut off the power to that base, to cut off the food supplies in the base. So the U.S. is able to do it because it’s got this massive ecosystem that allows it to be able to supply these bases. It’s got the logistics capability to do it. China does not have that capacity. It just doesn’t. For all the logistics prowess that China has in delivering Taobao goods, it does not have that capacity militarily. And it is a truly unique ability of the United States to be able to service these bases.

However, what we have seen in the Gulf shows you the extreme vulnerability that these bases have in modern warfare today in an era of drones. That the Abraham Lincoln was sitting in the Gulf getting food from Diego Garcia because the Bahrain base, where it normally was supposed to get food, is shut down because of Iranian drones. The Chinese can’t be a part of that because they don’t have the capacity to defend or supply foreign bases yet. Maybe that’ll change one day, but I’m dubious, you know.

Andrew: Yeah, no, totally makes sense. And I agree, again, being in D.C., it is an uphill battle to convince people.

Eric: It is. They really convince themselves of these narratives. And it’s just like you get 10 people in a room…

Andrew: It’s projection.

Eric: Who all agree with themselves about it. And that’s why I’m just like…

Andrew: But it’s, “Well, we would do it.” You know what I mean? Like, “So, of course, they’re going to do it.”

Eric: That’s right. And that is faulty logic.

Andrew: Yeah, I agree. Well, let’s pivot now to what’s next on the diplomatic agenda, the BRICS Summit. So, this is in India. This is, I think, this upcoming weekend. It also seems like maybe Xi and Modi are going to have…

Eric: Xi and Modi will have a sideline. That is the expectation. A couple of different things. The reason why Xi is going to this, and wasn’t 100% sure, but then it became clear, next year, China is the rotating chair of the BRICS. And the Chinese are obsessed with the optics of these summits in Beijing. And so, if Xi didn’t go to New Delhi, then Modi would have stayed home from Beijing next year. And that could not have happened. So, under any circumstances, to not have India and Beijing for the China-hosted BRICS summit would have been a non-starter. So, that’s the main reason I think he’s going.

The reason why we had some doubts was because there was a foreign minister’s meeting, a BRICS foreign minister’s meeting, at the same time as the Trump visit. So clearly Wang Yi was next to Xi’s side when he was talking to Trump. But that the Chinese didn’t send Vice President Han Zheng, who, remember, welcomed Trump at the airport, but could have easily gotten onto a plane to stand in for Wang Yi. And Vice President Han does do that. He is a ceremonial vice president, but he has the stature to stand in for a foreign minister at some of these types of events.

Instead, they put the ambassador in, which was diplomatically and protocol wise, really a statement. You know, there’s no coincidence in Chinese protocol politics. Everything is thought through. And that let us who are observers going, huh? And it was a wonder if, are they not taking the BRICS as seriously anymore? Are they not as interested when they didn’t send anybody of higher rank than an ambassador when all the other foreign ministers were there? So that was notable. But then people said, “Well, listen, next year, BRICS is going to be in Beijing. So of course, he’s got to go.”

At the same time of all of this, we’re seeing this real détente happen between India and China that’s really started over the past 18 months. And both sides, remember, if you recall, in early 2020 at the Galwan Valley incident, where dozens of Indians, and again, I mean, the numbers are very imprecise. I’m invariably going to upset some part of your audience. The Chinese say only four of their soldiers were killed. Indians will say there were way more. Let’s just say Indians and Chinese were both killed in the Galwan Valley incident. And it really put relations into a deep, deep freeze for about four to five years.

So much so that Xi and Modi couldn’t even look at each other at the South Africa RICS Summit. And they withdrew their ambassadors. They kicked out journalists. There wrecked flights. This was bad. More importantly, they moved tens of thousands of troops to each sides of the border, heavy artillery, mechanized artillery. In fact, the Indians redeployed off of Pakistan to the line of actual control. And what ended up happening about ‘24, ‘25 is that both sides said, “Crap, this is getting too expensive. We just can’t have this much.” the Chinese need to you know, dedicate military resources into the South China Sea, the East China Sea. They need to dedicate resources to other places. The Indians, obviously, it’s about Pakistan.

And both sides said, “This is ridiculous. We got to back down.” And so, they have started this, this détente, which for the most part has really shown signs of progress. Flights are back. Ambassadors are back. Business is starting to pick up. Cultural exchanges are happening. And they’ve pulled back some of troops. Not all, but some of the troops have pulled back. So, that’s all good. In fact, just last week, they had the highest meeting of corps commanders. The top military commanders on both sides of the border met as part of the ongoing conversations. We’ve never seen those two leaders meet.

So, it shows you that there is positive momentum. That being said, the level of distrust and just hate between these two sides is stunning. Just, I mean, go to our YouTube and see the show, the Indian shows, and see how the Chinese comments are like, “These effers, I hate them, I don’t trust them.” And the Indians are like, “I hate the Chinese.” And that distrust is right there under the surface. Som despite all of this kind of wonderful détente and this kumbaya moment and the commanders meeting and, you know, all these different things, boy, the distrust runs very, very deep. And that, of course, goes back to the 1962 border war and disputes over Tibet.

And obviously now what’s happened in Nepal has brought a lot of that back up. Indian media really were quick to jump on the idea that it was Chinese infrastructure building in Tibet that caused this. Again, it’s too early to tell what the causes of this were yet definitively. Nonetheless, you can see how close to the surface the suspicions are. So the meaning between Xi and Modi in summary, in my view, is more important actually than whatever happens at the BRICS.

Andrew: Yeah. Well, that’s also great context in summary. I guess the question for me when it comes to this thaw is like, what do you think the prospects are that it lasts?

Eric: It will last because both have a strategic interest that it should. There is a strategic interest that it gets to a point of sustainability. Are we going to see the Indians pull out of the quad, line up with Xi against Trump? Never. Never, never, never. Despite the hugs in Beijing, remember the famous pictures of the hugs in Beijing? That was a big middle finger to Trump. The Indians simply don’t play politics that way. So, the Indians, again, are a little bit like the Egyptians and a little bit like the Vietnamese where they play all sides and they put money down on red and on black at the casino. So, they both, I think, recognize the limits of what can be done.

The Indians are very, very conscious of the trade imbalance, that they’re not selling very much back to China, but importing quite a bit from China. This is, of course, a concern that everybody has. The Chinese are very conscious and nervous about the Indians kind of being, remember that China Plus One? Well, they’re worried about India being the plus one. So China put exit bans on technical engineers. They are not transferring over some of the advanced technology for phones manufacturing and for auto manufacturing. They’re worried about India because of the scale of what India can produce, that it could be an alternative.

Apple has moved a significant portion of its manufacturing out of China to India for sale in the U.S. and other places. That is something that is of deep concern to the Chinese. Remember, the Indians and the Chinese compete for influence in the Indian Ocean. I, you know, push back heartily against the U.S. when they talk about the Chinese in the Atlantic. The Chinese have no interest in the Atlantic. The Chinese have deep interest in Indian Ocean supply lanes that take resources and energy from Africa and from West Asia through the Indian Ocean to the Port of Gwadar in Pakistan, to Myanmar, and then around India.

Those sea lanes are strategically essential for the Chinese. And India doesn’t like that. They’re competing in places like Sri Lanka and Bangladesh as well for influence. These are areas. And then, of course, there’s Pakistan. The Chinese have a partnership with Pakistan that is really quite remarkable. 80+ percent of Pakistan’s military hardware today comes from China. It is a real-world showcase for Chinese weaponry and military technology. So, they talked about the… remember the DeepSeek moment? Well, during Operation Sindoor, which was the brief war between India and Pakistan, it was the J-10s and the PL-15 missiles- the J-10 fighter jets and PL-15 air-to-air missiles that were being showcased.

And a lot of people were like, “Wow, this is great. Chinese tech has finally arrived.” We just reported this week that Pakistan has added to its arsenal HQ-17 anti-drone technology to combat the Indians. So, there’s a whole bunch that gets on in this relationship, and it’s very complex. So, we’re literally looking to a point where can we just make it that they don’t dislike each other? It’s like divorced parents with the child. You’re like, “Let’s just be civil to one another. We’re never going to be lovey-dovey. If we can avoid being antagonistic, that’s where I think the sweet spot is.” And that’s where I think they are.

On the BRICS itself, there’s a real cleavage that’s starting to kind of form within the BRICS, more so than the SCO. The SCO is a security-related organization. The BRICS is a much more comprehensive type of group, but you have two blocks that are starting to take shape. Brazil, South Africa, and India don’t want to see the BRICS as an anti-Western block, whereas Russia, China, Iran, all members, do like to see the BRICS as an anti-Western bloc.

And so that is one of the reasons why we’re not really going to see big outcomes out of the BRICS. You’re going to see lots of little incremental announcements. They have an industrial park, you know, sharing agreement. They’ve got media that they do. There’s cultural exchanges. You know, these are all pretty much small-time things in our era, big-time, great-power rivalry politics. The biggest thing we’re going to see out of this one is maybe a BRICS cross-border payment system, which is different than a BRICS currency.

Andrew: Yeah, but it’s not a small thing, actually, potentially.

Eric: That’s not a small thing, but it depends on the mechanics of how that works. The biggest concern for the Indians, and to some extent the Russians, is they don’t want to surrender any monetary sovereignty to the Chinese, which would invariably happen if there was a currency, because a currency would need a central bank. And the largest economy would probably have the largest voting shares in the central bank. And there’s no way that Putin or Modi would ever give that power to the Chinese. So, that’s why Trump is completely idiotic for thinking that there’s a BRICS currency coming.

But maybe a crypto coin back kind of blockchain type of payment system that facilitates non-use of dollar is…

Andrew: Exactly right. That’s what I was going to say.

Eric: … something that could be interesting.

Andrew: Anything that lets these companies increasingly circumvent use of the dollar is high on the agenda, very in vogue, not just in vogue. That’s not strong enough of a word. I mean, these countries don’t want to get caught up in U.S. sanctions, and they’re trying to blunt the power of those.

Eric: Sanctions are one thing, but remember that a lot of these countries, and again, at the beginning of our discussion, I talked about the resentment of the U.S. Remember, a lot of these countries are on the downstream impact of whenever the central bank chief decides to adjust interest rates, that has an immediate impact on the poorest countries and the value of their dollars. And so, they suffer mightily every time the U.S. makes an adjustment to its interest rate and to its monetary policy. And so, they hate that. And a lot of countries, especially after the pandemic, were extremely short of dollars. And that put a huge inflationary pressure on these countries.

And they resent the fact that so much of their monetary policies are out of their control. They’re dependent on this thing that happens in Washington. So, if they can reduce that risk, sanctions is one thing, but just reducing the reliance on the dollar gives them more flexibility. So, this is one of the things the Chinese have been doing aggressively over the past year is doing more of these yuan-based loans, settlement transactions in yuan, and doing more. And a lot of these countries are welcoming that because it doesn’t require them to convert into dollars.

The dollar is still paramount. Until the Saudis decide they want to start trading oil in yuan, which they could do tomorrow, by the way. There’s nothing stopping the Saudis from saying, yeah, the petrodollar is over. It’s the petroyuan now. They don’t because they don’t trust the yuan. They don’t understand the monetary policy. They don’t understand the risks inside with it. So, therefore, they don’t do it. That’s the limitation of yuan-based growth on that. But you’re going to see these non-dollar-based transactions go up, and settlement tools like the BRICS payment system, or whatever that is, go up, just the same way we’re seeing more in crypto and blockchain.

Andrew: Totally, yeah. Well, that would be an interesting one to look out for if there’s any actual movement on that out of the BRICS.

Eric: I’d look for an announcement on that. I think that’s coming. We did something on that, and I think there’s going to be a movement towards a payment system. But you saw the Brazilian foreign minister in Singapore this week going out of his way to say a BRICS payment system is not de-dollarization, and it’s not a BRICS currency. So, they’re just really trying to placate the Americans who are obviously very sensitive about this. And so, we’ll hear a lot of, “No, it’s not this, but we’re doing something.”

Andrew: Interesting. I’ve got one more question for you. Another kind of contextual question on before, if we’ve still got the time to talk a little bit about the AI piece that I know you’ve got a lot of thoughts on.

Eric: Yeah.

Andrew: Just on the diplomacy, someone posited the other day, you know, maybe part of the explanation behind the spate of diplomacy at this time is a year from now, we’re going to have another party Congress. Xi Jinping likely going to go for a fourth term. Do you think there’s any merit to kind of that kind of argument? Is there anything reflected in these meetings about domestic politics in China?

Eric: Not that I’m seeing, no. Yeah, I don’t see anything related to the upcoming party congress in any of the rhetoric or even some of the coded language that they use that you have to interpret. No, I think that this moment right now is very much focused on the U.S. and focused on great power competition and focused on making sure China has a space that it wants. That whatever is happening now, change is not seen in 100 years, right? That they are able to shape the direction of whatever comes next. That’s, I think, the focus less than domestic Chinese politics. I think most people outside of China have a very, very poor understanding of what happens domestically in China.

So, I think if they were bringing that dynamic into their diplomacy, it would probably go over most people’s heads. There’s just not the level of China competency to have that level of sophistication to understand that.

Andrew: Yeah, no, I tend to agree with you. And I thought that the argument, I was a little skeptical of the argument when it was made, but I just wanted to check it with you.

Eric: I bet you that was made by a Chinese domestic policy analyst who overstates the importance of domestic politics.

Andrew: Of what they did, yeah.

Eric: I would be surprised if anybody on the outside would think that. Now, there are things like dual circulation and these community for common destiny, these kind of umbrella statements that both the Party, Qiushi, and Xi will kind of use as architecture language to better understand. But it takes people like Kevin Rudd to then explain that to the rest of the world. The Chinese do an absolutely horrific job of explaining this to the rest of the world. They talk about community for common destiny or dual circulation as if everybody understands what it is. Almost nobody does.

So, that’s the only thing I would look for in the next party Congress is there going to be another architecture type of language that shapes Chinese thinking that will then impact their diplomacy. But typically, that comes out either in the run-up to the Congress or it comes out at the Congress itself. So, just for example, like we saw in the run-up to the latest five-year plan that was released at the two sessions was Qiushi, nine months before, publishes an article talking about how they’re going to hold the entire value chain and low-end manufacturing is going to be important.

Xi then comes out and says and articulates that. That has huge ramifications for the Global South. I mean, just massive ramifications, but most people don’t understand that because they don’t read Qiushi and they’re not following Xi’s speeches. But when China says it wants to hold the bottom of the manufacturing ecosystem value chain, that means that developing countries traditionally who would move up into that space now can’t.

Andrew: 100%.

Eric: So that’s where domestic politics are important to follow. But again, there’s not a lot of China literacy in the world today.

Andrew: Yeah. Well, that’s a whole nother podcast. I’d love to talk to you about the changing development model and how that’s going to impact the global south. I want to touch on the other piece of you said, again, changes unseen in a century. I mean, one of those changes is according to China, the rise of China and the relative decline in the West. Another one is the rise of AI and the absolute breakneck speed of technological innovation. And I know you’ve got a lot of observations around what China is doing in that space, what Chinese companies are doing that you think particularly is going to potentially cause big challenges or present significant competition to U.S. AI companies in terms of deployment in the global south. What do you see?

Eric: If the first China shock was what, the early 2000s and the Walmart China shock where all the manufacturing moved out of the U.S. to make the stuff we buy at Target and Walmart, and the second China shock is new energy and cars, the third China shock, of course, is going to be AI. And what I don’t think is appreciated as much as it should. and by the way, Scott Galloway on the Pivot Podcast, I mean, he’s on this, he gets it right away. And he sees what I see out here, that, yeah, OpenAI, Meta, you know, and Anthropic, they are going to be the Apple, and they’re going to capture 90% of the profits in the market, but they’re going to have 10% of the market share.

And 90% is going to go to Android. And that Android is going to be equivalent in the AI world is Moonshot, or Kimi, and DeepSeek, and Qwen and the others. So, you’re seeing the uptick, even in sovereign AIs, which I think is very funny, that countries are adopting Chinese open source, open weight models into their sovereign AIs. And I wrote an article when Kimi came out and Moonshot kind of came out with this moment. And I said, I gave five reasons why it’s so appealing to global South countries. You’ll appreciate this because you were talking about sanctions.

But number one, remember, there is jurisprudence. There’s law, precedent that the United States said that if data passes through U.S.

servers, that is subject to U.S. jurisdiction. That was overturned, if my understanding is correct. But the fact that it happened, and this was a case involving Ireland where data was passing through a Microsoft server in Ireland, and the U.S. said, “Nope, that’s our jurisdiction because it’s an American company.” You know what? If you’re sitting in many parts of the world, you’re like, “Holy crap, I do not want the FBI or the Justice Department in my business.” So, there’s a sovereignty issue. There is the cost issue, obviously.

Most people focus on the cost issue. A lot of people will tell you that the cost, sure, closed networks from OpenAI and Anthropic may be more expensive, but when you’re getting an open-weight, open-source model, you’re still going to need a lot of support to customize it, support it, to defend it, and all these things. So, it’s not free. If you’re a bank in Vietnam and you’re building AI tools, you’re going to do basically what you did with Linux, where you’re going to get Linux as an open-source code, and then you’re going to hire Red Hat, and you’re going to hire all these companies to be able to service it.

This is where the Chinese are going to make their money. They’re not going to make their money by selling the code. The code is the razor blade. No, the code is the razor. They’re going to sell the razor blades. So, all of a sudden you’re going to get free tokens, but Huawei servers, Huawei support, Huawei engineers, Huawei protection, Huawei updates- that’s where the money’s going to be made. So, on the AI itself, yes, are the Chinese three months behind, six months behind? I don’t think it matters. I think that’s the wrong way of looking at it. And again, people keep talking about a race. A race implies there’s a finish. We have no finish in this thing. Okay?

So, success is going to be defined in lots of different ways. Another issue here, and this is a really important one, is that if we look at the seven largest AI companies in the U.S., six are not profitable, and the seventh is profitable only because it’s selling or leasing out data center space to the other six. This was predicated. The whole model for open AI going into so much debt the way they have, was predicated in some ways on a Google model. Here in Southeast Asia, everybody buys Google ads, everybody buys Facebook ads. They had a truly global market and they extracted trillions of dollars of wealth from this global exposure.

Now, if you have Chinese AI, I don’t need to buy OpenAI. I can buy much cheaper alternatives. So, one has to wonder if this is the concern that Scott Galloway keeps talking about, and I share his concern, is that if the Chinese are going to completely undermine the entire premise of what the OpenAI and Anthropic and all these companies who’ve leveraged up into massive amounts of debt, they’re never going to be able to pay it off because they’re not going to get Vietnamese and Kenyans and South Africans to buy their service the way that they bought Facebook and Google, okay? Because the Chinese are there. So that’s another, you know, of my list of five things, and I’ll give you one more, you know.

So, obviously having a closed network without any access to the U.S. is really an important selling point. And the customization is an important selling point. But the security is another important selling point. Remember that the United States will accuse the Chinese of having back doors. Everything runs through the CCP. If you’re sitting in many parts of the global South, let me go back to the first part of my conversation— the depth of resentment that’s in these parts of the world for the West cannot be overstated. They don’t trust the Americans any more than they trust the Chinese. Okay? So, this whole idea that the Chinese tech is somehow less secure is not something that is selling in many parts of the developing world where they look at the U.S. without a lot of credibility on this front.

Andrew: Right. Yeah. That’s a good point. Very good point. And there’s a bunch of different threads there in terms of kind of how this plays out in the competition between U.S. and China. I mean, one point you made was, you know, the characterization of a race doesn’t make sense. I totally agree. And we talk a lot, Kendra, one of my business partners who runs our tech practice and all of our kind of tech-related internal aspects of our company, which includes our use of LLMs, just talks about how we don’t need, for most of the stuff we do, a cutting edge, we don’t need an AGI, you know, adjacent AI capability.

Eric: And neither does a bank in Ho Chi Minh City, by the way.

Andrew: Exactly right.

Eric: And so that’s why Scott Galloway says they’re making a Mercedes when a Toyota or a Hyundai will do fine.

Andrew: Exactly right.

Eric: And again, the Chinese, are they going to make money off the AI? Probably not. I mean, and Kai-Fu Lee was just on a Bloomberg podcast and said the same thing. But the services around the AI are going to be the areas that they make a poop ton of money. And that’s also going to be very empowering for local businesses around the world who, just the same way Linux produced huge quantities of service companies in every part of the world, I think you’re going to see popping up in Nigeria, popping up in Nairobi, all these different companies that are going to take Chinese AI and do amazingly innovative things with it. And they are going to profit from it. That is going to build huge quantities of goodwill for the Chinese.

The last point that I make on this is that you’re going to see much more Chinese out into the product level. So, a Chinese AI will be at the product level, in the cars, in the phones, in the devices. Those are going to be things that people will use in the Global South much more than they’ll use an OpenAI or a Kimi, you know, LLM. So, I think that’s going to be another way that people in the bottom four billion will engage AI is through the product. And so, we’ll see, for example, phones that are better optimized for darker complexions.

We’re going to see better recommendation engines in different languages, in Hausa, in Igbo, in Swahili, and other things that the AI will be able to do. And that’s going to be something very important. That’s going to be a space that the Americans are not going to pay attention to at all. And so you’ll see Chinese AI move into those spaces much more aggressively too because of the open-weight, open-source dynamic that makes it possible to do that.

Andrew: Totally. Another kind of related issue that you talked about, the Google model. I forget who I was hearing say this, but I thought it was a smart point. They were arguing that the AI companies are making the mistakes that some early SaaS companies made, which is to understand that consumers, by and large, are not going to pay for online tools. And yes, there are a lot of people who pay 18 bucks, 20 bucks a month, or whatever it is, for OpenAI, for ChatGPT, and for Claude. But the Google model was to keep everything free and sell the ads. And to know that B2C is not the path to nirvana: basically, you get as many users as you can, and then the users basically become the product and then you sell ads.

And so, it also strikes me as two things. One, a strategic mistake that maybe these companies are making because it’s another way they’re shutting off revenue streams from a bunch of different countries, including Global South countries. But I wonder if the Chinese will figure that out.

Eric: Well, so it was never about consumers with AI. It’s always about enterprises where the big money was. And the key thing to remember is that-

Andrew: No, that’s the point. That’s exactly the point. Yeah.

Eric: Yeah. And Bloomberg has done quite a bit of coverage on this, as well as the New York Times just did a really big spread on Chinese AI in Africa. And one of the things that we’re hearing, again, is the sales distribution channels for Chinese AI is not going to be a moonshot sales team going to knock on every door. They’re going to sell it through the existing hardware distributors who have already a massive presence across these countries. ZTE, Huawei, go down the list, Transsion, all the phone companies. They’re going to start bundling Chinese AI products into their sales channels. So ,I think that you’re going to see a lot more distribution. Again, the AI, that’s not the product. The product is the services on top of the AI. And that’s going to be where I think the money comes in for it.

And the Chinese already have a formidable presence in these countries because they’ve got distribution and sales channels set up everywhere to sell hardware that they’ve been selling already, not to mention the auto companies now that are setting up everywhere. And they’re going to have sales channels. Again, are they going to sell you a moonshot subscription with your car?

No.

But are they going to sell to the auto dealer networks in South Africa a package of software options that can better help you target customers?

Yes.

Do you know what I mean?

Andrew: Yeah.

Eric: So, there’s all these kind of B2B things that I think the Chinese are already well positioned to take care of. Think about it in the mining industry. We’re seeing AI now, you know, facilitate so much in terms of the mining industry. Chinese mining companies are already so present there. Again, I see that’s where I think it’s going to play out. And we don’t have strengths there. U.S. mining companies are not strong. U.S. infrastructure companies are not strong. U.S. technology companies and consumer tech are not strong other than Apple. So, how is Meta going to sell this stuff to a bank in Vietnam? I don’t know. I mean, we’ll see how it shapes, but I’m not as optimistic on that. And I tend to follow Scott Galloway and Kai-Fu Lee on these things.

Andrew: Yeah. Well, and another point relatedly that, again, Kendra has made, which speaks to this idea that you don’t need the cutting-edge model for everything is, you know, her argument is right now everybody’s trying to figure out what the new tool is. People are sort of jumping from platform to platform, AI company to AI company for different use cases because everything’s changing so quickly and the tools are getting to the place where you can actually use them for different things. But pretty soon, people are just settle in, they’re going to have their setup, their AI setup, their various apps that they use for different things, and they’re going to be kind of set in their ways.

And it’s not going to be like every few weeks or every month or whatever, I change from this to that. And so, it becomes, if the Chinese get in early in these countries, and once people kind of stop, once they’ve adopted and they’ve kind of got their setups, if China’s the first mover there, it will give them potentially an enduring advantage. Do you agree with that?

Eric: Yeah, and then software’s a service. So, the updates will come through the service. And again, you can’t keep upgrading your systems, big upgrades in the systems. One last point on this that I think is important. Again, I go back to what I said earlier about both and. And again, good hygiene in a mobile telecom tech stack is to have some Huawei, some Cisco, some, you know, back in the day, Nortel, Ericsson. You don’t want all from one system because if there’s a virus or if there’s an outage or if there’s a problem, your whole system goes down.

So, you will see probably some diversification in the big companies. The big multinational banks are probably going to have some Chinese and some Western AIs that come in there. And by the way, let’s not discount the Europeans. Lovable is there. Mistral is also there. Mistral, in many respects, is positioning itself, that’s the French AI, as a B2B kind of solution provider. And they’ll be niche. And I guess the important thing to remember is that this is not only an American play. And I think we in the U.S., I am shocked in the U.S. by how few people, even in Silicon Valley, and I live, you know, my U.S. home is in Berkeley, and how little people know about Chinese AI in places like Silicon Valley.

It’s really quite remarkable. And they know the headline. DeepSeek, yeah. Kimi, yeah. Three months behind, yeah. But beyond that, they really don’t know very much. And that is, I think, quite stunning to me. We’re going to see the emergence of other AIs too that are going to be either industry-specific, culture-specific. So, again, they’re developing fascinating LLMs in Nigeria to preserve Nigerian languages because they’re concerned that as the English-dominant LLMs start to kind of take over the world that it just crushes dialects and crushes languages.

That’s really interesting. So we’re not going to see this kind of simple world of China and the U.S. I think right now that’s where we are. But in 10 years, I think it’s going to be far more fragmented than what it is today.

Andrew: Yeah, no, I was thinking about that the other day. I mean, obviously, everyone just assumes that the AI companies that are leading the world now, whether they’re Chinese or U.S., are going to be the ones that outlast. But this is the kind of world where a competitor can come out of nowhere, right?

Eric: Yeah, and you and I are old enough to remember the 1990s in the internet and AOL and Netscape and Yahoo. None of them are around today.

Andrew: Exactly right.

Eric: So, I think that in 10 years, it’s a good chance that all of the current players are wiped out from something else that comes along. You know, Andy Grove, the former chairman of Intel, once said that he’s not afraid of, you know, competition from a Fortune 500 company. He’s afraid of a 16-year-old in a garage. And I think that’s…

Andrew: For many reasons.

Eric: For many reasons. But I think that’s where the concern is, is that innovation comes from lots of different places. Nobody expected that DeepSeek would do what it did. I mean, the Americans were so arrogant, you know, that they had years ahead of the Chinese, and that all vaporized. And Ukraine has taught us that they can reset the rules of war. So, everything can be reset now. And so, I think this is a time that we should all be very, very humble.

Andrew: Yeah, I totally agree. Do you have time for one more question?

Eric: Sure. Yeah, let’s do it.

Andrew: All right. So, last thing, which is coming up. I know you’ve got views on this. U.S., China, Xi coming to Washington. You know, the normal question people ask is, what do you expect? But I want to ask you really just kind of how do you think that meeting and that relationship at this point is viewed from where you sit, Ho Chi Minh and other Global South countries?

Eric: Yeah. The thing that people, I think, want more than anything is stability. That is what has so unnerved so many of these countries is that, you know, the old saying that when the elephants fight, it’s the grass that suffers. And in this case, the grass is Southeast Asia, Africa, Latin America and whatnot. And we see this playing out in Latin America right now. Marco Rubio is on a three-country tour of South America very much to counter China and to push back against China. This is not a space that these countries want to be in.

China is the largest trading country for most of these countries. China is a major source of investment for some of these countries. It’s a very important economic partner, and increasingly a diplomatic partner. They would prefer to have stable relations with both. They would not like to see people like Marco Rubio running around telling them you have to choose us or them. That is not a space that any of them want to be in. Some, like Vietnam and like Kenya, have managed this exceedingly well. Others are struggling to do it. So, when they see some type of stability come back into the U.S.-China relationship, I don’t think anybody believes that this visit is going to do that.

I don’t think that anybody really believes that Trump represents his government when it comes to China. What’s so interesting in Washington today is that Donald Trump has his views on China, and pretty much everybody below Donald Trump, from J.D. Vance down, doesn’t agree with him. And so, there is a sense, I think, that whatever comes out of this is temporary. The Chinese are already indicating that they’re going to buy more wheat, and they’re going to do the typical kind of like, we’re going to make nice, nice for the short term. They’re never going to fulfill Trump’s fantasies of a super mega uber deal.

So, I don’t think the Brazilians are that worried that their soybean market is going to evaporate, again, back to the U.S. I think American farmers made a bet on Trump, and they’ve lost. And the Chinese are never going to come back to buy soy from American farmers in the volumes that they did. Full stop. That is a huge benefit to Argentina and to Brazil. The world has changed from Trump, and it will not go back to the way it was. So, I don’t think people are paying that much attention in the sense of, like, is something big going to come out of this? Are we going to get a start to a type of nuclear treaty with Gorbachev? No.

But it’s a little bit like the India thing — Can we get to a point of sustainability? Can we get to a point where they’re not spitting at each other?

Andrew: Yeah.

Eric: I don’t know if we can, because I don’t think the mood you’re in China, When I’m in China, I was just there a few months ago, it was as toxic there about the U.S. as it is in Washington about China. Like they’re in no mood to placate the Americans any more than the Americans are in any mood to placate the Chinese. One point that I’ll make on this, and I find this really interesting, and I was talking to some high-profile D.C. folks in the think tanks, and they shared the same view on this. I don’t want to say their name because maybe I don’t know if it was in confidence or not.

But when I go to D.C., you hear this kind of parallel universe of like China’s the end-all, be-all evil of everything. I go a lot to Georgia. I was in Ohio. I live in California. I’m going to New Mexico pretty soon. And I find much more moderate views about China outside of D.C. Like, yeah, I don’t like these people, but I’d love to sell them my chicken feet. I’d love to sell them car parts. Silicon Valley would love more investment and more technology and key exchanges. I was at a small college in Ohio, and they said, “We love our Chinese foreign students. They’re fantastic. They bring a lot to our community. They pay full fare. They subsidize local kids.” They’ve never had a problem.

And I think that’s a really important thing to remember in this standoff, is that the people in Washington do not represent the full totality of American views on this. And I say this, by the way, also to people in the global South as well, who don’t always have a full understanding of that. There’s a lot more texture and nuance to American views on China than what’s reflected in mainstream media and what comes out of D.C. And I see that just in everywhere I travel across the U.S.

Andrew: Yeah, that’s a great point. That is a very good point. And we’ll see if those views start to impact kind of the longer-term trajectory of the U.S.-China relationship. I’m hopeful.

Eric: They might.

Andrew: Yeah.

Eric: You might have a pragmatism coming back in the next election and the swing that we’re going to have back. Pragmatism may be the driving force of politics in America, and that may call for a more pragmatic relationship with China. The same dynamics and strategic interest that brought the Indians and the Chinese to a more sustainable, pragmatic relationship might drive the U.S. and China back, that this is not sustainable at its current form. And once the Americans are starting to have an appreciation that if they got into a war the Western Pacific, there’s no guarantee they would win it now, that may also recalculate some of the thinking too.

Andrew: Well, I was going to say, we’ll end on an optimistic note until you added that last little bit.

Eric: Well, hopefully that recalculation will lead to a more pragmatic worldview.

Andrew: Yes. No, that is the optimistic bit. And I like that. I think that’s a good place to leave it because we have covered a lot of ground. Really, this was a lot of fun, Eric. I really appreciate it. And we’re going to make this a regular thing, right?

Eric: Yep. We’re going to do this regularly.

Andrew: Awesome.

Eric: And we’re going to do a lot more between CGSP and Trivium, and looking forward to it.

Andrew: That’s right. yeah.

Eric: So fantastic. And we’ll have you guys on our shows soon too. So looking forward to it.

Andrew: Absolutely. Anytime.

Eric: It was really great to speak with you and I really enjoyed the conversation.

Andrew: Yeah. Well, thanks a bunch for the time. This was amazing, and look forward to doing it again soon and working more with you. And thanks, everybody, for listening. We’ll see you next time, everybody. Bye.

• Fixed asset investment (FAI) has declined across all three of its main components — manufacturing, infrastructure, and real estate — and it’s set to keep dragging on growth through year-end.

• But look beneath the headline numbers, and three very different stories are playing out.

Manufacturing is stuck in a genuine malaise.

• The Iran war pushed up input costs just as an escalating anti-involution campaign was already squeezing margins in sectors from chemicals to building materials.

• Meanwhile, capacity utilization is at the lowest reading on record outside of COVID — and the first year on record in which utilization failed to tick up from its seasonal Q1 low.

• When factories are running this far below capacity, there’s little appetite to build more of it.

Real estate is worse and shows no sign of turning.

• Developer cash reserves fell 20% in H1 — faster than either sales or investment — meaning construction is being strangled by a genuine cash crunch, not just weak demand.

• The cushion that kept construction going through the worst of the crisis — finishing off pre-sold homes — has now largely run out.

• Meanwhile Beijing’s unwillingness to rescue the sector was best demonstrated by Xi Jinping’s recent choice of photo-op — a visit to a Shanghai housing project that didn’t involve any new home purchases.

Infrastructure is the one component we forecast to grow in the second half of the year — but there’s less here than meets the eye.

• On the surface, Beijing’s new “six networks” investment push and a fresh wave of bond issuance look set to push infrastructure investment back into growth territory.

• But investment in H2 2025 was exceptionally weak, meaning infrastructure investment can look meaningfully better this year without genuinely accelerating at all.

• Strip out that base effect, and we see a picture of modest investment stabilization, rather than a genuine investment rebound.

We’ve just published a full breakdown of what’s driving investment in each of these areas, sector-by-sector forecasts through year-end, and the specific policy signals that could change our view.

• It’s available now to subscribers of our China Markets service — along with the rest of our macro, markets, and policy research.

Not yet a subscriber? Start a 30-day free trial to get the full report.

• Or if you’d like to talk through what China Markets covers before diving in, get in touch — we’re always happy to walk you through it.

What you missed

U.S.-China

Xi Jinping is considering bringing a group of “tech, electric vehicle and aerospace” execs on his visit to Washington later this month.

• But the business contingent may be more show than substance, with one SCMP source saying the delegation was “more about optics than concrete deliverables.”

US intelligence agencies issued a joint advisory alleging that Chinese AI companies have systematically extracted capabilities from U.S. frontier models through distillation.

• The document names DeepSeek and Moonshot AI as the worst offenders, and also accuses Alibaba, MiniMax, StepFun, and Z.AI.

The U.S. and China are reportedly preparing a mid-September AI safety dialogue.

• Washington wants labs on both sides to police themselves and share information to head off AI-directed cyberattacks, following July’s Hugging Face breach by rogue AI agents.

Econ and finance

China’s exports grew 25.0% y/y in August, up from 23.9% the previous month, but growth continues to be driven by price rather than volume.

Meanwhile, consumer prices (CPI) rose 0.8% y/y in August, up from a meager 0.5% in July.

• The uptick is mostly due to base effects, as CPI fell 0.4% y/y in August 2025.

Business environment

AmCham Shanghai’s annual China Business Report found that 58% of respondents were optimistic about their five-year outlook in China, up 17 percentage points from last year’s record low.

• Firms are less worried about the U.S.-China relationship, with only 53% citing bilateral tensions as one of their top three challenges – down from 66% in 2025.

Competition from Chinese firms has overtaken U.S.-China tensions as the top challenge for American firms in China for the first time since 2022.

• In an attempt to keep pace with Chinese rivals, half of firms surveyed by AmCham Shanghai plan to raise R&D spending in China, up from a third last year.

Corporates

BYD is reportedly planning to build 70,000 charging stations in China between 2027 and 2028, on top of the 20,000 it plans to have in place by end-2026.

• If true, the size of BYD’s charging network would approach that of China’s entire network of 110,000 gas stations.

Tech

The securities regulator (CSRC) has issued informal “window guidance” to investment banks that raises the bar for humanoid robotics IPOs.

• Private market funding for humanoid robots is showing signs of overheating — a couple dozen humanoid unicorns were minted in H1 2026 alone.

The industrial ministry (MIIT) released its 15th Five-Year Plan for the information and communications industry, covering targets for telecoms, data centers, satellites, and spectrum.

• The plan targets a 6.2x increase in intelligent computing power over the next five years and explicitly calls on officials to “step up efforts to adapt to domestic chips,” indicating an even narrower space for foreign chips in Chinese data centers.

Agriculture and rural affairs

The agriculture ministry (MARA), the Party’s rural policy office, and four other agencies jointly issued a plan to improve financing mechanisms for rural revitalization.

• The plan aims to make rural finance more effective by 2030 by prioritizing rural areas in fiscal budgets, putting rural assets to work, and ensuring investment is coordinated with ag policy priorities and trade settings.

As always, it was a busy week in China.

• Thank goodness Trivium China is here to make sure you don’t miss any of the developments that matter.

To discuss the nature – and limits – of the fragile US-China economic détente, we are joined this week by Evan Medeiros, the Penner Family Chair and Director of Asian Studies at Georgetown University’s School of Foreign Service.

• Evan’s read: The US-China relationship is at an unstable equilibrium, and in for a snapback toward a much more contentious state of play.

In this episode, host Andrew Polk and Trivium colleague Cory Combs sit down with Evan to unpack:

• Why Xi Jinping’s upcoming state visit to Washington, the first in over a decade, may be the one thing still holding the relationship together

• How the trade war became a supply chain war back in April 2025, and why tariffs aren’t the main event anymore

• Why China keeps reaching for chokepoints tied to US national security instead of hitting the broader economy, and what that reveals about Beijing’s actual theory of leverage

• The uncomfortable new front opening up: Beijing increasingly penalizing American companies for the crime of complying with US laws

It’s another great discussion, so enjoy!

Transcript

Andrew Polk: Hi, everybody, and welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network.

I’m your host, Trivium Co-Founder, Andrew Polk, and I’m joined today again by Trivium’s Head of Supply Chain and Critical Minerals Research, Cory Combs, who’s going to co-host with me today because we’ve got a terrific guest… very excited to have him on.

He is the Penner Family Chair and Director of Asian Studies at Georgetown School of Foreign Service and a former senior China and Asia official on the National Security Council under the Obama administration.

It’s Evan Medeiros. Evan, how are you doing?

Evan Medeiros: Good, Andrew. Great to be here.

Andrew: Thanks so much for coming on. I’m really glad to get you on the pod. Been wanting to have you on for a while, so I’m glad we were able to make it happen.

Evan: Yeah, I’m a huge fan of Trivium. Hope everybody continues to read it. It’s the best stuff out there. So, I’m excited to sit down with you and Cory and spin a little yarn this afternoon.

Cory Combs: Cheers.

Andrew: Yeah, well, thank you for the kind words. We certainly appreciate that. Cory, how are you doing today?

Cory: Well, I feel like, you know, I’ve been reading, catching up on the papers I haven’t read of Evan’s and other corresponding research. And it makes me wish I could go back to graduate school and do it properly this time. So, it’s fun to be able to zoom out a little bit and talk about these issues.

Evan: You’re always welcome at Georgetown, Cory. Always welcome. Maybe we’ll give you a friends and family discount.

Cory: Cheers.

Andrew: I love it. I love it. Always be selling. Always be selling.

So, Evan, we are going to talk today about some of the work that you’ve been doing, which is, of course, relevant to our listeners and to our clients — This is around the U.S.-China relationship and kind of how you’ve framed the evolving nature of that competition. We’re going to start with sort of the news of the day, Xi Jinping’s upcoming state visit to D.C., and then we’ll kind of broaden out and talk more about that relationship more generally and some of the economic lawfare that China’s been using to hit back against the U.S. and sort of the nature of that leverage, both from the Chinese side and the U.S. side.

So, going to be a very fascinating conversation. But before we get into it, of course, we have to do the customary vibe check. So, Evan, how’s your vibe today?

Evan: Vibe is good. I would say excited, but anxious. Excited because we’re starting a new school year at Georgetown, teaching my first or giving my first lecture of the year this afternoon. But, anxious because there’s just so much uncertainty in global markets, in geopolitics, and we have this weird U.S.-China summit coming up. We’ll get into it, but it’s hard to see where this takes the relationship.

Andrew: Yeah. I feel like excitement and anxiety increasingly go together in our line of work. So, I think that’s a very inappropriate vibe to be bringing into this conversation, Evan. How about you, Cory? How’s your vibe today?

Cory: Yeah. I mean, I don’t think you can beat that vibe. It seems evergreen right now. So completely agreed. And me personally, that tracks in terms of upcoming travel. I’ll be back in D.C. shortly. A quick trip up to New York as well, and back to LA, where it’s been, you know, I was going to complain about the heat, but it’s been like 92. And for LA, that’s insane. Dry heat here, something we complain about. So, I finally get to complain about the weather briefly, but I’ll be back in the swamp soon, and it’ll probably be a hundred degrees and given. So, looking forward to that.

Andrew: Yeah. Well, it certainly is hot here. So, you’re not going to get any respite in D.C. For my part, I am headed off on Friday to Shanghai to see some of our clients and our colleagues there. So, always excited to get back to China, ready to get back on the road, kick off the fall. So, that kind of energy is what I’m bringing to the podcast today. So, I think we got a good mix here. Some excitement, some anxiety, some ready to get on an airplane from Cory and I. And I know Evan’s on the road a lot. So that’ll suit us well for the rest of the conversation.

Before we get into the content, I quickly also have to do the housekeeping up top. So, just a quick reminder that we’re not just a podcast here. Trivium China is a strategic advisory firm that helps businesses and investors navigate the China policy landscape. That, of course, includes domestic policy in China along a range of areas, tech, autos, minerals— you name it, we do it— but it also includes policy towards China out of Western capitals like D.C., London, Brussels, and others. So, if you need any help on that front, please do reach out to us at hq@triviumchina.com.

We’d love to have a conversation about how we can support your business or your fund. Otherwise, if you want more Trivium content, please check out our website. Again, www.triviumchina.com. We’ve got a bunch of different subscription options in terms of staying on top of Chinese policy intel, whether that be in policy related to the markets, to the tech environment, or just as a general China business person or China watcher, you’ll find the China policy intel option you need on our website for sure.

And then, finally, please do tell your friends and colleagues about Trivium, both about the business and about the podcast. Those word-of-mouth recommendations really, really do help us grow the company and the listenership. So, we really appreciate it. All right. With that, Evan, let’s get into it. You ready?

Evan: Yeah, let’s go.

Andrew: All right. Well, you already teed it up. We’ve got this big trip from Xi Jinping coming to Washington, D.C. on September 24th. I believe this is going to be the first official state visit by a Chinese leader to Washington in more than a decade. We’ll get into some of the bigger context around the relationship and how you see that evolving in a minute. But I just want to start with that piece.

What are you expecting out of this meeting? Are we going to see any significant breakthroughs, any changes to kind of how the two countries deal with each other? Or what are your thoughts on what’s going to happen a few weeks from now?

Evan: Yeah, I think that’s the critical question — What are our expectations? I have to admit, Andrew, I have pretty modest- I would say even low expectations for the meeting because it comes at a time of fragile truce, tactical détente. Pick your adjective and noun. There’s loads of them floating around out there. But the reality is we’re at a highly uncertain period in the relationship because we’re in this period of a commercially driven détente where the leaders are meeting twice this year, maybe upwards of four times.

But yet, below the surface, competition continues to be fairly intense. And you could argue it’s actually even growing greater. The administration likes to use the analogy of water polo. Below the surface, there’s an enormous amount of competing and fighting and kicking going on. So, the summit comes at a moment of this sort of unstable equilibrium. And the Trump administration, because of who they are, they haven’t approached this summit using the typical ways that other American leaders, Republicans and Democrats have.

So, there haven’t been a lot of high-level meetings to prepare for the summit. It’s very unclear what the deliverables are going to be, either geopolitical or commercial. So, I think the most likely outcome of the summit is an extension of the truce that was reached in Busan in the fall of 2025. But even then, that extension of the truce, it could be six months, it could be a year, and I think that’s probably most of what we can expect.

I think from the Chinese perspective, they’re much more focused on limiting downside risks than they are at achieving upside gains. What I’m hearing from the Chinese is that they’re most concerned about ensuring that Xi Jinping is not embarrassed and making sure that he looks good because he has to return to China and quickly prepare for the fifth plenum, which is key politically to the party Congress that will be in the fall of next year. So, I got pretty low expectations.

There might be a few small deliverables related to Chinese purchases of agricultural goods. But again, it’s going to be a lot of implementation of past commitments as opposed to anything substantially or dramatically new.

Andrew: Yeah, I think we would tend to share that view. And related to that, I just wonder how you think about the Busan deal at the moment. Because over the past nine months, I’ve thought, you know, it’s actually provided a pretty decent level of stability. Both sides seem to want to broadly adhere to the deal. Now, the reporting is that both sides seem to want to extend the deal.

But over the past just three, four weeks or so, we’ve seen kind of a barrage of back-and-forth sort of spearheaded by the Federal Communications Commission on the U.S. side, and China hitting back against moves by that entity out of the U.S. And it just has felt to me over the past few weeks like we’re sort of bursting at the seams almost. I don’t know if that’s the right way to say it, or that détente, that agreement is kind of straining as both sides continue to try to find different ways to assert their interests even under that agreement.

Kind of like you said, the water polo example is a great metaphor, right? Calm up top, but still a lot of kicking and jabbing underneath. Do you get the same sense?

Evan: Oh, absolutely. I completely agree, Andrew, because there are two fundamental dynamics at the heart of the U.S.-China relationship. The way I think about them is there are two negotiations. One is the U.S. and China negotiating the threshold of competition. So, we have the Busan truce, but both sides continue to take actions below some undetermined threshold or boundary — the U.S. with its FCC actions, the Chinese in retaliation. And nobody really knows where the threshold or boundary is, but we keep taking actions and the Chinese retaliate.

And I think it’s just inherently unstable. So that’s why my favorite adjective-noun combo for the relationship is an unstable equilibrium, because it’s a détente that’s constantly being stressed. And so, we’re in this situation where both leaders talk about meeting maybe upwards of four times this year. We talk about extending the Busan cruise. We talk about maybe some other deliverables, ag purchases, Boeing planes, etc.

But yet the tech competition is intensifying; it’s expanding, and it’s diversifying. The other negotiation, of course, that’s going on is between the executive and the legislative branch of the U.S. government, which is odd because typically, and I know this from my time in the Obama NSC, most of the intense debates are within the interagency, so within the different parts of the U.S. government.

Right now, the debates appear to be largely between the executive and the legislative, with the Congress debating and discussing passing new pieces of legislation, which would accelerate the tech competition and the tech decoupling. And I think that these two processes are fundamentally unsustainable. And so I think that, and I’ve written about this, that we’re on track for a snapback to a much more competitive rivalrous relationship at some point.

I can’t tell you precisely when that’s going to happen yet. We’ll know more, of course, after the summit. And so, to me, what’s so interesting about the summit process is it’s sort of stress-testing the demand for stability because both sides want stability in the relationship. But the question is, is what costs and risks are they willing to pay to sustain stability?

You know, Trump obviously needs it because we’re at war in Iran and we have economic problems at home. The Chinese need it because they’re entering into a very sensitive, difficult political year in advance of the 21st Party Congress. And of course, they have their own economic problems. And so, it’s in some ways, both sides are trying to figure out, how much can I compete without blowing up this stability? And I don’t think either side really knows where the line is.

And so, all of these interactions, the summit, if Trump goes to APEC, if Xi Jinping reciprocates by coming to the G20 that we’re hosting, we will sort of begin to learn where these boundaries exist and how deep the yearning is for stability in the relationship or whether or not both sides ultimately find the politics and the geopolitics can’t sustain.

Andrew: Yeah, I like the way you have written about this, about the potential for a snapback. And I know you just said you can’t really, in advance, pinpoint exactly sort of what the tipping point for that might be. But can you talk a little bit more? And then I want to bring in Cory on how and if critical minerals might play into that, which I would guess would be potentially a large part of it. But can you just expound on the snapback idea and what you kind of in broad strokes think that looks like?

Evan: Yeah. So, the idea of the snapback is that we move from this current era of tactical détente, unstable equilibrium, to something that looks more like the U.S.-China relationship in 2020 post-COVID. In other words, the relationship is defined much more by acrimony and intense competition, economic competition, military security competition.

And the question is, what will trigger that? So there are both Chinese actions and U.S. actions that could cross this imaginary threshold. And I think both are relevant here. I think on the U.S. side, you could have a situation where, you know, for example, the Chinese provide some assistance to Iran that really alienates the president. Number two, you could have the Chinese miscalculate in one of their export control actions that alienates the White House.

You could have Trump simply come to the conclusion that the Chinese are playing him for time, manipulating him, and he just decides that it’s not worth it anymore. You could have congressionally mandated actions, especially after the midterms, if you see major changes in the House and Senate that could lead to a sort of new political configuration in the United States where either the Congress becomes more active on China or more likely the president feels that he has big political vulnerabilities and decides to go full MAGA on China, not unlike COVID.

So, I think on the U.S. side, there are multiple things. As I said, I think on the Chinese side, there are multiple actions they could take that largely involve just over-cranking that alienates the U.S.

Andrew: Yeah, I share your concern here that there’s going to be a miscalculation and someone’s going to go too far and kick a little too hard under the water, to stick with the water polo metaphor. But Cory, Evan has pointed out that a lot of the back and forth, or the tension on this issue currently, is between the executive branch and potentially the legislative branch if Congress were to take action against China to sort of ramp things up in a way that China would see as abrogating the Busan deal. What do you see as issues that might trip up the relationship? And China is to… yeah, I think the assumption is that China’s ready at any moment to pull the lever again on critical minerals. How do you think they’re thinking about that as a potential reaction?

Cory: Absolutely. I think Beijing has made clear that a lot of options are on the table. It’s also made clear, I think, since probably around May or so this year, that we might be in what I think Evan has rightly characterized as finding the new floor. And earlier this year, kind of up through April this year, it seems like both sides were trying to find the new floor of relationships, or the relations. But since then, I mean, we’ve had a number of actions. They’re so many, but most recently leading to the August 5th retaliations, right?

And so, you have all this willingness to press further and to kind of explore the boundaries, sort of the détente really. And I think it’s clear that Beijing, one, is willing to push back. And two, it’s not trying to unilaterally escalate, right? So, I think it would take a lot to get the rare earths card going back in all of a sudden. It’s possible that negotiations break down. But there’s one case, I guess, where you have the extension of Busan breaks down for some reason. Now, that’s, I think, a tail of risk. We were actually fairly optimistic that some kind of deal will get advanced.

But at the same time, we’re a little less confident in that now than it would have been in, say, March, April, May. Because at that time, you’re looking at this kind of commitment to let’s not break up this brief floor setting that we’ve managed to achieve. Let’s maintain the détente for now. But then over the summer, you’ve seen a lot more of these moves: FCC action, the UFLPA, Uyghur Forced Labor Prevention Act listings from the Department of Homeland Security.

Those are actions that the U.S. took that China immediately responded to in a way that it’s all proportionate in terms of impact, not unilaterally escalatory. But you start pushing on the boundaries, like you said earlier, kind of bursting at the seams, the water polo metaphor, the question is, is there a threshold of which this boundary pushing goes a little too far, and one side or the other kind of blows things up? And this is question and comment.

What I’m concerned about is, Evan, you already mentioned, it’s not quite clear where the thresholds for both sides lie. And my bigger concern is that they move. Some of the thresholds are clear, like don’t embarrass Xi Jinping and stuff like that, like that’s pretty clear. But there’s a lot of thresholds that are far below that. I think they are shifting. And so, does Trump feel he’s getting played? Well, it depends on a lot of things, including things that have nothing to do with China. Does he feel like he’s getting played by other countries and regional blocks like the EU?

And he does tend to kind of take it out when he’s losing somewhere; he’ll take it out somewhere else. All these factors that I think just make it very difficult to predict. I am still optimistic that we won’t see Beijing feel a need to throw a unilateral, well, rare earth controls are back on the table, right? I don’t expect that right now, but there are a variety of other pathways. And so, further decreasing the flow of license approvals, which would cut off exports more broadly than just Japan, that’s on the table right now.

And that’s kind of somewhere between the actions we’ve seen so far, like blacklisting MP materials and USA rare earths, which are notable, but I would say not, you know, catastrophic. Between that and a full rare earth export ban, there’s a lot of middle-ground options that China has. And I just don’t know when exactly. And that’s my question for Evan is, you know, what thresholds do you see? And what do you see moving in the current state?

What does stability look like up through the agreement of a new extension to the Busan agreement? What does that look like?

Evan: One quick caveat before I answer Cory’s excellent question. Keep in mind that when we talk about the boundaries around this unstable equilibrium, this tactical détente, that because this is Trivium, we’re talking about the economic dimensions of it, but let’s not forget there are big geopolitical dimensions. And here, I’m thinking of Taiwan, South China Sea, and Japan as well. I mean, it is notable that since the Busan Agreement and the tactical détente have been reached, the Chinese have actually been quite aggressive and assertive in their claims against the Philippines in the South China Sea, including trying to establish a near-permanent presence in and around Scarborough.

For example, the Chinese on Taiwan have now come much more active to the east of Taiwan using Coast Guard activities, basically trying to assert maritime rights in Taiwan’s littoral in a way that sort of effectively, you know, turns it into territorial waters, right? As opposed to international waters to assert Chinese sovereign rights over the landmass and the sea rights that accord with that. And so, all of that is out there as well, in addition, that I think is very much stress-testing where the floor in the relationship is.

But to get to Cory’s very good question, sort of where do I see the thresholds? What I would say is, number one, I can’t pinpoint the threshold. I don’t think anybody can. That’s the problem. Nobody really knows what action is going to be a step too far. What I would say is that I do believe that 2026 has been a very, very important year in the supply chain competition, export control competition, because it’s a year and kind of pretty substantially built out its architecture.

Some of our listeners may be familiar about an article that Andrew and I wrote about a year ago that sort of told the broad story of the export control architecture from 2018 onward. But in 2026, the state council passed decrees 834, 835, 837, all within 90 days of one another, all done at the state council level, all effective immediately, all of them building out certain rights under the broader infrastructure of the Unreliable Entities List, the Anti-Foreign Sanctions Law, with different and new dimensions layered on.

In 2026, we saw China move to much more actively assert its extraterritorial rights or extraterritorial mechanisms in the application of export controls. In particular, basically, it looks like every entity listing this year bars anyone anywhere from transferring China-origin dual-use items to listed parties, basically asserting jurisdiction over third-country conduct. And it’s, of course, started with Japan, but it’s more than that now. And now we have, you know, China targeting entities like the Responsible Business Alliance in April and the sort of accreditation activities.

They’re now listing MP materials and USA rare earths on some of their control lists, which to me makes export control policy look increasingly like industrial policy. In other words, using export controls to shape supply chain activity of other countries.

So, it feels like 2026 in retrospect will really be a very, very significant year. So, going back to your core question, Cory, I don’t know where the threshold is, but I feel like we’re pretty rapidly stressing wherever that threshold is. And I think the only thing sort of holding all of this up are these leader-level meetings.

And I say that as somebody that has studied and worked on the U.S.-China relationship. This pattern of behavior on both sides, it’s just not sustainable. And imagine if this year finishes with Trump not going to APEC because the losses of the midterm are too bad and he doesn’t feel like he got enough from Xi at the summit, Xi Jinping doesn’t come to the G20 and then we’re sort of off to the races.

Andrew: Well, I hadn’t even really kind of contemplated that sort of quick of a deterioration because I’ve been hoping that this Busan deal and the leader-level meetings would kind of continue to provide a ballast. But that’s a good point. Something trips up those meetings, then you sort of lose the one leg of the stool that’s still hanging on. And one-legged stool, by definition, isn’t very stable to begin with.

But I did want to stay on this idea of the supply chain war. I mean, I think you articulated well this idea that we’ve really morphed. We’ve written about this at Trivium. You and I, Evan, wrote about it a little bit in our piece earlier that, I mean, tariffs aren’t even the main show anymore. This is absolutely a supply chain war. This is a choke point war.

And I guess maybe the question is, I mean, in my view, China sort of shifted the ground onto that playing field. Do you agree with that? One. And secondly, why do you think they did that? Why do you think they did it now? Why is 2026 the year of the supply chain war?

Evan: Well, I mean, they did it in April of 2025, right? And this story is well known to your listeners, right? I mean, we had tariffs that were well above 150%. And the Chinese, I think, said they basically looked around, they broke the glass, and they pulled the fire alarm, so to speak, they pulled the greatest, most significant source of leverage they had, which was rare earths. Now, the U.S. retaliated with its own supply chain and vulnerabilities. These are specific commodities China can only source from the United States.

But I think it was at that point that the trade war really transitioned to a supply chain war. And it was really about both sides trying to reduce their own vulnerabilities and increase sources of leverage. I mean, the good news is, is in 2025, I think both sides in May sort of had walked to the brink of using these cutoffs in critical choke point technologies and materials and walked back and said, we don’t want to go there.

But they had already crossed that threshold. And I think that’s where we are today. I mean, as you guys know well, you write about it so frequently. I mean, the administration is very concerned about the fact that the Chinese are not providing general licenses for the export of rare earth materials. They’re approving individual licenses on a case-by-case basis, which is super slow and super inefficient, which has led to a huge amount of frustration.

And so, I think that the whole issue of the extension of the Busan truce, will it be three months, six months, nine months, 12 months will be tied in part to whether or not the Chinese are willing to accelerate their licensing regime for rare earths. And then, another part of a possible summit package is this whole question of Boeing planes — will China buy Boeing planes? And part of that is held up by the fact that there’s this Chinese requirement for Boeing to sell them a huge supply of spare parts. So, they’re not subject to some kind of choke point cutoff in the future. So, we are very much in a supply chain competition.

I think that’s exactly right. And we should understand it as such. And as a result, basically what’s happening is both sides are sort of racing to reduce vulnerabilities and increase leverage. And the challenge is that there’s a little bit of an asymmetry there between the U.S. and China.

Cory: I’d like to build on that a little bit. I absolutely agree. And I don’t just say it’s a supply chain issue because I’m a supply chain guy. I became a supply chain guy because it’s an issue. So, 100% aligned there. One further point, I’m curious if you’ll agree with this. I think when we shifted from the economic to supply chain conflict, it shifted from commercial and national security grounds. And I think that is the deeper, very fundamental issue here.

For China, the motivation on kind of when they’re looking for asymmetric leverage, right? U.S. tariffs them, they can’t just tariff back and that’s proportional. They needed something else. So they reached, as you say, they broke the glass, they reached out at other tools. And specifically, it has always struck me that nine times out of 10, Beijing has not tried to attack, say, the U.S. economy broadly.

There’s probably a lot of reasons, but at least one is implicit, I think, is that they didn’t think it would move the needle. I don’t think they believed it would change U.S. behavior. I think they believed what would change U.S. behavior is things that would affect national. So, rare earths and tungsten and other things that go to the Pentagon. And I think that message was shown to be basically validated by, certainly the Chinese industrial discourse will suggest it was validated on October 9th when the U.S. kind of backed down.

So, for China, there’s not much of a tension there to kind of use this commercial control to impact national security grounds of the U.S. to secure China’s commercial interests by getting the U.S. to back off. But for the U.S., and you’ve pointed this out, among others, that the U.S., with its tech controls, has actually treated what used to be purely national security matters. Can you use certain chips like Huawei? Can you export certain chips that are essentially banned for national security purposes?

Can you use those national security interests as bargaining chips in what is technically a commercial negotiation? And so, the use of national security as a bargaining chip is something that has concerned many people. So, I think that’s all part and parcel in my head of this shift to supply chain conflict. It’s specifically supply chains for national security interests that are really kind of the center of this discourse. I’m curious if you would align on that and what that means.

Is this an appropriate kind of use in terms of the way that the U.S. has been responding?

Evan: Well, the challenge, I think, Cory, is where’s the line between commercial interests and national security interests, right? I mean, China denies the sale of permanent magnets to American companies making motors for EVs. That doesn’t feel particularly national security. I agree with you that a lot of their export controls have been much more focused on denying rare earths and permanent magnets to defense contractors, but there’s also been a commercial application.

So, I think the Chinese are careful, but I don’t think the line is very clear anymore in a supply chain war between commercial and national security. What I will say is that the Chinese are very careful with the way they sort of apply these controls. In other words, they pay great attention in the extent to which the application of new controls is reciprocal, proportional, and symmetrical.

Because I think the Chinese, as you rightly went out, are often trying to find the sweet spot between imposing costs and not escalating the situation. And I think back to the controls that they adopted in September of 2025 when they applied the Foreign Direct Product rule to rare earth controls. The way that they adopted that was actually phased in a way that was meant to sort of give them time and give both sides breathing space to do what they ultimately did, which was suspend them in Busan. And that suspension is still in place.

So, I do think that the Chinese pay great attention to the way they calibrate the imposition of export controls for punitive purposes, because they’re very attentive to escalating the situation and they want to maintain some degree of escalation control. And they also want to see how much resistance and pushback they get. What I hear a lot these days is a great amount of focus among Chinese on the whole concept of reciprocity. They’re like, basically, when we use the rare earth controls, we demonstrated that we could impose real costs on you. You have a vulnerability.

It’s going to take you a very long time to fix it. That source of leverage for us has sort of leveled the playing field. We’re now equal status with you. So, if you do something, we’re going to retaliate. There’s a new commitment to reciprocity. And I think we’ve seen that play out all summer because every FCC action seems to be met with a Chinese action.

But interestingly, the FCC actions are not met with symmetrical actions, right? I mean, the stuff that the Chinese did most recently on August 5th was all pretty interesting in the sense that it was just a series of sort of four different actions the Chinese took to retaliate, you know, the actions on drones, etc.

Cory: Yeah, I think building up on that, just in terms of finding that line, I think Beijing’s line has been, I mean, very early on and more recently, you look at the early actions on rare earths, and you see them, there’s this conversation of did China of overstep or overreach. And I’d say a lot of that discourse I kind of pushed against. But the one piece where I think that was fair was where they had commercial impacts that they didn’t intend to, they would very quietly try to roll that back.

And so, a good example was with the auto industry you bring up. The auto industry. I mean, Ford shut down their plants early on because they couldn’t get access to material. That hasn’t happened. They reopened. It hasn’t happened since they reopened. And partly it’s because the Chinese are making sure they actually do get those flows because the goal isn’t to shut down Ford. And with the EU, it’s a similar thing. All the older companies, among others, who really were not the intended targets, but obviously were impacted, and Beijing, kind of, trying to do this without losing face or admit faults or anything, of course.

But you start to see things flow in that direction. And now when you hear companies getting licenses rejected, and again, the licenses are applied to the Chinese exporter, but they have to clear their end user, just for the audience’s reference. So, the end users are unable to get that material. Nine times out of 10, the reason listed is we couldn’t prove that you’re not going to end up giving this to Raytheon or someone. And so in that gap is where a lot of companies still get hit.

And so that strikes me as a lot of the intent behind the actual work controls remains really around dual use, national security, that kind of approach. Of course, there are huge commercial impacts, but it seems to be kind of a tolerated collateral damage. But yeah, so that’s one piece. And I think what’s so interesting is the US has used chips, which is also kind of a national interest story, not so much national security in the same sense of, do you have Samarium for this, right? That’s a little bit more direct.

But with chips, it’s a lot about China’s ability to use U.S. chips in military systems and for AI that could be deployed for defensive… all that rationalization. And then to relax those controls, right? I do not ever see China relaxing controls specifically on the dual-use or national security grounds. I don’t ever see them allowing Boeing to get whatever they want. That could go into non-commercial applications. But you do see the U.S. enabling some chips to be sold that originally were argued to be banned under national security grounds. That seems to be an asymmetry to me.

If there’s empirics I’m missing, I’d love to know, but I’m just curious if you see it that way or if you can push back or what that means.

Evan: Well, let’s bring Andrew into the conversation. Andrew, I want to get your sense of sort of these dynamics.

Andrew: Yeah, I mean, I agree with you, Cory, in terms of the asymmetry. I think, in my view, part of the reason that China has done this is because just very fundamentally when it came to the tariff war, they were outgunned, right? Because the U.S. buys more stuff from China than vice versa. And so they, years ago, realized they were going to have to fight an asymmetric war when it came to a tariff war or a trade war. And then as time went on, and their various moves kind of went, I don’t know, not unnoticed, but not really… The Trump administration just didn’t react that strongly to some of the asymmetric moves that China was making.

They sort of ratcheted it up piece by piece until they found an asymmetric weapon in rare earths, as Evan pointed out, that the Trump administration absolutely could not ignore. But on that score, Evan, I wanted to ask you, you know, if you were to give each side a grade, just I’m thinking about the nature of leverage in this competition now and going forward- if you were to give each side a grade, how good do you think China is? How good do you think the U.S. is? Or how good have we been on using our leverage vis-à-vis the other country?

Evan: Yeah, I mean, leverage is a tricky thing because it’s not a mathematical equation. And in part, leverage, you know, depends on the political tolerance of a country and its leadership to withstand pain. So, it’s important to understand that I can sort of give you a balance sheet of leverage, but it’s an inherently political calculation, right? So, if the Chinese can really impose costs on us, but we’re willing to sustain those costs, it’s not really leverage.

But what I would say is at least the events of 2025, Andrew, revealed to me the asymmetrical nature of U.S. and Chinese vulnerabilities and leverage. You know, it basically as of 2025, and I want to highlight that this is meant to be a snapshot. This is not a forecast or projection for the future. But the U.S. vulnerability to China is pretty broad and its leverage is relatively narrow. And, again, we’re only talking about the economic supply chain realm and that affords China certain benefits because the areas where we have vulnerabilities to China are pretty significant.

Right? In other words, China’s leverage over us is in the global supply of critical minerals, rare earths, magnets, and other sectors like, you know, biopharma, etc. And so, the trade war highlighted that the Chinese could pretty substantially impose costs on us. And of course, the Chinese buy lots of our agricultural goods, both grains and animal products. That could be a source of leverage for them as well.

And so, because China is an important part of so many of our supply chains, right now, I think China has a lot of leverage. By contrast, China’s vulnerability to U.S. actions at this moment look relatively narrow. It’s more commodity-specific than sector-specific. You know, we have choke point actions we can take against China — semiconductor design tools, jet engines for commercial airliners, a few other areas that are genuine choke points. And the Chinese know that and they’re trying to reduce those vulnerabilities, especially in the semiconductor supply chain.

One of the difficulties in assessing our leverage is that we do have a wider assortment of tools available to us, but they’re tools that would be so highly disruptive and costly to the global economy, like cutting China off from the dollar system, cutting it off from a swift global payment system, cutting off their access to U.S. capital markets, trying to globalize all of our export controls. These are things that conceivably we could do. The problem is that they’re so highly disruptive and costly to the global economy, they’re really not credible threats in peacetime. They seem like they’re tools that we would use during a conflict.

So, when I think about what the balance of leverage is, you have to think which tools does each side have that can credibly be used. And so, I think right now, because we’re so exposed to so many different supply chains where China plays a critical role, I think we have a lot of vulnerabilities that we need to correct. And I hope the Trump administration is doing that. We know that they’re investing in critical minerals, rare earths and permanent magnets, but there clearly are other areas. So, I think the picture right now doesn’t redound to America’s benefit.

Cory: Yeah, I agree with that. And then I have a follow-up for you on that. And I think you laid out several pieces of the answer, and I’d like to get your take on the whole thing is, what is the end destination of this? What is a stable point after this? And I’m asking specifically in terms of there’s the rare earth’s vulnerabilities, there’s other critical minerals. Beyond that, there are a lot of intermediates, there are new technologies and bio and advanced materials that China’s developing that the U.S. don’t have access to. So, there’s a list of things.

And part of the problem we’ve already seen is that rare earths is not one choke point. There’s like five just within rare earth themselves. And there’s 50 others. It’s a lot of downstream stuff. And you rightly characterized this thing before as it’s kind of broad. Even the seemingly narrow specific choke points, they have broad impacts downstream. Even if not broad economic, like in terms of one… rare earths themselves are not a huge industry. But the stuff that you’re into is massive industry and they all depend on it. So, that’s where the breadth comes out of its specificity.

Let’s say the U.S. somehow manages to clean up a lot of that stuff. There’s always something else is the concern. And so, in the worst case, do we end up just back in an ongoing destructive dance as we patch one vulnerability and the other side finds another one? Or do you think that there’s a level of cost that starts to constrain any growth of spiral? And you mentioned, for example, the U.S. has leverage of the so-called- maybe nuclear options is not the right kind of phrase here, but cutting China out of the dollar system would be just such a dramatic, just absolutely not foreseeable now.

Do you think we run up against a point where that’s the only leverage left and the cost of that additional leverage prevents the cycle sufficiently to kind of constrain it? What do you see as an end point in the kind of mid to near term?

Evan: Cory, it’s a great point, but I don’t think that there’s an end point. I think that this is a new dynamic at the heart of the relationship that is ongoing, in which both sides are constantly going to be trying to identify and eliminate vulnerabilities, at the same time, try to accumulate sources of leverage where possible.

Some leverage is big, some leverage is small, but I think that this just becomes an essential element of this broader thing we call long-term geopolitical strategic competition between the United States and China. I think it’s with us for the long term. And let’s not forget, this dynamic that we’re talking about exists within a broader geopolitical competition as well.

So, when we enter into periods of détente, that affects the cost-benefit calculus of both sides to whether or not they want to probe or test or whatever. But I think these sources of vulnerability and leverage are now a persistent, consistent feature of our long-term competition with China.

Andrew: Yeah, you’ve been really generous with your time, Evan. I know we’ve only got a few minutes left. I wanted to press on the leverage piece just one last time and then some thoughts on how businesses should be thinking about this. But do you fundamentally think, good or bad, I don’t know if those are the right words, but is it in a way positive for China and the U.S. to each have some leverage over each other?

There seems to be a strain of thinking out there that both sides having leverage over each other kind of creates an entanglement, an entwinement, a sort of the whole idea of mutually assured destruction on the economic front, right? That creates some stability because both sides can’t fully extract from each other or at least not without a lot of pain.

But then I guess, you know, that leaves sort of unexplored the counterfactual of, well, what if both sides were able to reduce their vulnerabilities to each other significantly? Might that be a better situation to be in? Where do you come down on kind of leverage as a stabilizing force or not when both sides have it over each other?

Evan: It’s a hard question for me to answer because this is when the part of my brain that’s a former policymaker kicks in, Andrew. And my instinct is that the United States should accumulate as much leverage as possible and then use it to advance American interests. And so that’s my instinct.

What I would say in answer to this question about mutually assured disruption, and I know you and I have talked a lot about this, and I hope we will continue talking about it. I don’t really see it as a stabilizing force. Everybody forgets that mutually assured destruction was not this great source of stability between the nuclear powers. In fact, both sides were constantly trying to exit MAD because they didn’t like the mutual vulnerability associated with it. I mean, there’s lots of books and articles about that.

So, in retrospect, it looks broadly stabilizing, but at the time, both sides were deeply, deeply uncomfortable with it. The other thing, of course, is, you know, mutually assured disruption economically is fundamentally different than nuclear MAD, because with nuclear MAD, the stakes are so high, they’re existential. With mutually assured disruption, the stakes are not existential, right? It’s basically just how much pain is the other person willing to withstand and how might they retaliate in ways that you don’t like.

And so, I think we’re in a world where both sides are going to be, at least at this current moment, much more willing and able to use these sources of vulnerability and leverage in their broader competition. So I don’t think it’s necessarily stabilizing. Sometimes I do wonder whether or not this whole idea of mutually assured disruption is really has mistaken the source of, or the cause of stability in this current period. In other words, it’s the fact that Donald Trump is not a hawk on China, worst kept secret in Washington.

The fact that he secretly wants to have a good relationship with Xi Jinping, that he himself is very committed to leader-level diplomacy. And so both sides sort of put together, kludged together with duct tape, a sequence of events for 2026 that have sort of allowed for this, the current weird moment that we’re in. But that once we’re outside of this leader level diplomacy, the fundamental sources of competition are going to kick back in again.

I don’t really buy the mutually assured disruption aspect or I don’t really buy the mutually assured disruption explanation for the current moment. I think there might be other forces at work that really explain the stability of the moment. But we won’t really know. Let’s do the same podcast in a year. And who was right and who was wrong.

Andrew: For sure. Well, to wrap up then, one last question for you, which is, it’s just, I mean, if you’re right, and I think your analysis here is strong, right? That a snapback is highly likely coming, that we’ve got a current floor, but it’s not sort of the medium-term floor. And that each side is going to be persistently and consistently finding new sources of leverage and trying to maximize that.

I know you talk to businesses a lot as part of your work. Of course, every business is different, but how do business leaders think about, how should they think about this? If just this is the new world where Beijing is going to be looking for leverage over the United States, of course, in the national security realm, but also the commercial realm and vice versa, how on a broad level should companies be navigating that dynamic, which doesn’t seem to be going away anytime soon?

Evan: Well, I think every company, if they haven’t done it, needs to do their own sort of China risk audit. How exposed are they to China, both demand in China as well as supply in China? And on the supply piece, make sure that there aren’t choke-point single-source vulnerabilities. I think even in this day and age after the rough-and-tumble events of 2025 and 2026, there’s still loads of companies that I don’t think fully appreciate how vulnerable they are to disruption.

Number two, I think that American companies, and we haven’t talked about it on this podcast, but I got to bring it up, need to pay attention to this growing Chinese preoccupation with American companies doing business in China who are complying with American laws. So, it’s all captured in the Anti-Foreign Sanctions Law. It’s reiterated in 834 and 835, the new state council regs from this year, where basically I think that there’s a growing appetite in China to start penalizing American companies who are just trying to comply with American laws like the Uyghur Forced Labor Protection Act.

And from my perspective, the Chinese started doing this a little bit earlier this year when it came to companies that were trying to comply with American sanctions on buying Iranian oil. Cory will know the details better than me. And then, of course, this recent action against the RBA, which does these audits relevant to both complying with the Uyghur Forced Labor Protection Act, as well as critical minerals.

And so, I think that to me, that’s a big new vulnerability that companies need to think about because the Chinese basically are going to try and force them to choose. Like you can’t operate in our market and comply with U.S. law. And so, I think determining where those vulnerabilities are is another real challenge for American companies.

Andrew: Yeah.

Cory: Yeah. We work on that a lot, specifically like the potential for compliance trap. And we do, generally, sense that Beijing doesn’t have an overriding interest in kicking out all American investment and business operations, obviously. But at the same time, absolutely, they’re using this as pressure. And if the U.S. is trying to put the U.S. in a position of like, you’re the reason… So, there’s a lot of compliance trap issues that Andrew, I’m sure, has a lot of framing on. But that is, in short, one of the top issues that we’re focused on right now. So, I’m glad you raised that.

Andrew: Yeah, it’s certainly only going to become more complex to be a multinational company trying to navigate this environment. And especially as these dynamics, as you say, Evan, are not going away anytime soon.

Evan: And just to reiterate a point I made earlier, I think it’s important to be mindful that on certain supply chains where the Chinese want to have dominant influence, I think you’re going to begin to see the use of export control policy basically as a proxy for industrial policy, right? They’re going to build alternative supply chains.

Now, I’m not trying to say that they’re reducing their exposure to imported oil as a weapon to target the Western world, but there are ways in which the Chinese, as they build up a greater degree of their own self-reliance and resilience, can, in certain ways, use that to the advantage of their economic policy and industrial policy. And I think we just have to be really frank about how China could sort of weaponize some of these tools. I think it’s a real risk.

Andrew: Absolutely. And we know for certain they will be continuing to sort of look at what the next leverage point is and the next leverage point, not only as you kind of pointed out, because that makes sense from a policymaker’s point of view, it’s what policymakers do, but they basically have said as much in the 15th Five-Year Plan.

And we’re doing a lot of work to kind of figure out what are the next choke points. And so, as soon as the U.S. closes the rare earth choke point, there will be something else that pops up.

Evan: Exactly.

Andrew: Evan, thank you so much for the time today. This has been a really great discussion. There was a ton of other stuff I wanted to get to that we just unfortunately didn’t have time to. But hopefully we can have you on again soon and talk about these issues because, as you said, they’re not going away. You said we can reconvene next year, but hopefully even before that we can try it again.

Evan: Yeah. Look, you guys are great. I’m a huge committed Trivium reader. It’s my favorite thing to read every morning. So, I hope everybody listens to the podcast, signs up, and to be continued. Look forward to keeping in touch with you guys and talking again in the near future.

Andrew: Well, thanks so much.

Cory: Cheers.

Andrew: Can’t ask for a better organic plug than that. So, thanks again for the time today, Evan. And thank you, Cory. And thanks, everybody, for listening. We’ll see you next time, everybody.

Cory: Thanks so much.

Andrew: Bye.

Evan: Thank you.

This week’s US sanctions are the perfect example: On August 20, President Donald Trump’s warned of “TREMENDOUS Economic Consequences” for any country that provides “any type of lifeline to Iran.”

Days later, Treasury Secretary Scott Bessent unveiled “Operation Economic Outcast,” Washington’s plan to cut Iran off from external economic support.

· Bessent announced sanctions on more than 60 entities – including several in mainland China and Hong Kong – accused of supporting Iran’s nuclear and missile programs, cyber operations, and oil-revenue generation.

· He also warned that entities failing to cut ties with Iran risked being frozen out of the dollar-based financial system entirely.

Notably absent from the list, however, were any Chinese oil refineries or banks.

· That’s a telling gap, given these are the institutions facilitating the vast majority of Iran’s oil exports.

Hardly the TREMENDOUS consequences we were expecting.

Washington is concerned that sanctioning major Chinese refineries or banks would lead Beijing to retaliate, reigniting the trade war the two countries have spent considerable political capital trying to wind down.

· Instead, the administration has sanctioned a collection of smaller, more peripheral entities – disguised behind a barrage of aggressive rhetoric – while leaving the institutions that really matter untouched.

The Iran sanctions aren’t an isolated case: Washington’s approach to China in recent months has followed the same script of all bluster, no substance.

· In mid-July, Trump made a televised address accusing China of interfering in the 2020 election. There was no substantive policy follow-up.

· Earlier this month, the White House released a report accusing China of exploiting differential tariff rates to evade US import duties, titled “The Great Transshipment Scam.” But the report’s own proposed remedies amount to little more than AI-assisted customs monitoring.

Beijing appears to have clocked the difference between what’s real and what’s theatre, and is responding with studied indifference.

· China arguably needs less from this relationship right now than the US does. Washington wants Chinese purchases of American agricultural goods and Beijing’s help nudging Iran toward a peace deal, while also pushing China to rein in the alleged industrial overcapacity fuelling its export machine.

· Beijing, for its part, mostly wants the relationship to hold steady long enough for Xi’s visit to the US, now less than four weeks away, to go smoothly and, beyond that, for Washington to stay out of its face.

That asymmetry is shaping Beijing’s entire posture. Rather than responding tit-for-tat to every fresh round of tariffs or provocative rhetoric, Chinese officials appear willing to absorb the noise and wait Washington out – confident that the threats which would actually hurt are precisely the ones Washington has so far declined to make.

The danger is that this equilibrium is more fragile than it looks.

· Strategic patience only works for as long as Beijing judges the costs of waiting to be lower than the costs of acting – and Washington’s next move, on Iran or anything else, could easily tip that calculation.

A relationship held together by one side’s forbearance and the other side’s bluster is not built to last.

· But for now, that is precisely the foundation the world’s most important bilateral relationship is resting on.

Joe Mazur, Head of Geopolitical Research, Trivium China

What you missed

US-China

A “broad understanding” that the Busan trade truce will be extended is taking shape ahead of Xi Jinping’s September visit to the US.

· The Chinese side has reportedly pushed for an extension through the end of Trump’s term, while the US wants another one-year extension.

The US is preparing to impose a 7.5% tariff on Chinese imports due to Beijing’s alleged industrial overcapacity.

· On top of the forced labor tariff imposed in June, the excess capacity tariffs would restore Trump’s duties on China to around 20% – consistent with the trade truce terms agreed in Busan.

Foreign affairs

Xi Jinping met with King Abdullah of Jordan in Beijing on the final day of the king’s week-long state visit.

· Like other powers in the region, Jordan wants deeper ties with China to diversify its sources of investment and trade, while preserving the US security relationship that remains essential to the kingdom’s stability.

Econ and finance

The macro planner’s (NDRC) vice chair Yue Xiuhu convened ministries and companies to work out how to finance the “six networks” infrastructure push.

· The shift from discussing what to build to how to finance it signals that investment in the six networks is set to pick up in the coming months – providing Beijing with a lever to shore up slowing growth.

Corporates

CATL is now the largest shareholder of battery swapping (BS) unicorn Qiyuan Green Power, having acquired an additional 24.9% stake in the company.

· With Beijing offering generous policy support for heavy-duty truck (HDT) electrification, buying into the BS industry leader is a shrewd move for CATL, giving it a sizable customer base and countrywide battery swapping network which would otherwise need to be built from scratch.

Tech

eVTOL (aka “flying cars”) maker EHang withdrew its full-year revenue guidance of RMB 600 million, citing uncertainty around manned commercial flight approvals following a fatal crash in late June.

· Beijing has been aggressively promoting the low-altitude economy as a growth driver, but a single fatal crash has shown how quickly safety concerns can override industrial policy ambitions.

The cyberspace regulator’s (CAC) new plan to support digital enterprises, released August 21, outlined the agency’s regulatory priorities over the next several years.

· In a bid to rebuild trust with digital enterprises in the post-tech crackdown era, the plan commits to standardizing administrative inspections of these firms to reduce disruption to normal operations.

Net zero

The Party Central Committee and State Council general offices jointly released a set of measures governing how local cadres will be punished for causing ecological and environmental damage.

· Notably, officials will remain accountable for misconduct that occurred on their watch even after they retire or move on to other roles – much like the Party’s approach to corruption.

Politics

A massive mudslide on August 26 at Tibet’s Jilong port has left at least three dead and 558 missing in China, with Xi directing the response from Beijing.

· During his nearly 14 years in power, Xi has rarely appeared at the frontline of a disaster, in stark contrast to his predecessors Jiang Zemin and Hu Jintao.

The Party’s anti-corruption watchdog (CCDI) convened an unusual special plenum to appoint two new deputy secretaries, Zhao Shiyong and Zhang Zhong.

· The August meeting was the first stand-alone mid-year CCDI plenum of its kind in at least two decades.

As always, it was a busy week in China.

● Thank goodness Trivium China is here to make sure you don’t miss any of the developments that matter.

· Beijing just released a plan to fix both problems at once.

Our take: “China’s nefarious plan to get its companies to obey overseas laws” is a Foreign Affairs headline just waiting to be written.

On this episode, Trivium China podcast host Andrew Polk sits down with Kendra Schaefer (Head of Tech Policy Research) to unpack:

• Why lumping AI labs, e-commerce platforms, and cybersecurity firms into the single regulatory category of “cyberspace enterprises” is a bigger deal than it sounds

• The story behind AliExpress’s EUR 550 million EU fine, and why Chinese companies keep getting tripped up by rules they don’t fully understand

• One vague line in the CAC’s latest policy doc that might matter most: Beijing says it will “regulate the overseas competitive behavior” of its own tech firms, with zero detail on how

• Why cleaning up Chinese tech companies’ act abroad might get Beijing branded as the bad guy either way

Transcript

Andrew Polk: Hi, everybody, and welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium Co-Founder, Andrew Polk, and today I am joined once again by Trivium’s Head of Tech Policy Research, Kendra Schaefer. Kendra, how’re you doing?

Kendra Schaefer: I’m doing great. How are you?

Andrew: I’m wonderful, especially since I have the opportunity to talk to you about China tech policy. I mean, that’s just what gets me going. I’m only half kidding. Actually, I’m 90% serious. So, anyway, we are going to talk today about this regulation that came out on August 21st. We are recording today on August 25th. And this document came out on the 21st from the Cyber Administration of China.

It’s a 2026 to 2030 action plan aimed at helping Chinese digital companies, everything from SMEs to big platform companies and AI firms, grow stronger and compete internationally.

So there’s a lot in here about supporting firms as they head abroad, but also some pointed language about bringing in some bad behavior once they get there.

So we’re going to unpack all of that with Kendra today and talk about what it signals. But of course, before we get into it, we have to start with the customary vibe check.

Kendra, how’s your vibe today?

Kendra: A little bit overwhelmed, actually. I am going to be on four trips in September. I’m not really sure how that happened, but I’m going to be in D.C. like three times, and then I’m going to go to New York once. That just kind of trip’s just piled on trips, so I’m gearing up for a lot of Amtrak in the next four weeks.

Andrew: Wow. Well, that sounds like a lot of fun. That’s great. My vibe is, I don’t know, like ready for the fall. Our kids are back in school, so it feels like we’re getting back in that whole rhythm of D.C. starting to heat up, not temperature-wise, of course, but activity-wise. Once Labor Day comes and goes, that’s when D.C.’s back at it.

So, kind of getting warmed up over here and excited to talk about this with you today as part of getting back into the rhythm. So, welcome. We also have to quickly do the housekeeping up top. Just a quick reminder, we’re not just a podcast here.

Trivium China is a strategic advisory firm that helps businesses and funds navigate the China policy landscape. That, of course, includes domestic policy in China around a bunch of different issues like tech, which we will talk about today, macro policy, minerals, autos, exports, choke points, industrial policy, you name it, we do it.

It also includes China or policy towards China out of Western capitals like D.C., London, Brussels, and others. So, if you need any help on that front, please reach out to us at hq@triviumchina.com. We’d love the chance to talk about how you can support your business or your fund.

Otherwise, check out our website, again, triviumchina.com, where you can see all of our various subscription options for subscription policy monitoring and policy analysis products that we have there. We’ve got a range of options – free, paid. You’ll definitely find what you need on the site in terms of China policy intelligence.

And finally, please do tell your friends and colleagues about Trivium, both about the company and about the podcast. It really helps us grow our listenership, grow the business. Really cannot stress enough how the word-of-mouth recommendations really help us out a lot. They go a long way to building trust with potential new clients and new listeners. So, help us out and tell your friends and colleagues about us. All right, let’s get into it. Kendra, are you ready?

Kendra: Yeah, I’m ready. Let’s go.

Andrew: All right. So as I said, the CAC, the China Cyberspace Administration, released a new policy on digital enterprises. The policy is a bird’s-eye view on how the state is thinking about both big tech platforms, AI companies, and smaller tech companies, and how it wants to support those firms and regulate them.

So, a digital enterprise means a social media platform, an e-commerce company, a cybersecurity firm, an AI lab, a software SME, basically any kind of company that builds and sells digital products and services. So, with that intro, straight over to you, Kendra. Why is this policy interesting, or why should it be to our listeners?

Kendra: It’s interesting for a couple of reasons, actually. So, I think the first one is that we haven’t really seen the state lump AI companies into a sort of targetable category with e-commerce platforms and software companies before.

So, I thought it was vaguely interesting that we now have a sort of category.

They’re calling them cyberspace enterprises that policymakers can essentially target. But more important than that, since the tech crackdown ended, I think AI has sucked a lot of the regulatory air out of the room. There hasn’t really been a lot of discourse in the policy space about what the state wants for its digital companies.

And so, this policy gives us a really good overview, right? What kind of regulations are coming out, but what is the state also supporting? And a lot of the things that we’ll see in this policy, I think, are policy trees or trajectories that are threads that our regular listeners are probably pretty familiar with because they’re continuations of policies that have been ongoing for a while.

But there’s a couple of really interesting new things in here. So, I’m excited to do a little overview.

Andrew: All right. Well, let’s jump into the overview. Give us the overview of what’s in there, what’s interesting?

Kendra: All right. Well, actually, before I talk about the interesting stuff, let me talk about the not-so-interesting stuff. And I say it’s not interesting because-

Andrew: Great place to start; the not interesting stuff.

Kendra: Yeah, always get right in with like a really good, boring headline and get everybody really drowsy before we get into the fun part. But no, I think our regular listeners will remember a lot of this or have been tracking a lot of this for a few years, right? The state still wants Chinese companies, Chinese tech companies to invest more in basic research, particularly in strategic technologies. Those are the obvious ones — AI, quantum, blockchain, etc.

And they also want tech companies to participate in some of these national science and technology projects. So that means getting in the room with researchers, with universities, and really starting to kind of push the frontier forward on some of those emerging technology fields. They don’t want there to be a big separation between enterprises and academia.

They’re trying to sort of close that gap. So again, that’s something we’ve heard of for a long time.

They also want tech companies to digitize traditional industries like manufacturing and agricultural production. And that idea that the cyberspace companies should be contributing to the digitization and upgrading of traditional sort of dinosaur industries is another thread that we’ve seen in, for example, in the recent AI Plus policy and in several other tech policies in recent years. There were also some very familiar refrains on platform regulation.

It’s kind of funny that the state has been trying to crack down on some of these problems in the platform economy for many years now and is still sort of pursuing those regulatory pathways. One of them is improving personal information protection, of course. The other one is strengthening anti-monopoly compliance, so making sure that tech companies are adhering to antitrust law.

Eliminating forced exclusivity. And we’ve talked about that in the past during the tech crackdown. Obviously, there was a sort of push to prevent platform companies from forcing on-platform merchants from only listing on one platform, for example, through various nefarious contracting methodologies.

So, forced exclusivity elimination. Eliminating excessive consumer subsidies and involution-style competition. So, in other words, I mean, I think we’ve talked about that a lot on the podcast, right? Trying to crack down on this idea of, or this competitive mechanism whereby Chinese companies just try to drive each other out of business in some kind of war of attrition by holding each other’s head into the water until your competitor runs out of money, until they don’t want to see that anymore.

And then they also want to reduce unreasonable or obfuscated platform fees, reduce telecommunications fraud, improve AI governance. So, all of those things are sort of, again, regulatory trajectories that haven’t changed. So, even though we’ve already generally got a clear picture of where the state is going there, it’s always good to get an overview, right?

It’s like a little bit of putting a pin in the map. Yes, we’re still thinking about these things. Yes, we intend to think about them for the next half-decade. So, those are going to be, you know, those things aren’t ending. We don’t see that regulatory push as being complete. So that’s a good thing to know.

But the most interesting part, I think, of this policy is that it explicitly outlines the state’s intentions to help platform companies and AI firms and this sort of group of cyberspace enterprises compete in international markets. And that’s something we haven’t really seen the state explicitly outlined before.

It’s definitely said that it intends to support Chinese companies going out. It has said that it wants Chinese companies to compete internationally, but exactly what the state would do to support that and how the state would support that has not previously been discussed, I think, in this level of detail.

Andrew: Yeah, well, that’s all super helpful. I think you’re right to lay out the domestic stuff first, right? Because they want to continue to push forward their various regulatory priorities over these companies within the China market. And, as you say, you know, a lot of times these high-level documents, they’re not mind-blowing. They’re not a bunch of new stuff, but sort of a reassertion of, hey, this is the top five, top 10 list of things we’re going after.

So, kind of always good to get a reminder that these issues are what are top of mind for regulators domestically. But as you said, that the probably more interesting stuff is what regulators are going to do, policymakers are going to do to sort of grease the wheels for companies to go abroad. So, why don’t you talk to us a little bit about what was in the document in terms of what the state intends to do to support those efforts?

Kendra: There are so many tantalizing hints in here. I think the first one and the most interesting one is that they basically explicitly say that the state will use international fora, like the WTO, like the Belt and Road Initiative, like BRICS, like APEC, like the Shanghai Cooperation Organization, to smooth the pathway for Chinese firms to compete abroad.

And the way that they would do that is by cooperating with foreign countries and regions in areas like digital infrastructure or artificial intelligence or e-government or e-commerce or mobile payments, right? So, these areas where cooperation could basically lay the foundation for Chinese technical solutions to come in and kind of backfill the results of that cooperation.

And that’s something that we have tracked for a long time, suspected for a long time, read between the lines about for a long time. But this policy makes that very explicit that that is part of the state strategy. So, that’s one thing that I thought was kind of interesting.

Secondly, it also lays down a series of measures that regulators are going to take to help Chinese cyberspace enterprises navigate an increasingly hostile international market and an international legal environment.

And some of the things the policy says they’ll do are interesting. One, they’re going to provide what they’re calling an early warning mechanism to ensure that firms can predict and respond to unreasonable trade restrictions imposed by foreign countries. And we know what they probably mean by unreasonable trade restrictions imposed by foreign countries. That would be things like going after, right? TikTok and forcing a divestment or imposing stricter rules on Chinese companies in foreign markets when they’re competing, etc. So, unreasonable trade restrictions imposed by foreign countries.

Two, they’re going to establish overseas compliance guidance centers to help firms understand how to stay legal in foreign markets. And I’ll talk about some examples of why I think that might be important in a minute. And then three, they’re going to set up a case, like a case database of legal disputes that involve internet and information technology enterprises overseas, basically as a method to help corporate lawyers at Chinese companies understand how similar cases usually go and I think to help Chinese technology companies understand what the foreign legal environment looks like when they’re entering into it and where the risks actually are and to sort of prepare in advance for all of that.

Andrew: Yeah, that’s really interesting, that last part of kind of helping Chinese companies protect themselves abroad. I know we wrote about this today separately in our Neopol Daily that the NDRC, the National Development and Reform Commission, also on August 21st, released a draft revision to outbound investment measures.

And basically, the revision requires companies at sort of every level of the overseas investment process to report back to regulators about sort of the dynamics they’re facing on the ground, partly because they don’t want to or they want to keep companies from transferring technology or assets kind of on the back of the whole Meta-Manus thing and transfer of tech outside of China, but also for national security reasons.

And I think even more so, it says investors must flag when overseas holdings face foreign discriminatory or unreasonable measures to which the NDRC can respond by restricting the foreign party’s investment in China or Chinese entities’ dealings with it. And so, I feel like everything you just talked about is very much in line with what the NDRC is saying here, that basically we’re trying to keep Chinese companies from being messed with while they’re overseas or unfairly treated.

And I feel like it’s a little bit of an underappreciated part of the lawfare build-out. We talk about the export controls and the anti-foreign sanctions law and China building up extraterritoriality, but it’s not just about sort of punitive, retaliatory-type measures against foreign companies. It’s also asserting and helping defending Chinese companies’ rights overseas.

Do you kind of agree with that assessment that that’s part of what’s going on here?

Kendra: Oh, for sure. I would say that it’s half of what’s going on or maybe 70 percent of what’s going on. I think the other half of it, I think there’s actually two kind of things they’re tackling. The first is, as you say, the perception that Chinese companies are getting treated unfairly overseas or getting unfairly targeted. And the state wants to kind of help them protect themselves and also have the information necessary to intervene as necessary.

But secondly, there’s so many cases where Chinese companies have entered foreign markets and violated the rules of those markets simply because they’re behaving the way they behave in China. And I think there’s just a sort of lack of understanding about… I mean, if you think about it the same way that you get a foreign MNC that comes into the China market and they don’t know anything about the local government when they first enter that market, they don’t understand the business norms.

They don’t really get the legal environment. Sure, they’ve hired a lot of very smart people, but the decisions that are being made at the headquarters level are not necessarily plugged into the realities on the ground. I mean, we sit in the middle of those kind of issues all the time.

So, there’s a similar thing now with Chinese companies that are going the other way. And so you see things like, actually, the one that I’m probably most intimately familiar with is all of these Chinese e-commerce platforms that have entered the EU in recent years.

And you probably, you know, you know all about this, but just a couple of months ago, the EU Commission sort of fined AliExpress 550 million euros for failing to sort of prevent the sale of illegal goods on their platforms. There was also a big fine levied against TAMU, I think 200 million euros, right? I think that was violations of the Digital Services Act or Product Safety Act or something like that.

And we actually did a big research project on that at one point. And one of our key findings was, I mean, I think the assumption by EU policymakers was that those platforms were going into that market like with total disregard for local law. And they didn’t really care about local law at all. But the reality of the situation was, I think they were a little bit unfamiliar with the operating environment.

It was partly that. And they were simply behaving. I mean, I’m wildly oversimplifying a very complicated issue. But part of it is that they were just behaving exactly the way you would behave in China; when a regulator knocks on your door in China and says, “Hey, you need to fix XYZ,” you pay a bunch of lip service and they’re going to go away, and then they’ll come back and tell you to knock it off, and then they’ll go away and then they’ll come back and tell you to knock it off. And surely, you’ll be able to sort it out at some point.

But the entire sort of legal and compliance environment is really different. And all these sort of e-commerce companies got caught up in that to some extent. Now, there were lots of other things going on. They were selling unsafe goods into those countries, and they failed to stem the tide of those services. I think those fines were probably quite justified.

And in fact, I would say that the state, Beijing, knows that those fines were justified. They know those fines were justified because the EU talked to them about some of those; they were very provable, obvious issues. And the EU talked to Beijing multiple times about what was going on and Beijing couldn’t fix it. And the platform struggled to fix it. And so, you’ve got two situations, right? One is, as you say, companies go abroad and because they’re Chinese companies, they’re under additional scrutiny.

They’re more concerned about data collection maybe than there would be of another company from the same size from a different country. They get sort of targeted for exclusionary trade treatment. They feel that that’s unfair, and Beijing wants to step in. But the other half of it is those companies go into those foreign markets, Beijing knows they’re violating the rules, and they just get sort of caught up. They give Beijing a bad name, essentially. They get sort of caught up in, right?

Andrew: Yeah, that’s kind of a tough one to untether — when are Chinese companies being unfairly discriminated against and when are Chinese companies being fairly penalized for acting like Chinese companies — It’s kind of a hair-splitting exercise. But talk to us about that second piece of it in terms of what this document talks about specifically to help companies both protect themselves, but also kind of educate themselves or at least shape up their act in overseas markets.

Kendra: Well, it doesn’t get into extreme detail specifically about what they’re going to do, but how the Chinese government is going to intervene, let’s say, in the second case where you’ve got a situation where a Chinese company is operating abroad, it’s operating illegally or it’s not complying or it’s behaving badly in the market or whatever it is doing. Right? But there’s a little tantalizing clue in this policy. It says “Beijing will regulate the overseas competitive behavior of cyberspace enterprises,” and then didn’t go into detail at all.

And that is very interesting to me because they have largely not done that. There are a couple of mechanisms by which they might regulate the overseas behavior. Well, maybe they might regulate the overseas behavior of Chinese companies abroad, but there really hasn’t been a push or any mechanism by which a Chinese regulator would pull a Chinese tech company into a room and say, “Hey, we just got a complaint from the EU. What are you doing?” Right.

So, if that means and again, I’m going on four words here, but if that means there’s going to be a more formal or aggressive mechanism by which Beijing pushes both of those angles, on the one hand, it becomes much more aggressive about supporting its companies abroad and not taking such a passive non-interventionist approach to, well, you could argue, depending on the case, they’ve been very interventionist, that they weren’t just sort of responding on an ad hoc retaliatory basis to U.S. moves, but rather trying to step in to support companies in a way that they haven’t done before, right?

And then also being very aggressive with companies and very disciplinarian with companies, insisting that if the state is going to lend its support to you, you have to earn that support by trying to be compliant with overseas laws so that you don’t put us in a bad position when we’re in here supporting your outward expansion.

Andrew: Here’s one for you. That’s all very interesting. What do you think the reaction is going to be from EU member countries and the U.S., you know, Western countries generally, to something like this? Because it strikes me, part of this is Beijing trying to say, clean up your act in these other markets, which should be good, right? But part of it’s also saying we’re going to support you. And my guess is that this just gets interpreted by foreign governments as, oh, you know, Beijing’s trying to direct its companies to, I don’t know, overtake our markets. How is this going to be interpreted? Am I being too skeptical there?

Kendra: No, no. I was going to say I have a pretty cynical view of that. I mean, I think the interpretation of this will be Beijing is helping its companies abuse foreign legal environments better, that it’s going to really equip its companies with the knowledge necessary to weasel their way out of various lawsuits and penalties abroad.

And that, of course, depends on what some of those outcomes are. I mean, if regulators see a positive change in the way that some of those companies behave in the market, then maybe they’ll be a little bit more apt to appreciate some of this. But I am skeptical about that as well. I mean, in historical cases, when Chinese companies have changed behavior or the entire Chinese marketplace has changed behavior for the better over time, that rarely does get recognized.

So, even if this does work, I mean, you could take the case of counterfeiting, for example, right? It’s like 20 years ago, counterfeiting was absolutely… I mean, you couldn’t buy a non-counterfeit product. I mean, there was no real product. There was no real Gucci store at all. It was only fakes, right? The entire country and every single store had counterfeit products of every single thing.

And now China is still the primary source of counterfeits globally, but the problem has been significantly reduced over 20 years in very little credit. I mean, nobody’s patting China on the back for that. So, I think that even, you know…

Andrew: I was just going to say, people are going to give me a hard time for saying this, but I can see The Foreign Affairs article now — China’s nefarious plan to get its companies to obey overseas laws.

Kendra: But I could understand somebody having concerns about, well, if China, if they fall under the radar in foreign markets, that means that they will then be free to compete in those markets in a way that is, you know, endangering to local enterprise. So yeah, I think there’s a damned if you do, damned if you don’t situation here.

Andrew: Fair enough, fair enough, fair enough. Although I do think There is a little bit of a tide turning in terms of I’m seeing more and more articles out there by well-respected, particularly academics, but also policy-adjacent people about sort of what we’re losing by cutting off Chinese investment, what we’re losing by cutting off our markets to different Chinese companies like the whole EV story.

So, I think it’s interesting that that conversation is starting to be out there or starting to be had more. And I believe at least that would be a positive conversation to at least for us to consider if, you know, just a reflex of cutting off China from our markets is the right path. But any thoughts on that?

Kendra: Yeah, totally. And I mean, setting aside what policymakers will think of it, or what D.C. will say, or what Brussels will say, there is absolutely great benefit to having Chinese companies or having a pathway to push Chinese companies to abide by things like safety standards. It doesn’t matter what policymakers think about that. If there are less unsafe toys in international markets, that is overall just an objective good.

Andrew: Yeah. Totally. Totally.

Kendra: So I’m all about it. So hopefully we’ll see over time some results in that respect.

Andrew: Yeah. Well, thanks for walking us through all that so far. You just mentioned one other thing that might be worth flagging, which is there was one other thing in here around IPO channels. And that was another kind of element of regulators looking to support these companies. Why don’t you walk us through that and we’ll wrap it up.

Kendra: Yeah, I just had a quick little note I wanted to point out. I mean, one thing this policy says as well is that it’s going to expand exit channels beyond IPOs. Actually, I’m going to read the quote here. “We will expand exit channels beyond IPOs, encourage the development of private equity secondary market, market funds or S funds and M&A funds and further facilitate a virtuous cycle of investment, exit, reinvestment.”

And so, that’s obviously a continuation of this effort that policymakers have had to unblock the IPO pipeline. You’ll remember that about a year ago, IPOs had essentially ground to a halt, and they were gridlocked for about eight months. Approvals were gridlocked for about eight months. Then there was a push to get the IPO pipeline restarted again. That pipeline restarted again a couple of months ago. Now we’re seeing a bunch of major listings.

We saw some chip makers have listed; Unitary listed earlier just a few days ago. And now they’re looking for channels for exit beyond IPOs. So, this reads to me as the next step of that trajectory, right? That they’re not just going to support IPOs as an exit mechanism, but also these other pathways as well.

Andrew: Yeah. And that’s important, obviously, to get investment in these smaller companies, innovative companies. I mean, the capital market ecosystem is one of the great strengths of the U.S. innovation ecosystem. And China’s sort of innovated absent that ecosystem. Dinny and I have talked a lot about how they’re trying to establish more trust in capital markets, have capital markets be more plugged into national industrial policy goals so that individual investors and institutional investors can basically reap the gains of what policymakers expect to be more and more innovative companies going forward.

So, it’ll be interesting to see how that part of it plays out. The financing piece, you always have to get it right. We’re talking about that with the U.S. side in terms of trying to build out our critical minerals industry in the wake of the Chinese export controls. Cory and I talk about that a lot. It’s like, well, yeah, you can say you want all these companies to build out capabilities to process rare earths. But if the money’s not there, you don’t know what the funding mechanisms are. It’s just never going to get it off the ground. So, this is an important one to keep in mind as well.

Kendra: Totally, totally.

Andrew: Well, great. Well, thanks for walking us through that. This has been a nice, tight, short one, but always great to have you on, Kendra. Thanks for giving us some time today.

Kendra: Yeah, great to talk to you as always.

Andrew: Thanks, everybody, for listening. We’ll see you next time. Bye, everybody.

• Two prominent essays published earlier this month – one in the Party’s flagship theoretical journal Qiushi and the other in state media Economic Daily – laid out with unusual clarity how Party leadership is thinking about the country’s economic malaise.

The core message: Getting China out of its economic funk requires broader adoption of advanced technologies across the economy.

The Qiushi article argued that China’s economy is “in a critical period of transition between old and new growth drivers,” adding that:

• “A seamless transition…is impossible; there will inevitably be a gap”

Bridging the gap requires “maximizing the positive effects of new technologies,” and ensuring the benefits aren’t limited to a handful of advanced industries by:

• “Vigorously promoting the penetration and diffusion of new technologies into traditional industries.”

The commentary in Economic Daily made a similar argument, saying China’s “uneven development reflects a profound structural transformation,” and that:

• “There will inevitably be…discomfort along the way”

The way through is to pursue:

• “The diffusion of new technologies across different industrial sectors”

It identified environmental, digital, and AI as the key technologies that should be adopted more broadly.

Read together, the two essays confirm what we have been arguing for months: Beijing is playing the long game.

• That framing helps explain why policymakers haven’t responded to the country’s weak consumption, collapsing property market, and depressed household confidence with a proper demand-side stimulus.

• Because from Beijing’s perspective, weak demand is a short-term price to pay for a much bigger prize – an economy in which advanced technology permeates every sector, from steelmaking to logistics to agriculture, lifting productivity and cementing China’s position at the technological frontier.

The consequences of this strategy are clear:

• First, China’s K-shaped economy – with AI and renewable-energy sectors surging while domestic-facing industries stall – is not going to correct itself any time soon.

• Second, exports, which are the natural outlet for surplus industrial capacity that the domestic economy can’t absorb, will keep surging.

This has significant implications for anyone doing business in or with China.

Companies planning around a domestic consumption rebound need to reset their expectations. Exporters competing with Chinese firms in third markets should expect competition to sharpen. And investors betting on a stimulus-driven turn in Chinese equities should think again.

We help clients think through exactly these kinds of strategic implications.

• Get in touch if you want to work through what Beijing’s long-game strategy means for your business.

Dinny McMahon, Head of Markets Research, Trivium China

What you missed

US-China

The first meaningful volumes of Nvidia H200 chips have entered China, with ByteDance and Tencent receiving about 10,000 in recent weeks.

• This approval comes roughly five weeks out from Xi’s September 24 state visit to Washington, suggesting it’s a gesture to signal that China isn’t totally rejecting Trump’s offerings.

Chinese officials are reportedly frustrated with the Trump administration’s lack of planning for Xi Jinping’s pending visit to the US.

• Per the SCMP’s sources: “No US official or agency had thus far assumed responsibility for organizing the visit.”

Foreign affairs

Swiss President Guy Parmelin and Commerce Minister Wang Wentao announced the two sides had concluded talks on upgrading their 2014 free trade agreement.

• Under the upgraded deal, 99.8% of Swiss exports will enter China duty-free.

Xi Jinping met with Ecuadorian President Daniel Noboa during the latter’s eight-day state visit to China.

• Beijing okayed resumed imports from eight Ecuadorian shrimp plants just ahead of Noboa’s visit.

Econ and finance

A Shenzhen court sentenced Evergrande founder Xu Jiayin to life imprisonment over eight financial-crime charges, including illegal fundraising, financial fraud, and corporate bribery, to which he pleaded guilty in April.

• The court also handed prison terms to 56 other former Evergrande executives and employees involved in the offenses, including Xu’s two sons.

In an August 16 piece co-authored with the China Iron and Steel Association (CISA), top Party journal Qiushi argued that steel must not become a “sunset industry.”

• The article argues steel is foundational for both emerging industries and strategic sectors like shipbuilding and defense, and explicitly warns against US rust belt-style hollowing out.

In July, retail sales of services grew just 3.3%, the slowest rate in two years and the most concerning signal in this month’s macro data.

• Throughout 2026, we have pointed to resilient services spending as evidence that consumer spending still had pockets of strength.

• That argument is becoming harder to sustain – and if services consumption continues to decelerate, the last remaining pillar of China’s consumption story will have crumbled.

Tech

Anhui issued a 2026-2028 action plan to promote AI-powered one-person companies (OPCs) – solo ventures built on large models and agents.

• Hangzhou and Tianjin have both rolled out their own support for solo AI start-ups this year.

Net zero

The macro planner (NDRC) and energy administration (NEA) released the 15th Five-Year Plan (FYP) for oil and gas development, covering 2026 through 2030.

• The plan signals no acceleration in China’s decarbonization drive, instead aiming to increase combined production of oil and gas to 440 million tonnes of oil equivalent, up from ~420 million in 2025.

Politics

The Party gathered in the Great Hall of the People to celebrate the 100th anniversary of the birth of former Party General Secretary Jiang Zemin.

• In a speech, Xi explicitly praised Jiang for voluntarily proposing to give up his leadership positions within the Party.

• But unlike in his eulogy for Jiang in 2022, Xi did not mention how in so doing Jiang cleared the way for a new generation of Party leaders.

As always, it was a busy week in China.

• Thank goodness Trivium China is here to make sure you don’t miss any of the developments that matter.

• Consumption, investment, and property all deteriorated further last month – and the two props that supported the economy in the first half of the year are now fading fast.

On this episode, Trivium China podcast host Andrew Polk sits down with Joe Peissel (Lead Macro Analyst) to unpack:

• How July’s slowdown was broad-based, across nearly every metric that matters – and why growth looks even worse than the headlines suggest

• How the K-shaped economy has spread from output into investment flows, entrenching the divide between booming and struggling sectors

• Why deflation, not inflation, remains the real danger for a heavily indebted economy like China’s – as officials are having to quietly pick their poison

• Why even China’s 24% y/y export growth print obscures a much less impressive reality, once you separate price from volume

Transcript

Andrew Polk: Hi, everybody. Welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium Co-Founder Andrew Polk, and today I’m joined again by Trivium’s Lead Macro Analyst, Joe Peissel. Joe, how are you doing, man?

Joe Peissel: Hey, Andrew. I’m good. Thanks, man. Happy to be here as always.

Andrew: Good to have you. Joe is here today to talk us through China’s July macroeconomic data. The title of his most recent note pretty much says it all. It’s titled A Grim Picture. So, we’ll get into that and talk about why consumption, investment, and property all deteriorated further, why the K-shaped economy is now showing up, not just in output, but investment flows as well, and why the deflationary pressures that eased earlier this year look set to make a comeback.

But, of course, before we get into it, we’ve got to start with the customary vibe check. Joe, how’s your vibe today, man?

Joe: Yeah, my vibe’s good. Well, the thing is, my vibes are closely correlated with the Chinese economy by nature of my job. So, I would summarize my vibes, Andrew, as…

Andrew: Grim?

Joe: Gloomy, yeah, but with pockets of strength. That’s how I’m vibing, man.

Andrew: Yeah, well, you’re going to have some critical distance, man. You can’t let the work become your life. You definitely do not want your life dictated by the whims of the Chinese economy, let me tell you that. I’ve been doing this for a long time, and that was something I learned long ago.

Joe: That’s one of the saddest vibe checks I’ve given, I think.

Andrew: Well, my vibe is pretty mellow. This is the last week of summer. My kids are not in camp. So, we got me working from home, my wife working from home, my kids hanging out. It’s always just a little bit all four of us on top of each other at home all day. It gets a little bit much for everybody. I think our kids are going a little bit stir crazy. They do not want to start school on Monday, but I think it will be good for them. And I certainly am looking forward to it.

Joe: Sounds pretty intense, man.

Andrew: Well, we will not let my mellow state and your gloomy state undercut the energy of this podcast. We will still have a good discussion. So, stick with us, listeners. But of course, before we get into the content, we also have to do the quick housekeeping. So, a quick reminder, we’re not just a podcast here.

Trivium China is a strategic advisory firm that helps businesses and investors navigate the China policy landscape. That, of course, includes domestic policy in China across a range of issues, including macroeconomic policy, which we’ll talk about today. But it also includes policy towards China out of Western capitals like D.C., London, Brussels, and others. So, if you need any help on that front, please reach out to us at hq@triviumchina.com. We’d love to have a conversation about how we can support your business or your fund.

Otherwise, if you’re interested in more Trivium content, go to our website, again, triviumchina.com, to peruse our different subscription options. We’ve got a bunch of different China policy intel options on the site that you can check out, both free and paid, and along several different lines: tech policy, general business policy, China watcher policy, markets, which Joe covers. So, check that out.

You’ll definitely find the China policy intel option you need on the site. And finally, please do tell your friends and colleagues about Trivium, both the business and the podcast. It really helps to grow the company and our listenership. We really, really appreciate the word of mouth recommendations that you all help us out with. So, please continue to do that. It means a lot to us. And finally, if you’ve got a second, leave us a rating on your favorite podcast platform. It really helps to boost the visibility of the pod.

So, with that out of the way, Let’s get into it. You ready, Joe?

Joe: Yeah, I’m ready, Andrew.

Andrew: All right. So, I already started or noted the title of your piece is literally “A Grim Picture.” The July numbers just landed. Talk us through how bad it is and what’s different about this month’s sort of data and the slowdown you’re seeing versus the headwinds that we’ve seen economically all year.

Joe: Sure. Yeah. So yeah, it’s pretty grim. We’ve seen this broad-based slowdown across pretty much every metric that we care about — a slowdown in consumption, continuation of this unprecedented collapse in investment across China’s domestic economy, an acceleration in the property decline. I think there’s actually two things from H1, from the first half of the year, or certainly Q2, the second quarter, that were propping up China’s economy, which is starting to fade, and which make July’s data look even worse than it was earlier this year.

So, one is services consumption. That’s what households spend on services has so far been really resilient, but the growth rate slowed a lot in July, dropped to a two-year low. So, sort of the one final strong point of consumption appears to be waning. And the second area is inflation. There’s been this cost-push inflation from the Iran war. That in and of itself isn’t a good thing.

But what it did do is inflated literally Q2 GDP growth. So, Q2 nominal GDP growth, which incorporates price effects. I mean, it grew at its fastest rate in three years. And while that was mainly just a consequence of cost-push inflation, which we don’t want, there are positive consequences from that high growth. For example, nominal GDP growth is really closely correlated to tax revenues, for example. And we’ve actually seen an increase in government tax revenues. So, there are signs that deflationary pressures are returning, the end of this cost-push inflation, that brings a whole other set of challenges for China’s economy. So, hence the title, it very much was a grim picture.

Andrew: Excellent. Well, thanks for walking us through that. I mean, excellent explanation, not excellent for the Chinese economy, but you get what I mean. Talk to me now about this idea about the K-shape of the trajectory sort of moving beyond output and towards investment flows themselves. First of all, maybe you can kind of remind folks what the K-shape and the output is, and then tell us what you mean by the K-shaped shifting to these investment flows.

Joe: Sure. So the macro note I wrote last month, so that was covering June, and H1 data was creatively named; I think it’s, can you see the K or the K-shaped economy? The idea here, which we really highlighted last month, was China’s economy is diverging. You can see that really clearly if you put it on a graph, all the main economic indicators. A bunch of them are, or a few of them are heading up, very strong growth rates, and a bunch of them are heading down. They’re actually declining, already sluggish growth rates. On a graph, it literally looks like a K, hence the name.

So, what’s been growing strongly so far this year has been exports and high-tech manufacturing. So, that’s the output of EVs, shipbuilding, AI-related products, or semiconductor chips, or AI hardware, things like this. And then the tail end, or the bottom end of the K, are the things that are declining — property, domestic investment, really sluggish consumption growth, things like this. Now, what I highlighted in this month’s note, which I think is quite interesting, is we’re not just seeing the K-shape in China’s broader macroeconomy.

If we drill down into specific data sets, it’s appearing there as well. So, imports is one such example. But in particular, in this month’s note, I talked about it in the investment data. So, if we look at China’s aggregate domestic investment, fixed asset investment that fell by double digits. I think it’s about 13% decline. That’s huge. That is unprecedented. It’s actually accelerating. It was a faster decline than the previous months.

Within that manufacturing investment, that’s a subcomponent of aggregate FAI, manufacturing investment, that fell about four and a half percent. And again, that decline is accelerating. But if we drill into the manufacturing investment, so we disaggregate it by different industries, what we see is there’s still strong growth, but concentrated in a very narrow subset of industries. And these are sectors where manufacturing output is also really high.

So, we can think about computers, AI-related components, AI hardware, really, various different areas of transport, equipment, specialized machinery. All of these areas from a manufacturing output perspective are grown by double digits. And so, manufacturing investment in these areas has also grown really strongly. But meanwhile, investment in the broader or in other areas or other manufacturing subsectors is pulling back really fast. So investment in things related to property. So you can think of things like in furniture, in cement production, glass manufacturing, metal output, both manufacturing output and manufacturing investment is pulling back.

Actually, there’s this K-shape within the investment data where we’re seeing investment growth in some subsectors growing really fast, but in the majority declining. So, there’s really tight correlation between manufacturing investment and manufacturing output disaggregated at the individual industry level. The problem with that is that it entrenches this K-shape. It exacerbates this discrepancy, because if you have some part of the sectors, you almost have this positive feedback loop.

So, they’re investing lots, they’re producing lots, they invest more. But the flip side is that also applies to the sectors which are declining. They invest less, they produce less, and, as a consequence, they also invest less. So it exacerbates the K-shape in China’s economy.

Andrew: And talk to me just a little bit on this about sort of the relative scale between the upper end of the K and the lower end of the K. My impression is that the pieces of the economy that are doing well, particularly the AI-linked high-tech type stuff, are growing very fast, but are a relatively small portion of manufacturing and of overall industrial manufacturing output.

And I would guess that it’s the same for investment, right? That these parts of the economy make up a smaller part of overall investment. And thus, you put it all together and you’ve still got a pretty weak investment environment, even though some areas are doing really well. Is that right?

Joe: Yeah, that’s exactly it. We spend a lot of time talking about China’s high-tech or high-value manufacturing, and it is an important part of the economy, but it’s still the minority of economic activity. China’s manufacturing base still involves a lot of lower-value or medium-value output that is not related to the things we talk a lot about, like AI or EVs or clean energy. And so, a consequence of that is, well, we see investment in AI manufacturing facilities grown by double digits, but overall, manufacturing investment still declined by 4.5% because it’s dominated by these other parts of the economy which aren’t performing as well.

Andrew: Yeah, and I say this pretty regularly, but my sense is that, I mean, based on everything that we write and everything that we read about both the Chinese economy and what Chinese officials are saying is that top policymakers kind of approach is to kind of wait it out and allow these smaller portions of the economy that are growing very fast to get bigger and bigger and bigger and bigger and bigger, and eventually carry the weight for economic growth or carry the load.

That’s just a process that’s going to play out. So, that’s one thing that I kind of always remind people of. I think that’s a key part of what they’re thinking. And then the second piece related to that is that one of the biggest chunks of the economy, even though it’s shrinking, is still the property sector. And so, if you’re trying to wean the economy off of property as a growth driver, that’s also going to take time. And it just means that you still have this massive chunk of the economy struggling, contracting.

And while you’ve got new growth drivers, they are, or budding growth drivers, we shall say, they remain still very small, especially compared to the property sector. And so, this is a process that the party seems pretty committed to that they’re going to let play out over time. And so, in a way, that explains, one, why they’re not panicking, but also it underscores that this is going to be a pretty extended transition process.

And also, I would say, it seems to me that this is a path that is at least partially intentional, so that officials have made themselves comfortable with the idea that overall growth is going to be sluggish throughout this transition process. And I, again, just would say, you know, for people looking at the Chinese economy, everyone keeps saying, oh, the Chinese economy is terrible, is terrible, is terrible.

Well, a big chunk of that is simply down to the real estate market, which they are purposefully shrinking and purposely trying to move away from. Do you agree with those kind of framing ideas?

Joe: Yeah, I agree with everything you said. Nothing to add. Beijing is like very aware that they have a painful transition ahead of them. And they’re willing to tolerate that pain to support this structural change in the economy.

Andrew: So don’t expect any big transitions in policy terms anytime soon, I don’t think, but we’ll get to that piece in a minute. Before we do that, I want to now pivot to sort of the price action and the economy. You mentioned in your piece that there is a risk, and I would say it’s probably more than a risk. It’s virtual certainty at this point that China’s deflationary pressures will return in the coming months. Can you talk more about what’s happening in that space?

Joe: Yeah, sure. I would just say, I mean, I’m not convinced it’s a certainty because so much of it is dependent on the outcome of conflict in the Middle East. So, I think it’s plausible. There’s a scenario where commodity prices, oil prices in particular, spike for a sustained period. And I think that could spill over into kind of broader inflation in China’s economy. I don’t know whether that’s likely, but I think it’s possible. But I agree. I think the more likely outcome is a return of deflationary pressures.

So, over the past few months, we’ve seen this rebound really in producer prices and, to a lesser extent, in consumer prices. And this has totally been a cost-per-shock. It’s not a domestic demand story at all. So, input prices for manufacturers, oil and other commodities, just various manufacturing inputs, these have increased mainly because of the Iran war. And so, as a consequence, we saw a reversal in like three plus years of PPI deflation. What manufacturers have been selling their goods for at the factory gate has been declining for over three years, and finally reversed a few months ago.

And there was a slight spillover impact on consumer prices as well, which picked up. But we’re seeing a slowdown in both CPI and PPI inflation. So, in July, consumer price inflation, it slowed sharply to half a percentage point, down from 1% the previous month. So, a really sharp slowdown. And if we look at it on a month-to-month basis, so generally when we talk about changes in inflation, we’re thinking about year-to-year. So, what were prices in July 2026 relative to July 2025?

But if we look at it on a month-to-month basis, so what were prices in July relative to June of the same year? Well, then CPI has actually been declining for three consecutive months. So, in many respects, consumer price inflation has already returned. We’re just not seeing it in the headline, the year-on-year growth figures yet, but it’s very likely that there’s going to be a return of deflationary pressures. Now, this really isn’t a demand story, aside from the fact that there is no demand. That’s why prices have fallen, but prices have been falling for a long time.

There was simply a short interval of cost-push inflation, predominantly caused by the Iran war. Now, that is fading away. We’re seeing this unmasking of deflationary pressures, which have been sitting there all along. It’s really no change from what we’ve been tracking over the past few years. Of course, the return of deflation is really problematic for China.

I mentioned earlier, nominal growth was boosted in Q2 because of these inflationary pressures. And again, I’ll say this again, we don’t like cost-push inflation. It’s not a good thing in and of itself, but it does lead to a boost in nominal economic activity, and that is associated with some benefits. Increase in tax revenue is the most obvious one. And so now we have a return of deflationary pressures, we’re going to have all the associated problems. That’s going to hammer corporate revenue. That’s going to hammer government tax receipts. That’s going to undermine consumer confidence. So, it’s just another headwind to an already struggling economy.

Andrew: Yeah. I want to throw a little bit of a curveball at you. So yeah, congratulations, or get ready for this one. I think you’ll be fine for it. But just as you’re talking through that, I was thinking, I mean, for any policymaker, you really want kind of inflation to be in a sweet spot, right? You want mild inflation that kind of is indicative of expanding domestic demand, but isn’t growing so quickly that it’s reducing people’s real wages, real wealth, that kind of thing.

Traditionally, over decades, Chinese policymakers have been very wary of inflation, specifically consumer price inflation, because in the ‘70s and ‘80s, huge inflationary pressures in a lot of emerging markets led to economic and social instability. And so, officials have really been very focused on kind of trying to keep that contained for a long time. Yet, at the same time, deflation is also not a good situation to be in. And it underscores other vulnerabilities with the economy, specifically the overcapacity, overproduction type issues.

So, neither high inflation nor deflation is particularly good. You’re kind of looking for that sweet spot. And so, the reason I bring this up is we talk about deflation as insidious and difficult to do, and I think that’s true. But then we also say, well, this inflationary impulse that they have is also not ideal because, like you said, it’s cost-push inflation through an external shock that is just rising or driving up commodities prices, which is reducing margins for industrial producers.

But my sense is that officials have sort of, if they had to choose, they might choose the cost-push inflation. And even if that’s not the case, I would say they’re sort of like taking advantage of the cost-push inflation to sort of make some adjustments. Dinny has written about how they’re kind of using that inflationary environment plus strong exports to start a little bit of deleveraging in order to sort of cap debt growth with the idea that several years down the road, five, 10 years down the road, they’re probably going to have to raise more debt to build up their social security framework.

But do I have that right? Do you think they’re sort of like, well, this isn’t the best option, but we will kind of take advantage of inflation while we have it? Or do you think both options are bad? Or what do you think, I don’t know, Chinese policymakers would almost prefer when it comes to the inflationary?

Joe: They have to pick their poison.

Andrew: Yeah, yeah.

Joe: Right. Yeah, yeah. I think there’s no doubt deflation is the more dangerous problem for China’s economy. I can think of two main reasons. And I think the first, probably the most important, is that China is a highly indebted economy. And as you just mentioned, China’s trying to use inflationary pressures to try and deleverage the economy, to try and reduce its debt-to-GDP ratio. Well, deflation achieves the opposite of that.

Deflation raises the real value of debt while incomes or tax revenues stagnate. So, for a highly indebted economy, which China is, deflation is a real problem and makes it very difficult to tackle rising debt stocks. And then I think the second problem, there’s many, I’m just picking the main two, is that there’s this idea, there’s this risk of self-reinforcing expectations. So, consumers delay purchases, waiting for lower prices, which in turn harms the economy even further.

And we see this most clearly in the property data. Property prices have fallen. We’ve long argued that a prerequisite for an increase in property activity, so things like home building or real estate investment, or even sales, are for property prices to bottom out. And so, these two risks, the increase of the real value of your debt and this self-reinforcement expectations are two huge problems, real dangers for the Chinese economy.

I think inflation, in contrast, also has its problems, which you alluded to. But it’s a problem that China and also just conventional economic theory knows how to fight. So, we can think about tightening policy or reducing fiscal expenditure. It’s arguably easier to deal with excessive inflation than it is excessive deflation.

Andrew: Great points. I will say this all kind of gets back to the point that we’ve made and a lot of economists have made, which is, ideally, you’d have an inflationary environment driven by strong demand, and that’s the argument for China having or enacting a little bit more direct demand-side stimulus, which officials seem pretty reluctant to do. So, they’re kind of picking from bad options, but partly because they’re putting themselves in that place by refusing to do sort of more traditional macroeconomic management from fiscal expansion. Do you agree with that?

Joe: Yeah.

Andrew: Okay, let’s turn to exports — the part of the economy that is particularly bright has been all year, has been for several years now, continues to sort of outstrip expectations or outpace expectations. So last month, exports continued to go strongly at roughly 24% year on year. It sounds like a big win. How upbeat are you on the export side?

Joe: Yeah, it’s one of the successes of China’s economy right now. It’s the upward part of this K. 24% growth in July is amazing. It’s a really strong headline. But I think there’s some nuance we can add to that, which is if we look at exports in volume terms, they’re still growing but by a lot less than the export value. There’s 24% growth in value. So that growth in value, a lot of that is a price story. What I mean is that the prices Chinese exporters are charging is going up, that’s inflating overall export value.

But if we think about exports in real terms, like real activity, really stripping out the price effect, and we can do that by looking at volumes, how are exports growing in volume terms? It’s a lot less. So I can give some examples which really demonstrate this point. In value terms, semiconductor exports more than doubled. There’s growth of 117% year on year in July. In volume terms, they rose by 2%. It’s entirely a price story. And that’s because of the surging cost of memory chips, which is a consequence of the global AI investment boom.

So, just demand for memory chips has gone through the roof everywhere. And that’s led to inflationary pressure on the cost of memory chips, not just in China. Mobile phones, which are kind of a classic Chinese export, in value terms, they grew by double digits. In volume terms, they actually fell. China exported less mobile phone units in July 2026 than last year. But in value terms, they grew because the price is going up.

Same with a bunch of commodities. If we look at metals or petroleum-related products, in value terms, they grew. In volume terms, they shrunk. So, the surge in value, as I mentioned, partly driven by this global AI memory chip shortage, which has led to inflated prices for memory chips, and secondly, elevated commodity prices. So, export growth mainly driven by price, not really driven by China shipping more physical goods. Of course, there are exceptions to this.

Auto exports are surging in value and volume terms. They were up. China shipped 60% more cars in July 2026 than in July 2025. And again, the export of ships, of manufactured ships, that was up about 30% in volume terms. So, there are still some success stories. But I think the big takeaway here is we shouldn’t just look at the headline figure. It’s important to think about the nuance behind that. In this case, exports are an important part of the economy, but maybe not as much as the 24% year-on-year growth, the headline figure that we’re seeing.

Andrew: Yeah, I was thinking about that both as I was reading your piece and as you were talking here. And we kind of present or you kind of present the fact that export growth, at least last month, was driven by price effects as sort of not a negative, but kind of undercutting some of the positivity of the large export growth figure. But I guess the other side of that is, one, Chinese exporters have been dealing with negative margin pressure for a long time, right? Partly as they shift exports away from the U.S. and try to find new markets, partly due to a relatively sluggish global economy.

So, one, is this some relief for exporters with prices going up or at least a certain subset of exporters? And then secondly, I’d just say, as somebody who runs a business, I mean, if my total revenue goes way up, even if I’m not shipping more volumes, just simply on margin, then I’m perfectly happy with that. So, from a macro standpoint, it might not be ideal, but from an individual business standpoint, that seems totally fine.

Joe: Exactly.

Andrew: What do you think?

Joe: Yeah, you’re totally touching on it. So, from an individual business perspective, it’s great news. From a macro perspective is what we really care about when we think about trans macro economy, right? Higher export prices per se aren’t a bad thing. There’s still benefits —increased corporate revenues. And, as a consequence, higher corporate tax receipts for the government, things like this. But what I’m saying is we think of 24 year-on-year export growth really strong figure. What we care more about, if we had to pick, a minute ago you asked me to pick between too much inflation or too much deflation, now I’m asking myself – do I care more about export prices or export?

Volume, definitely volume, because that leads to more manufacturing activity, factory activity, has positive spillover effects on the labor market. It can lead to upward pressure on wages, things like this. So, ultimately, export volumes are really important here. And the export volume story is nowhere near as positive as the prices. But again, to clarify, I’m not saying export prices in and of themselves, it’s not a bad thing if exporters raise their prices. But if there’s no subsequent increase in volume, then I’m less excited about the headline export growth than otherwise.

Andrew: Yeah, I think the key is, one is kind of more beneficial for the macro economy as a whole. Another may be beneficial for individual businesses, as we talked about. And then the other piece is this isn’t China exporting inflation. This is China raising prices because of general sort of weak supply for key goods, particularly in the semiconductor and other AI-driven space, and very, very high demand. So, this is just kind of exporters reacting to the environment. So, they’re sort of more of a passive player in this.

Joe: Yeah, totally. We see the same with China’s imports in value terms. They’re way higher than in volume terms. So, China’s as much, yeah, it’s just a passive player here. Its exports have benefited from high global prices, but its import bill has surged as well. Actually, imports have been growing faster than exports most of this year. China’s trade surplus is actually down a couple of percent so far this year.

Andrew: Yeah, that’s interesting.

Joe: Yeah.

Andrew: Yeah. I think I’ve read headlines or not headlines, but in news articles, people make an argument, “Well, that should make policymakers in other parts of the world more comfortable,” but really not because it’s primarily down to surging cost of commodities. And part of the problem is that China doesn’t buy non-commodity goods from the rest of the world. Right? And that’s what people…

Joe: Exactly. Yeah. We actually, we did some research. We wrote a piece on this for our subscribers. If you strip out the impact of gold imports and memory chips, then China’s imports this year are up by single digits. If you include gold and memory chips, they’re up like 30% year on year. It’s not a broad-based increase in imports. It’s just a spike in the import bill because memory chip inflation and a kind of a one-off surge in gold purchases.

Andrew: Yeah. I’m glad you mentioned that because I thought that was a really interesting finding. So, I’m glad you highlighted it. Okay, let’s move now to another kind of downbeat piece, which has been continually downbeat for basically since the pandemic, and it’s China’s consumption picture. How bad is it and what’s going on there?

Joe: Oh, it’s pretty bad, Andrew. You teed me up for that one, man. So, sales of consumer goods, consumer durables, right? This is like autos and furniture and garments and cosmetics, all that sort of stuff. Sales of consumer durables rose by 0.6% in July. Tiny, tiny growth rate. Down from June, which grew by 1%. So, miserable growth in June, even more miserable growth in July. And we saw a decline in pretty much all of these big ticket items, which is what really from a macro perspective, we care more about the sale of, say, cars than we do of t-shirts because production of cars has much more spillover benefits.

It requires more skilled labor, higher wages, more complex supply chains. So, if we look at big-ticket items, then it’s even worse news. So, sale of cars, home appliances, furniture, all declined by double digits. The one exception was the sale of mobile phones and other consumer electronics, which grew quite strongly. And that’s interesting. It’s a very good kind of case study of the impact of fiscal stimulus. So, all of these items I just talked about- cars, furniture, mobile phones, consumer electronics, home appliances- they’re all part of the consumer goods trading program, right?

There’s essentially, the government providing subsidies for these goods. Now, the program was rolled out in 2024, and it initially targeted only at autos, home appliances, and furniture. So, they’ve now had like two and a half years of this subsidy stimulus. And the stimulus impulse has totally worn away. The reason being it boosts sales by pulling demand from the future. So, an individual that was going to buy a new piece. Let’s say they’re going to buy a new washing machine next year, but now there’s government subsidies available that will they buy it this year instead?

So, you get the short-term boost, but it means over the medium term, over several years, the stimulus impact fades. And this is what we’ve seen. This is why, even though in 2026, there are still subsidies available, the sale of these items is declining by double digits. But the program was only expanded to include mobile phones and other consumer electronics last year in 2025. So, they’ve only benefited from the program for about 12, 12 plus months, meaning that the stimulus impulse is still very much alive.

This is why last month, mobile phone sales, they grew by over 20%. So, what we’re seeing is that by borrowing future demand, over time, the stimulus fades. That’s already played out for cars, home appliances, furniture. And at some point, it’s going to happen to mobile phones as well and consumer electronics. Towards year end, the sale of these items is also going to decline. So, even kind of this one bright spot in the consumption data, this 20% growth in mobile phone sales, that’s running on a clock. It’s not a sustainable driver. At some point, it runs out.

And then to add to this gloomy picture, which I mentioned earlier, is the sale of services. This is household spending on travel and medical services, entertainment, going to the cinema, catering sales, all this sort of stuff. That’s fallen to its lowest growth rate in over two years. So, it grew by about 3.5%, 3.7%, I think. Previously, it’s been growing around the 5% mark. So, a sharp slowdown in one of the only strong parts of the consumption picture.

Andrew: So not ideal. Yeah, yeah, yeah.

Joe: Sorry, I left you on a cliff.

Andrew: No, that’s okay. That’s okay.

Joe: That’s my piece.

Andrew: Yeah. Well, anything that you see on the horizon that is going to turn the consumption picture around? I mean, we’ve been waiting for it. It seems like policy is not there. Are we just in for sluggish consumption? It seems like Beijing is… they talk about it a lot, but when push comes to shove, they seem unwilling to put more fiscal resources here. And maybe it’s unwilling, maybe it’s unable to manage this demand side picture on the consumption side. I mean, is there anything that can change this?

Joe: No, as you say, it’s largely focused on supply-side measures, even today. So, this August the 19th when we’re recording this, and Beijing has just released a policy plan to support local governments to support consumption in their local economies. This is like at the township level really localized policies. And it’s all about supply-side measures kind of building new shopping centers or converting dilapidated government buildings into retail stores, all this sort of stuff, improving consumption infrastructure is generally what they refer to it as very much a supply-side focus.

The one demand-side tool, which is this trading program, these consumer subsidies, that was effective for the original set of goods last year. It’s been effective for the mobile phone and consumer electronics this year. I mean, that’s just pulling forward demand. It’s not leaving a structural change in consumption. And it does raise the question, for which I don’t have a good answer, is what fills the gap when the program’s runway ends? At the moment, it looks like probably nothing. So, it’s another potential headwind for consumption in the coming months.

Andrew: Well, with that further grim sort of assessment, why don’t you wrap us up here? If you sort of had a single takeaway from the month’s data, what would it be? And then also sort of look ahead. What are you expecting from both the trajectory of the economy and policy, macro policy going forward?

Joe: So, look, a single takeaway, I think, is there’s been an exacerbation of this K-shaped economy. It’s kind of a tale of two economies. This narrow part of the economy, which is performing well, which is AI and export-driven and performing exceptionally well. And then there’s the much larger domestic economy, consumption and property and investment and mainstream manufacturing outside of AI and export-related sectors that is deteriorating. And this is exacerbated this month because we’re seeing a slowdown in consumption of services, and we’re seeing a removal or kind of a waning of this cost-push inflation, so the return of deflationary pressures.

What that means for H2, clearly pressure is building on policymakers to do something. I think the most recent signal we saw was in late July when they explicitly acknowledged economic challenges, but didn’t really commit to any new policies. I think they used the phrase “incremental policy measures,: so they promised to implement incremental policies, whatever these are, presumably modest and not very effective. But at least there’s explicit acknowledgement of the challenges that face them.

Now, I think the one clear area where we may see some progress or some momentum would be in infrastructure investment. It’s really unprecedented that infrastructure is declining for so long and so fast. And we’ve seen some movements. So, this week, the macro planner has pushed policy banks to increase their funding for infrastructure development. And there’s chatter going on in policy circles that Beijing sees this as a kind of as an increase in the important lever, something they really do have control over in the domestic economy to boost growth.

So, what that entails, it could be an increase in local government debt instruments, could be an expansion of the central government balance sheet to fund more infrastructure. I mean, we’re going to find out in the next few months. As of now, we’ve seen a push towards policy banks issuing more. At some point, we expect an increase in government debt as well to support infrastructure spending.

Andrew: Well, I was just again thinking as you were talking, it used to be when I started in this business 20 years ago, that if you said something like Chinese policymakers understand the issue and it’s on their radar, that you could expect a policy fix, a policy, fairly aggressive policy response to whatever that issue was in short order. And I feel increasingly the idea that Chinese policymakers know the problems. It’s like we have the same problem we have in the West. They’re admiring the problems. They’re not doing much about it, right?

Joe: Mm-hmm, yeah.

Andrew: So, we do not expect that necessarily to change anytime in the short term, which means kind of what you see is what you get. And the economy is likely to kind of struggle and bounce along on its current trajectory for the foreseeable. But as it does, we will continue to analyze it through Joe’s great work. So, Joe, I appreciate you walking us through all this today.

Joe: Yeah. Thanks for having me, Andrew.

Andrew: Yeah. Thanks, everybody, for listening. We’ll see you next time. Bye, everybody.

But the more durable — and future — points of leverage are already hiding in plain sight, in hundreds of intermediate goods most people never think about.

• Gerard DiPippo, Director of Global Macro at Eurasia Group, returns to the pod as our first ever two-time guest, joined by Dinny McMahon and Cory Combs, to unpack it.

On this episode, host Andrew Polk sits down with Gerard, Dinny, and Cory to dive into:

• Why rare earths are a uniquely cheap and low-cost weapon for Beijing, and why other chokepoints like batteries carry far higher stakes

• How China’s licensing regime doubles as a surveillance system, giving Beijing visibility into global supply chains it can use to ratchet pressure up or down at will

• The “shoe that hasn’t dropped yet”: China’s shelved extraterritorial rule that could restrict any product containing Chinese-origin content, anywhere in the world

• Why intermediate goods are the next frontier to watch, and why China’s reaction function gets a lot murkier once controls move further down the production chain — into products with real commercial value to Chinese firms themselves

It’s another great discussion – so enjoy!

Transcript

Andrew Polk: Hi, everybody, and welcome to the latest Trivium China podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium Co-Founder, Andrew Polk, and today we’ve got a bit of a special lineup. I’m joined by two Trivium regulars, our Head of Markets Research, Dinny McMahon, and our Head of Supply Chain and Critical Minerals Research, Cory Combs, but we also have an extra guest with us today, and that is the Director of Global Macro at Eurasia Group, Gerard DiPippo.

Gerard, how are you doing, man?

Gerard DiPippo: Good. Very happy to be back on the show.

Andrew: Yeah, it’s great to have you back. You’re our first two-time guest.

Gerard: Really? Wow.

Andrew: Yeah, absolutely. Very excited to have you back. Dinny, how are you doing, man?

Dinny McMahon: Good, mate. Always happy to be here.

Andrew: And Cory, how about yourself?

Cory Combs: Doing great. Really excited. We’re starting the hiring process for a new analyst position. So, very jazzed for that. It’s a good week.

Andrew: Awesome. Love to hear it. All right. Well, today we’re going to do another look at basically the economic lawfare and economic coercion playbook that is evolving out of China, specifically looking at kind of future choke points that China may look to draw on as its export regime evolves and its kind of choke point capabilities evolve. We’re going to use, as a jumping-off point, a piece of research that Gerard has done called China’s Chokepoint Leverage Goes Beyond Critical Minerals.

We’re not going to go line by line on that research, but we will kind of use that as a jumping-off point. And we’ll talk about where China is quietly building a dominant kind of share in various global markets. And then we’ll walk through that paper in general and our general thoughts from the Trivium side on Gerard’s analysis. It’ll be a great discussion. But of course, before we get into it, we have to do the customary vibe check. Gerard, I’ll start with you. How’s your vibe today, man?

Gerard: I’m happy to be here, although it’s funny because just before we recorded this, I was talking to my co-author from that piece, Amanda Hsiao, and she was saying how she loves this podcast, but actually doesn’t like the vibe check. And so it’s always controversial. So, shout out to her and shout out to the vibe check.

Andrew: Awesome. I love it. Yes, the vibe check is very controversial. We get a lot of people who love it, a lot of people who hate it. And so I guess that means you’re doing something right. I don’t know.

Gerard: I love it for what it’s worth.

Andrew: Well, see, good. Exactly.

Dinny: Yeah, I’m on the other side of the divide.

Andrew: Well, and with that, Dinny, how’s your vibe today?

Dinny: I’m feeling good now that I know that there are people out there who feel the same way that I do. But no, my vibe today, I’m feeling pretty rested. I had a long weekend in New York with the family. So yeah, I’m feeling good.

Andrew: Nice. So Dinny’s vibe is officially unburdened, I feel, now that he’s let it be known. Cory, how about you, man? How are you doing today?

Cory: I’m good. Yeah, again, just really excited to be bringing on a new team member soon, in particular to help work on a lot of these types of issues. Although now I have a new interview question, which is going to be the make-or-break for the candidates, which is whether or not they like the vibe check. It’s going to be a deciding factor now.

Andrew: Well, you can’t give away what the correct answer is actually now so that people will make sure that they answer honestly. Well, my vibe is pumped to have all you guys on. I’m excited. I think this is going to be a great conversation. I’m also excited. I’m going to see Gerard in real life later today. I always enjoy catching up, talking China beyond what we put on the pod.

So, we’ll get into the meat of the discussion in a sec, but of course, we also have to quickly do the housekeeping. So, a quick reminder to everybody — we’re not just a podcast here. Trivium China is a strategic advisory firm that helps businesses and investors navigate the China policy landscape. That, of course, includes domestic policy in China on a range of areas: autos, tech, etc., minerals, you name it, we do it. But it also includes policy towards China out of Western capitals like D.C., London, Brussels, and others.

So, if you need any help on that front, please reach out to us at hq@triviumchina.com. We’d love to have a conversation about how we can support your business or your fund. Otherwise, if you’re interested in more Trivium content, check out our website. Again, triviumchina.com. You’ll definitely find a subscription option that will meet your needs in terms of staying on top of China policy, intelligence, and research. We have a bunch of different options on the site. And finally, please do tell your friends and colleagues about Tribune, both about the podcast and about the company. It really helps us to grow through those word-of-mouth recommendations, so we really appreciate those.

All right, Gerard, are you ready to walk us through this?

Gerard: Let’s do it.

Andrew: All right. So, Gerard, your piece, or not just your piece, but let’s start sort of where the conventional conversation around this U.S.-China back-and-forth and evolving China lawfare usually starts, which is critical minerals and rare earths. Your paper argues that rare earth controls remain Beijing’s preferred retaliatory tool, but that the approach is evolving within that space. Why don’t you just set the scene and talk to us about how you see things evolving?

Gerard: Yeah, I’ll just give you the bottom line, which is that it is proper to be focused on critical minerals as a key choke point. And those are, in fact, what Beijing knows it can weaponize for at least years, and we can debate how long. But the point we wanted to make is that there are other choke points that are developing, particularly in intermediate goods. And Chinese industrial policy is geared towards expanding China’s market share of those goods.

And so, the implication of all of that is even if you think at some point the West is able to have enough secure supply of critical minerals, and we can debate how long that takes, at that point, China will have other choke points. And there are implications from that because it means that China’s coercive leverage is growing in ways that I think Western governments are not planning for.

Andrew: So, Gerard, we’re going to talk a little bit about the evolving nature of some of these choke points that you point to in your paper. And Trivium has done some work on this as well, so we’ll kind of be able to compare notes on what we think is next. But before we get there, you also identify some of the current attributes of China’s export control regime, specifically zeroing in on the licensing aspect, which sort of allows Beijing to ration supply and deny importers of goods from China the ability to stockpile.

Can you talk to us a little bit about why you think Beijing’s leaning on the licensing piece rather than an outright ban of sales to have a more durable and effective approach to export controls?

Gerard: It’s for several reasons. One is that the licensing requires foreign companies to apply for those licenses, which means they’re able to collect information on supply chains and general needs of companies. Relatedly, if they have more comprehensive data, they can then have a sense of what total demand is and have better mechanisms for detecting whether there’s any sort of transshipment or stockpiling going on.

So, they want full visibility so that there’s no smuggling or workarounds that put holes in things once they leave China’s borders. The other reason is you want to be able to keep companies on as short of a leash as possible. And that, one, is to prevent stockpiling. But two, it also means that if Beijing wants to dial up the pressure on any government or company, it can do so fairly quickly precisely because it’s prevented that stockpiling and workarounds.

And so think of it as sort of a surveillance and enforcement capacity that’s working together.

Andrew: Totally makes sense. And another piece I wanted you to highlight is, you know, focus in on Chinese state investment and overseas mining as well. So, this isn’t just about sort of controlling the source inside China, it’s also about reinforcing dependencies in the long term through investments. Cory’s also done a bunch of work on this. So, talk to us about that piece of it in terms of what China’s doing externally to reinforce its domestic export control regime.

Gerard: Right. So, they’re investing in overseas mining and capacities. I mean, Cory is a master of tracking this stuff, so I wouldn’t deign to lecture him on it. But think of it as a comprehensive plan. I don’t know if there’s a single plan, but there’s at least planning going on such that they’re able to track the supply chains of the things they know are upstream vulnerabilities. And their companies are making those investments, right?

And so, they also are aware that Western governments are working quickly by at least Western government industrial policy standards, to try to indigenize or sort of de-Chinaize offshore those capacities. And so, it’s really like a race of industrial policy systems.

Andrew: Cory, what are you seeing on this side? Do you see it similarly to how Gerard’s characterizing it?

Cory: Yeah, the first thing is that top to bottom, at a high level, there is systematic effort to map and understand China’s vulnerabilities. And so we have that supply chain and industrial security policy from March made public in April. And it’s a state council level doc that says that very explicitly, various authorities, including Central Planner and DOC, are basically in charge of making sure that these foreign vulnerabilities don’t disrupt China’s industrial upgrading and regular operations.

So, that’s driving a lot of investment by state actors, by state investors, Ex-Im, development banks, policy banks, all that. And so absolutely, at the same time, you also, at a lower level, at a more commercial level, you still see a ton of, and I would probably argue even more, private sector investment. Now, obviously, private gets very messy when you talk about private sector in China’s mining ecosystem, but you also have things like CATL, BYD, genuinely private listed companies that are pursuing no-one supply chain security overseas, especially in Latin America, parts of Africa, etc.

So, there’s both fronts happening simultaneously, and they both support Chinese mineral resiliency, as well as processing. So, it all aligns. And to the extent that Beijing doesn’t have certain central-level plans for driving specific niches of minerals, it’s because the market’s doing it for them. And so the areas where the market’s not doing it, Beijing is making sure it’s happening. So in both regards, it’s happening, 100%.

Gerard: I may be jumping ahead here, but I would say that China’s focus on overseas investments as a means of securing its own critical materials or other resources is not new. That’s been going on pretty much for decades, at least in a concerted way, at least 20 years. I think what is more new is China imposing export controls, not only as a means of having coercive leverage against countries, which you’ve already mentioned, but also to control the technology that it knows those countries want, including for things like magnets, so that they can indigenize their own technology.

I mean, one theme you can see is that a lot of China’s recent measures, including recent controls and outbound investment, are really aimed at technology, including but not limited to things that would be useful for critical minerals, right? So, it’s the idea that China now has the capacity, one, to hit back, but two, it also has technologies that it knows other countries want, particularly to break free of those chokeholds. And so, it’s sort of protecting in both directions.

Cory: Exactly right. And a good case study of that, I think there’s 100 of them, but I think one very clear one is gallium. So, one of the earliest controls, so gallium and germanium, had a lot of attention. Australia is now recovering some gallium as a byproduct of other operations. But what do we need the gallium for? And one of the most important applications right now, to my view, is the rising demand for GaN, a gallium nitride used in wideband-gap semiconductors.

I don’t know of really any large-scale producer outside of China that can turn the gallium into gallium nitride in the substrates we use for semiconductors. So, it’s great that we’re getting gallium, but what about the processing? And that’s exactly the kind of choke point that I completely agree — this is the intermediate goods issue. This is the processing issue. And where Beijing continues to control that, that is leverage.

Andrew: So, staying on this kind of idea of where we are now with the export controls and the strength of the export controls around critical minerals and rare earths, you guys both, I think, rightly touched on the processing piece, which now, of course, other countries, notably led by the U.S. are trying to you know alleviate that choke point from China, trying to build processing capacity. But again, Gerard, you point out in your paper, in your research that even if China’s critical minerals processing eventually erodes, Beijing could extend restrictions to foreign-made goods containing Chinese mineral content.

So, this is sort of the extraterritorial piece that we talked about a little bit, Cory, where you say if there’s any piece of Chinese content, doesn’t matter if it’s processed in China or not, we’re going to restrict that. Notably, that was part of their big October 2025 controls that really brought things to a head in the U.S.-China negotiations and led to the U.S. backing off a little bit and ultimately to the Busan agreement. But talk to us about that aspect of it, Gerard. How do you think that unfolds?

Gerard: Right. So, it’s the Chinese version of the foreign direct product rule. And that is the provision among several, but maybe that one in particular in October that scared Russian government so much. Because if you read it, at least verbatim, it sounded like China had the ability to impose controls on anything that had any non-negligible amount of Chinese rare earth content in it.

Which would, if you read it that way, would mean like a battery that China had made that is in a car made in Poland that goes to France or whatever. That is still subject to those controls. Now, because of the Busan truce, that part of the controls has been shelved. It’s not dead. It’s just on pause as part of the ceasefire. And so, to my knowledge, that part has not been fully tested. And it’s sort of the shoe that hasn’t dropped yet.

But because China is collecting data during this time through the application process for the sort of normal export controls and licensing requirements, it might be able to more effectively implement that in the future. And I don’t think that regulation or that capacity is going away.

Andrew: 100% agree. I mean, I think we always talk about these export controls as, Cory, let me bring you in, like, basically, China is sort of suspending their use. But there’s just one way of general travel here, right? China wants to bolster its export control regime overall. The actual implementation of the controls may ebb and flow, but they want extraterritorial jurisdiction. They want to be able to not only use these in a weaponized fashion when needed, but also for broader industrial policy purposes. What’s your perspective on the piece Gerard was just talking about?

Cory: Yeah, I mean, all of these tools, I think the hardest part of all this to map is what are the constraints on Beijing’s use of these tools, right? And so, I think exactly right, there’s one direction of travel when it comes to the material level controls. I think at this point it’s pretty clear. Meaning, which is to say, Beijing can impose an export restriction, which just means you have to apply for the licenses. I shouldn’t say just, it means you have to apply for licenses. And this is where a lot of the attention comes from.

At that point, I don’t see any way of coming back from that. Like that is just a lever that it can ratchet it up, it can ratchet it down. And there’s two different levers on top of that, which I’m sure many listeners will be familiar with, but just to confirm, first, they can escalate the restriction to a prohibition, which means you’re not getting a license. And separately, there’s a number of ways they can expand, add new compounds, add new derivative materials, etc. Or they could go the extraterritorial route and say, “Not only are you not getting it from China, you’re not getting it from somewhere else if it has a Chinese input,” right?

Som there’s other ways of escalating. And so, I think that is negotiable. That’s up and down. That’s leverage that you can deploy at will or pull back when you’re trying to pursue strategic stability, all that. But the existence of a licensing requirement in the first place, I don’t see you coming back from that point. I see one direction of travel there, and then it’s flexible from there on. And this is in contrast to, for example, some of the commercial security or industrial security investigations, which have been very explicitly used as leverage in negotiations.

Like, oh, maybe we’ll investigate this sector, but we’ll scrap that investigation if we get certain concessions, right? And so, one question I have for Gerard and Dinny as well is, in this context, is where do intermediate goods fall? I mean, we have some intermediate goods are already affected, right? spluttering targets are a good one. They’re not intermediate from a consumer perspective, but if you’re making semiconductors, you’re not taking rare earth, making a spluttering target making a chip. You’re buying a sputtering target from somebody who bought rare earths elsewhere.

So, in the upstream sense, we’ve already seen that migration down the production chain, so to speak, and we’ve seen it in a number of others that I won’t go on about. When do we start seeing that in intermediate goods where that, I think, starts to play? Those are much bigger factors in China’s total export value. Those have much bigger costs associated with them. So that’s why I’m very curious, how do you see China’s reaction function? What are the constraints on its willingness to move further down the production chain with export controls?

Gerard: So, I think we’re waiting to see what happens when they fully weaponize other intermediate goods. I mean, you’re referencing things that might have critical mineral components in them, but there are a lot of things that are unrelated to critical minerals where China makes intermediate goods. But you mentioned something that’s really important, which is those other goods, or some of them at least, things like, say, batteries, right, they have much more commercial value for China to restrict those things, but actually be imposing harm on its own companies in a way that rare earths do not.

Rare earths are basically an optimal upstream weapon, right? Because in dollar value terms, they’re really not worth all that much. But China controls the chokehold on the processing side. It has basically two state firms it can operate with to do that. It has the ability to use that to get visibility through licensing of a whole bunch of other industries. And it can do it without really disrupting its own exports all that much. And so, it can sort of pick and choose which industry it wants to disrupt.

There are other intermediate goods, like just think of industrial chemicals, let’s say, right, where China could disrupt something, but that’s going to be probably more narrow, right? So, I’m actually skeptical that there’s any one set of things that is going to be as powerful and as sort of cheap to use for China as critical minerals. That said, there are a lot of other things that could be used in conjunction.

And if you have a sort of whole supply chain visibility, you don’t have to use the same type of good to retaliate against any one country, right? You could use different sets of goods for multiple countries. So that was kind of the point of our piece, that there are other things I can go at that would be valid, even if it were the case that there were Western supplies of processed critical minerals that could avoid China.

Cory: Absolutely. Excellent. And just to put some scale on this, you’re talking about the difference in the impact for China, the cost of imposing this. China’s rare earth industry, the entire rare earth industry is probably on the order of one to $2 billion in terms of total value. That’s obviously not strategic value. I believe their exports of batteries last year were over 60 billion. So, that’s one product and that’s just exports, right? That’s exports compared to the entire rare earth industry. So, it just doesn’t really compare, and the nature of the companies as well.

The battery revenues are even more critical because a lot of Chinese companies can sell batteries, for example, at a much higher premium overseas than they can domestically given involution. And a lot of that money is going straight back into R&D. It’s going straight back into development of new battery chemistries that China is hoping will drive its competitiveness long term. You’re not seeing that kind of R&D in rare earths. You don’t need it. So, I think both financial value-wise and strategically, the costs are so much higher for some of these.

But very well said, I completely agree with the kind of ability to target narrowly these intermediate goods. It’s not quite the same blanket. Yeah, so just seconding all of that.

Gerard: And part of why we’re still talking about this is basically hypotheticals because they still don’t need to use as other weapons, so to speak, right? You could debate how long, but at least say five years conservatively where they would have a lot of leverage with critical minerals. And if we get to a point, say, in 2030, where there is Western self-reliance, we’re going to have another conversation about what else to go after.

One thing we tried to highlight in our piece was to look at specific intermediate goods in the trade data where China has 50% market share globally, both in value and volume terms. And we identified 300 goods at the HS6 level where that’s the case. And it’s grown rapidly since 2022. It’s almost like a straight line up and on track to be 400 goods by the end of this decade. Now, I should say that because we’re operating at the HS6 level in trade code terms, that’s like sort of medium granularity.

If you are assessing your own vulnerabilities, I would want to go much more granular than that. But the problem is that you don’t actually have a global standardization of those codes at that level. So, think of that as just sort of a high-level illustration that you actually see in the data what their industrial policies are saying they’re trying to do, which is to develop whole supply chain security, including for their own defensive reasons.

But it also means that because a lot of these things are pretty low value added or low margin goods, it’s things that Chinese industrial policy is just much better suited to absorb.

Dinny: Yeah, I’d say that when it comes to the intermediate goods, I mean, what Gerard’s saying makes perfect sense that for the most part, you know, so many of these intermediate goods for the meantime don’t necessarily pose a… aren’t the sort of things that can be weaponized particularly although one day it might get to that point. In some ways, the real threat to developed economies in particular at the moment is that China’s moving so aggressively on intermediate goods. And I think that’s kind of what Europe in particular is sort of struggling with.

It kind of looks at the degree to which China is so aggressively expanded into things like chemicals or it looks at the degree to which sort of China dominates, you know, precursor ingredients for pharmaceuticals. And yet, to a certain extent, it feels exposed, but it’s also worrying about the hollowing out of its own industry because China is moving so aggressively into these sorts of bits and pieces.

I think the researcher Richard Baldwin coined the phrase that China is effectively the OPEC of intermediate goods just because of the sheer scale at which it’s producing the components that go into manufactured goods. So yeah, the point’s well taken that for most industries, China isn’t in a position to weaponize these, certainly without sort of doing damage to their own industries. But certainly, I think the rest of the world is increasingly cognizant of just how vulnerable they feel, given how dependent they are.

Andrew: Yeah, I think this is basically the sexiest part of your research, Gerard, is the intermediate good space. Can you talk to us about how you think that’s going to increase China’s leverage over time? And then you also make an interesting point about how it’s more politically palatable to control intermediate goods instead of final goods?

Gerard: The intermediate goods are, in some sense, better as a weapon because you can mess up the production side of a target economy. And you might even be able to mess with multiple industries at once with the same good. The counterfactual would be if China were going after, say, consumption goods or final goods, right? These are things that consumers or end users would notice more visibly. They could, in theory, do that, right?

So, for example, in theory, BYD could be told you have to restrict exports of electric vehicles. The problem is that’s just much more visible, so more likely to engender political pushback. And also, because final goods, by definition, contain the value of all the intermediary goods, they’re worth more, right? Which means that if you go after final goods, you’re basically asking Chinese firms to eat a bigger cost as part of that weaponization.

So, again, the intermediates are really just the better tool, both economically and politically. And in terms of how they’re going to do it going forward, now, as I said, this hasn’t really happened yet because they haven’t had to rely on non-critical minerals because they still have critical minerals. Right? But we’ve seen in March, the Chinese Academy of Sciences published a note, a bulletin that had some research looking at 63 different technologies that China could, in theory, control.

And it sort of bracketed them in different metrics. And you get a sense of, you know, that’s just like one window, right? I’m sure there’s more going on that we’re not seeing. And there are ways of trying to systematically assess different technologies or goods where there are choke points. And what that shows is we think there are basically five broad criteria that they can assess whether something is, you know, a good weapon, right? So, one is obviously, does it hurt the target economy? Two, how replaceable is it? Because it can cause a supply or policy response.

The third is how much hurts Chinese industry, because if it’s worth a lot, then you don’t really want to actually impose those costs on the Chinese firms. And then there’s the enforcement capacity, which we talked about briefly. But if you’re talking about extraterritorial controls, that is harder to do. And they have spent the last year building up their ability to map out rare earths. But if you try to do that with other goods, they might not have the same visibility into that.

And finally, there’s reputational risk. So, there are things like pharmaceutical APIs. People talk about China having choke points there, which is basically true. And I should say that last year during the height of the U.S.-China trade war, Chinese interlocutors were back channeling, suggesting that a nice API supply chain there would be a shame if something happened to it, meaning that would be sort of the next threat. We’re personally skeptical they would actually do that, partially because if you’re trying to cut off pharmaceutical goods, you’re basically risking, at least narratively, killing people because they’re not getting medication, right?

So that’s not really optimal. That’s why I think their preference would be to stay in things that are either more sort industrial or “dual use,” they would have the pretense of having that sort of geopolitical security covered.

Andrew: Yeah. Cory, Gerard just walked through his kind of framework in terms of how he thinks Beijing identifies its next export control or its item to export control. What are your thinking or what is your thinking on how Beijing makes that decision? What are its key criteria going through that? And then I want you both to say what you think, kind of based on that criteria, what might be next? That’s what people want to know. What’s coming down the pike in terms of what the next choke points are?

Cory: Yeah. I mean, first off, seconding so much of what you said, I think it’s a great framework. I’ll just add a couple of pieces. I think one is in a lot of the lawfare countermeasures retaliation, we still see a preference for symbolic reciprocity, you know, reciprocal actions. When it comes to specific critical mineral-related export controls, you know, they’ve run down the list, you’re not going to see exact reciprocity. So, if there’s a defense action, you’re not necessarily going to see a defense mineral, right?

But at the same time, I think at this point, that on the export control piece specifically, we’re just seeing them go through kind of the next best targets in terms of where China has control and where the costs are not extreme. And so, for example, if I had my money where my mouth is, I think tungsten was one early on that we were very concerned about. And it’s a huge issue now because China appears to not be exporting any of it, as far as we can tell.

Another one very similar to that or akin to that is magnesium, which goes into so many things. But magnesium metal specifically, not oxide, is just such a risk if Beijing were to go after that, and we’d have to talk about that another time. So there’s your one, going on a limb to say something specific. But I think more broadly, I mean, I agree that we’re moving past the era of just an export control, right? There’s so much more dimensionality retaliation across the lawfare toolkit, but even within the realm of export controls.

And so, I agree with Gerard as well on things like API that there are costs that are not just financial that definitely seem to factor in. I think Beijing has had many opportunities to cause more damage, if it so chose, against a particular economy, against a particular sector, against particular institutions or interests that are very clearly not taken or stopped short of. And I think API is a good example. If you really want to force the other person to do what you want, API is not a bad target, but if you also want to be accused of killing people.

There are costs beyond financial that Beijing has been very wary of, including, for example, hurting the broad consuming public. I haven’t seen them go after, for example, things that would just drive inflation. I know it’s one of the early kind of questions– would Beijing go after kind of downstream goods? And there’s other reasons for that. Like Gerard said, they’re not the top strategic targets, but I also think the cost is, you know, right now, I think more Americans are mad at America than China, and for the current situation when it comes to consumers.

Not talking about the fans, not talking about the people involved in procurement, but the average person. There’s power in that, right? And so actually, I mean, one question I have going further down the chain, I had for Gerard is, does Beijing’s reticence to use certain tools in intermediate goods, obviously, there are potential risks there, but for the ones that aren’t risks, is that enough for the U.S. to focus less on de-risking, diversifying, decoupling in certain areas?

Is the sense that, for example, Beijing would not want to target certain sectors, is that enough for the U.S. to feel more comfortable in that space? Like, right now, I feel like the strategy in D.C. is decouple as much as possible, de-risk every possible thing that China has any leverage over. Are there pockets where we can relax a little bit, or should we continue to try to push to de-risk as much as humanly possible, just because China has control, regardless of the analysis of its likelihood of using it?

How much can we trust that? So, I’m going to fight the premise a little bit, which is to say that it is true that in D.C., where I live, there’s a lot of concern about reliance on China. But as a matter of policy, the focus is overwhelmingly on critical minerals. There are a lot of other things like, say, industrial chemicals, right? Which is there are various kinds, but that’s sort of a decent bucket of targets.

I am not aware of any U.S. industrial policy specifically to address that. The point I keep making to clients is that we knew, the West, everyone knew, about the risks of reliance on China for processing of rare earths 15, 16 years ago. And yet, there was not really a concerted Western response until about a year ago. Why? It’s because China had to fully weaponize them against the U.S., they’d use them a little bit against Japan.

So, we talked about the policy response function in Beijing, but the policy response function in the West, certainly in the United States, when it comes to industrial policy, is not all that forward-leaning. It’s quite reactive. So, there might be a lot of things where the system in the U.S. is good at sort of prohibiting emerging reliances on the technology side.

So, you see that with some of the actions with the FCC just announcing, for example, that they’re going to basically ban new types of robots coming from China. But there’s nothing equivalent on the lower value added intermediate goods side of things. I think it’s because there’s just too many goods to track. I actually don’t think the U.S. government is that good at tracking these things.

But maybe the more important point is even if they were, they don’t have the policy instruments or enough fiscal firepower to actually address all of them anyway. So, my sort of scary so-what of all of this is that my belief, my observation, is that Chinese industrial policy is quite good at targeting a very wide set of goods, in this case, intermediate goods.

Whereas the Western industrial policy apparatus, which is much less intricate and less developed, is more responsive. And so, the Chinese have this sort of first mover advantage in all cases. So, it might be true that the U.S. prevents reliance on China for, say, electric vehicles because the U.S. doesn’t allow any Chinese electric vehicles to come in.

But do the same thing across, say, pharmaceutical inputs or across industrial chemicals, things that are not really all that valuable but are still part of the supply chain? I doubt it. And so, I actually don’t think that the Western response can front-run Chinese industrial policy, so to speak, which is why I push against the premise of your question. So, you might say that the West might be less worried about things like batteries if you think there’s a big financial cost for China imposing controls on that, which I agree with.

But nonetheless, there are other things they’re going to miss. And I think the Chinese are going to map those things out.

Andrew: I’ve got a couple of thoughts and a bunch of questions. So, one is I think almost the exception that proves the rule of what you just said is that the FCC is now talking about restricting inputs into AI data centers from China, right? And it’s kind of like, oh, we found this one intermediate good, right? First of all, it’s the FCC doing it, a smaller regulatory body, not the Department of Commerce would do larger-scale export controls.

And secondly, it’s only there because it is part of the AI buildup, right? It is the sexy thing that everybody’s focused on. And data centers in particular are a huge, you know, they’re becoming a political issue. They’re part of the infrastructure buildup, all that stuff. So, I think the fact that the FCC is like looking ahead at this one intermediate good really backs up your point because it’s so rare that they would do that. I guess on the back of your statements just now, I wanted to bring in Dinny to see, I mean, again, you’ve done a lot of work on this intermediate goods stuff… Well, I’ll bring Dinny in and then have Gerard respond.

How much of this, if you can put a proportion on it, China’s investment in intermediate goods is for the express purposes of future weaponization versus this is just a strategy to grow our exports versus we just want to ensconce ourselves in supply chains, not for weaponization’s sake, but for our own economic security’s sake? What do you think about that, Dinny?

Dinny: It started off as the latter. So, I mean, Xi Jinping first started talking about this, I think, back in, probably going to get it slightly wrong, but I think it was about 2019, the idea of, you know, we need to do, that Intermediate goods is something that we have vested interest in investing more in and expanding our capacity. And the idea was that China would become so embedded in global supply chains that it’d be incredibly difficult to decouple. It’d be very difficult to extract China from them.

And so, it was a defensive measure. It kind of speaks to what Gerard was talking about before. It’s like, you know, it’s a smaller target. It doesn’t attract the same attention as sort of a consumer brand or anything that, you know, it’s sort of an end product. And so, it was a way to protect China’s export machine by embedding it more deeply in global supply chains and make it more difficult to extract China from it.

And so, in a world of decoupling and de-risking, it was a degree of protection that China could lean into. And I think, over time, it’s probably evolved because as China becomes more embedded in those supply chains and the rest of the world becomes more dependent on China for procurement, it gives China unprecedented power to sort of withhold supply. And so, yeah, I don’t think it started off as a weapon, but the success of the policy has certainly created weaponization opportunities.

Andrew: Gerard, what do you think? Well, let me restate the question. If we break it down, weaponization versus just growing exports versus economic and industrial or supply chain security, where do you put the emphasis? And then I guess the follow-up question is, does it matter? Am I splitting hairs? It’s all everything all the time, just because this helps China out economically?

Gerard: So, I agree with Dinny that you can see clearly in the planning, going back to maybe probably around 2019, that the fixation on supply chain security that was embedded in the 14-5-year plan, I think that was born out of a sense of insecurity based on U.S. actions, particularly what happened with Huawei and ZTE, and then also the trade war, right? So, I actually think it does come primarily from a position of insecurity. But that’s evolving over time as we’re getting more confidence.

And I think you’ve seen over the last roughly year or two, much more confident Beijing in how they’ve been using the export controls and how they’ve handled the United States for various reasons. So, it could be that, yes, most of this is “defensive” in origin, but then it has offensive implications. In terms of growing exports, it’s obvious that they care about manufacturing as a source of growth and they generally care about exports.

But a lot of these things that are going to be choke points, those that are actually the best types of choke points, are precisely those things that actually aren’t worth all that much. So, from an overall developmental perspective, they don’t actually do much for China. What they do is buy China resiliency against coercion against them. But then once you do that, with sort of the same mechanisms, you have your own indigenous supply, and then it gets big enough, it starts to be 50% or more of global supply, you then created a weapon, right? So, it’s sort of like a distinction without a difference.

Andrew: What do you, Gerard, and then I’ll bring Dinny and Cory on this as well, make of this argument that we touched on a little bit with the whole processing versus upstream inputs piece? That China sort of shot the starting gun on companies diversifying away from China, and therefore, the export controls actually backfired, they overreached. What do you make of that in terms of, A, the current situation, but more importantly, what we’re talking about going forward? Like, if we say China overreached, as having seen that in the instance of rare earths, will that create any policy impetus or a policy roadmap to avoid more dependencies in the future at all, in your view?

Gerard: So, the response function that Beijing has to watch for is not so much what companies do, it’s what governments do to facilitate diversification for companies. And that’s because for things like rare earths, if there is no state support, if there is no industrial policy, there’s pretty clearly a limit on what companies are going to be able to do on their own, because it just doesn’t make any sense for any one of them at least to pay for it. So, basically, I think they do have to be careful to not provoke a massive industrial policy response against them.

However, because there’s only so much industrial policy capacity in the West, and they’re quite focused on critical minerals at the moment, I think the risk of overreach there is currently pretty low. If you ask the question in the other direction, I think the U.S. export controls on China, or at least the early entity listing, and then later export controls, particularly what happened after 2022 with chips, that clearly has triggered a massive industrial policy response. And so, insofar as you’re seeing this as sort of an industrial policy race on both sides, it’s advantaged China for basically institutional reasons. And I think they are playing that to their advantage.

Andrew: Cory, I see vigorous thing that in your head. What are your thoughts?

Cory: Yep, absolutely that. And tying it to the biggest points on intermediate goods and kind of the limitations of Western industrial policy more broadly, I think one exactly, companies cannot replicate these production chains. I had conversations before this even blew up about companies who considered it, said it’s not worth it, spoke with the same companies after gallium, germanium, tungsten, all these, and finally rare earth controls, and they said, “Yeah, still can’t do it, still not worth it.” And these are some of the biggest companies in the world. They need the support. It just doesn’t make economic sense otherwise.

And, as that conversation happens, you know, we start thinking ahead companies, like, how do we not get in this position again? How do we de-risk and diversify our supply chains before the next action, which is why everyone’s asking, “What’s next?” Because they want to get ahead of it. But the calculus doesn’t change. They’re even less able to get around some of these other things than they are where it’s in many cases from the financial perspective, right?

And to tie in Gerard’s point from earlier, this gets even more difficult the further down you go into intermediate goods. There are too many of them, right? And I think exactly right. I see the same thing where the U.S. is able to focus industrial policy attention on maybe a couple of things. We see it on rare earths for sure. We’ve seen a couple of other things, but pretty modest, honestly, overall. And you frankly don’t see any industrial policy, meaningful industrial policy actions, even where there’s attention when it comes to certain critical minerals that definitely need diversification today or already controlled, but they just aren’t Earth since they don’t get a type of attention.

So, I think when it comes to has Beijing overreach, is Beijing going to face a slew of industrial policies that erode future leverage? The U.S. is struggling to erode the leverage it already has in rare earths, and it’s going to be harder to erode the future types of leverage on intermediate goods. The U.S. is going to be even less able to do that for the future goods than is for the current. So yeah, that’s my take here.

Gerard: Can I make a political point? I know this show is about China, but we’re talking about U.S. and China, so I’ll make a point about the U.S. We keep saying, or I keep saying, that and the U.S. is not as responsive, not as sweeping with industrial policy compared to China, which is true. And there are many reasons for that. But I think one important thing to focus on now is that the U.S. institutionally and legally has a bias towards mechanisms that give executive-level discretion, particularly when it comes to banning things.

That’s things like export controls or ICTS rule or things like what the FCC just did. It does not have the same level of discretion on the fiscal side, which is to say it doesn’t have the means of greatly empowering industrial policy in the way the Chinese system does. So, to take an example of critical minerals, and Cory, correct me if I’m wrong on this, apart for some small sort of top-up measures that were part of NDAAs or the One Big Beautiful Bill, there is no sort of sweeping congressional legislation that has been passed on critical minerals.

It’s mostly running through executive discretion, largely through the Department of War and the Department of energy, but there’s no comprehensive plan. There’s not a lot of actual money behind it, even though fiscally speaking, the U.S. could afford it. And I think it’s really revealed preference. And so, there’s a lot of talk in this town, there has been really for the past eight years or so about industrial policy for various reasons, including climate change. But my point is revealed preference is pretty important.

And the U.S. is actually just not all that disposed to do industrial policy that has any real fiscal outlays, except for rare exceptions like the IRA or CHIPS. And that’s basically the only ones I could think of, except for a few things on the defense side. And so even if we identify these goods, unless there’s going to be some mechanism to actually fund the response to them, it’s not just a question of, oh, do we have enough expertise or do we not know what those goods are?

Is there’s a literally fiscal authority to make it work. The U.S. does not have the equivalent of the Chinese state-owned financial sector to direct credit or government guidance funds at scale. And so, there is sort of an instrument in a political economy disadvantage here.

Cory: Absolutely. And I’d add to that, they’ve revealed preference. Obviously, there’s party line, there’s other ideology, this administration, etc. But when it comes to supply versus demand side, there’s a lot of focus on let’s keep feedstock here so we can get recycling all of black mass and all these other materials. What would be more productive, I would argue, for developing a battery industry would be to help support demand for batteries, which would be an EV policy, which was under the IRA, right?

So, there’s obviously a lot of complexity to what happened with IRA rollbacks and everything. But I’d argue that there’s a problem. It’s a supply problem. We can fix it with this targeted thing. And even within that, it’s very restricted, as you said. And I’d argue that’s another aspect of the reveal preference.

Andrew: Yeah. And Dinny, why don’t you talk a little bit? You just made a great point on the demand side, Cory, on the back of Gerard’s comments, which is, you know, not only is the U.S. policy not good at incentivizing, it’s really bad at creating demand for goods, which is what Chinese industrial policy is particularly good at. Dinny, wouldn’t you say?

Dinny: Yeah, look, I wanted to go back to this question about overreach, actually, because I think what Gerard and Cory were saying is spot on when it comes to specific issues, instances of lawfare. I mean, so far, we probably haven’t seen China overreach. And as Gerard said, I mean, what the U.S. did in terms of the CHIPS Act and whatnot sort of ended up in a massive industrial response in China.

But I think if we’re talking about Chinese overreach, I don’t think it’s with specific industries or specific instances of lawfare or protections or whatever. I think perhaps what we’re looking at is a more macro level, and it’s kind of what we were talking about a couple of weeks ago, or was it even just last week, Andrew, with the Ministry of Commerce’s essay about how China isn’t dealing with overcapacity and a kind of defense of its trade surplus and whatnot.

And I think if we’re looking at overreach or we’re looking for instances of overreach, that might be where to find it. I mean, China in its full-throated defense of its trade surplus saying, “Yeah, sure, we use subsidies, but so do you. We adhere to WTO rules. We are the defenders of the free trade regime.” But then you look at sort of Europe, for example, you know, and other parts of the world, you know, developed world where increasingly, if you’re kind of looking at the free trade regimes that currently stands, European nations in particular must be looking at and going, “This isn’t what we originally signed up for,” right?

Because free trade, more or less, was supposed to be a win-win situation, not a Chinese win-win, but a win-win for everybody, right? Where you sign up and you bring down your tariff barriers and your protectionist barriers, and sure, some of your industries are going to suffer, but you’re going to come out the front because that’s why everybody got involved in it.

And for a lot of countries in the world at the moment, there isn’t any clear benefit from the free trade regime as it currently stands because of just the sheer overwhelming power of China’s export machine. So, I think for me, the space to watch is more that kind of macro level of overreach. China says it’s sort of the defender of free trade and clearly sort of supports the current trade regime because it gets so much out of it.

But is it potentially undermining the sustainability of that system because more and more countries are going to find that they’re actually not benefiting in a way that they intended, that they thought they would from this regime and wake up one morning and go, you know, we want out because we’re not getting anything from it?

And I think the EU will be the proverbial canary in the coal mine because of China 2.0. Now, of course, you know, China shot 2.0 with the Europeans, it’s probably a slow moving response or a reaction given the sort of the way the EU works. But I think, to the extent we’re talking overreach, that’s the place to watch rather than sort of China’s management of individual industries or products.

Andrew: Yeah, and Gerard, I know you’ll have thoughts on this, so I want to let you cook on it for a minute. But I guess the way I bring it together in my mind is we talk about the overreach on weaponization of export controls and Dinny making the case that China’s overreaching in terms of, you know, its overall current account and trade surplus. We’re kind of getting to a situation which you can understand why other countries are frustrated with is China’s basically saying, “You have to buy all of our stuff, except you can’t buy certain stuff.”

And really kind of weaponizing the surplus in a way, saying we’re going to deluge your economies with all of these goods, except for really high value stuff or really stuff that goes into military applications. And that you can’t buy from us, and we’re dominant in it. I mean, that’s not a tenable situation at all. Gerard, what’s your thought on all of it?

Gerard: There’s maybe a dark irony that for years, Western companies saw China as being the market of the future. So, there was sort of a demand side narrative, but it turns out that China’s power is on a producer side. If only someone had been paying attention to Marxism, maybe that would be a little more predictable. That’s clearly where the policy has been driving at, right? And so, they are weaponizing it to some extent.

I would say to Dinny’s comment, maybe there’s different layers of overreach. So, I think Beijing more routinely commits types of diplomatic overreach. I think having a paper that says, “Basically, we deny all charges when it comes to industrial overcapacity, it doesn’t exist, blah, blah, blah.” Or telling the IMF, “No, our undervalued exchange rate has no bearing because prices basically don’t matter and our subsidies are actually in no way boosting our competitiveness, which raises the question, why do you have subsidies at all? But okay.”

I think that stuff enables the environment that is happening now in Brussels, where there’s serious discussion of finally doing something. However, it doesn’t operate on the layer of triggering a specific response function to get those countries to do something, particularly on the supply chain side, to target those goods. So, I think China has a pretty good read on other countries’ political economies in terms of their ability to actually respond meaningfully.

They don’t seem to be all that concerned of whether they’ve made the Europeans that upset. It’s more of, are they going to do something that is actually going to cause problems? And there, the threshold is much higher. So it might be true that China has committed diplomatic overreach in various instances. I just don’t think they’ve caused the same sort of specific policy overreach that’s triggered a response function that is that much of a problem for them.

Andrew: Wholeheartedly agree. My pet peeve is when prognosticators describe some action China has taken or position China has taken and describe it as untenable because it’s awkward, as if China is a person and they can’t stand awkwardness. And so, at some point, they’ll have to relent because the situation is just too awkward. We can’t deal with the awkwardness.

But actually, China have to have these dynamics be quite uncomfortable, even I would say awkward for other countries, and it might even prefer that because that’s the kind of situation where it’s uncomfortable, but it’s not so extreme that a country or a block of countries is actually going to push back. And that’s sort of the sweet spot for China in terms of exactly what you’re saying, sort of ruffling feathers, but not to the point where it actually spurs action a lot of times.

Well, Cory, you’ve got something. I do want to get to some of the specific, like what we think the upcoming choke points will be. And I want to give us a little bit of time for that because I know Gerard pointed out a lot of these in his paper, and I know Cory’s in a lot of work. But Cory, jump in on your thoughts here.

Cory: No, I agree. I think trying to hit that sweet spot seems to be the objective in many domains, politically and technically on the controls of export technology, as well as on the material goods. And I think you saw this, for example, I think the most robust overreach focused conversations I’ve had were early on after the rare earth export controls, when it became, again, this is reading between the lines, but I say it with fair confidence that Beijing did not intend to cause quite as much fear and anxiety in Europe with the rare earth export controls as they actually they did.

And they had to then have those conversations around, do we whitelist, do we green channel, etc. And eventually they got to the point where like, okay, yeah, Europe is angry, but not in a position to do that much more about it. And then rare earth, enough things got through that. It kind of held at this exact, that awkward, but not like Europe is going to do anything major over this. And I think that’s an example where when we talk about leverage, we talk about the dimensionality of leverage. That’s why it’s so important that China has the ability to make certain efforts more intense or less intense.

So, whether they move from a restriction to a prohibition, allow more exports or less exports, I think that, in large part, is the way that it’s able to calibrate and try to hit that sweet spot without going too far. And sometimes it does go a bit too far and then it dials it back a little bit. And actually, I agree on the diplomatic. I mean, the last several trips to Beijing this year, back and forth, was shocking to me how the level of technical depth of so many officials, and some of the, what I felt personally were ham-fisted diplomatic analyses of like, no, do you understand how big a deal certain things are diplomatically?

And so, while there’s a much greater, I feel, and again, this is not a definitive statement, the sample size is modest, but it does strike me that the average bureaucrat has a much deeper understanding of supply chain issues, industrial security, and all this stuff than you have, say, for example, in the U.S., where the U.S. has much less experience with industrial policy. But the diplomatic capabilities are not comparable in my view, at least in terms of what they were, certainly what they’re messaging, how they’re handling that.

I think, for example, the degree of concern around the cutoff of Japan, which Beijing, others have said this before, but Beijing seems to view the cutoff of rare earth exports and other critical matter exports to Japan as a bilateral issue. The entire world is now getting really, I’ll be polite with it, in a hard state, in a hard position, because Japan is not able to process things or to produce things that everyone else depends on.

So, this bilateral thing for China and Japan is not bilateral at all to the rest of the world, including Japan, including the U.S., including the EU. And that’s the case where I think if Beijing were listening or were acting more on the diplomatic side, diplomats have been saying this. This is not a surprise. This is something that diplomatic efforts have been trying to signal a message, but Beijing is not taking that seriously. And so, that’s where I think we could get into issues where it’s got a lot of tools to hit the sweet spot, technically, but maybe diplomatically it’s missing where the sweet spot really lives. I’m not sure, but that’s where I’d see it this day.

Andrew: Yeah, nuance certainly is not always the Chinese Communist Party’s forte. Great discussion so far. I do want to, as I mentioned a couple of times, drill down a little bit. We’ve talked about really the motivations, the current weaponization centered around critical minerals and rare earths. We’ve dug into the intermediates good piece at kind of the, call it 10,000 foot level. Let’s go a little bit closer to 5,000 foot level.

Gerard, you did a lot of work looking at what’s coming next. So critical minerals are really the tip of the iceberg. And you looked at, for example, Chinese dominance in battery active materials, super hard materials, power electronics, grid inverters, chemical intermediaries like fluorine chemicals, you mentioned pharmaceutical starting materials. What’s on your list for kind of, even just if it’s one or two things, that really are at the top of your list for where Beijing might zero in in the future that, you know, companies should be looking for, policymakers should be looking for? Where do you start with that?

Gerard: So, I would separate the question between what are goods that China might impose export controls on narrowly for sort of defensive reasons where it doesn’t want to allow its technology to go offshore for, you know, offshoring capabilities, right? But those are not meant necessarily to be retaliatory or necessarily to impose pain. That’s one set. The set we were looking at is one of the things that could replace critical minerals as a coercive tool for leverage. And there, it’s those five buckets you just mentioned.

So, it’s things related to batteries, super hard materials, power-related things, chemical things, and pharmaceutical things, right? I don’t know which one China is going to use. It thus far has not really had to use any others and won’t need to for at least several years. My guess is, of those groups, chemicals are going to be kind of an obvious one or certain materials because they are so upstream for reasons we already discussed, going after pharmaceutical APIs, while technically possible, is politically suboptimal.

And batteries are things where there is a real economic cost. Although you could imagine if China maintains its dominance of the technology, particularly with, say, Europe and the global south, not so much with the U.S. because it has more protective measures. Those could be weaponized. But I actually, I don’t know if they have a list of like what’s ready to go next.

I mean, they probably do for specific countries, but, by and large, I think the sort of magazine has some depth left in it on the critical mineral side.

Andrew: Yeah, maybe they’re like a coach in a football game that has, you know, he’s got a list of five to ten fourth-down plays that he can pull from, but he doesn’t know which one he’s going to pull until the actual situation arrives. As you can tell, I love sports metaphors, and they’re always very good, as is this one.

Gerard: Everyone understands American football. It’s a great reference.

Andrew: Cory, what are your thoughts on what’s next and how Gerard’s thinking about it?

Cory: My thought is that then you should introduce the cricket and rugby metaphors and watch them go everyone’s head. I think that’ll be the next best stuff here. No, in terms of predicting, I completely agree with all that. And I think chemicals in particular, I mean, it’s such a broad space. And so, I mean, more than saying, “Hey, we’re going after gallium nitride, I think one of the most approximate risks is probably riders where you start expanding existing controls a little bit further down the production chain, right?

It wouldn’t be hard to extend some of the existing controls to some of the, like, two production steps down from that. So, that’s one proximate thing, right? So, that’s one set of materials that we already track because they’re already impacted, but they could be much more impacted.

Andrew: Can you give a concrete example of one of those? I hate to put you on the spot, but just...

Cory: No, not at all, not at all. Yeah, so you have super hard materials, right, for example. That mostly is looking at tungsten carbide, and you’re looking at carbon-boron nitride, and then you have diamond windows which are using semiconductors. You also have things like types of silicon carbide that most of their applications are not actually controlled like just very specific ones. You could expand that, and that would be important in photonics and all these other applications. You have a lot of the gallium substrates, but you don’t have all of them, right?

So, you notice I’m focused on semiconductor. Guess what? We’ve been thinking about that a lot lately. Well, now on the flip side, you also have the potential, and Gerard, I’m not going to plant my flag on this piece, but when it comes to some mineral categories, there are certain types of control, I think, would be very difficult, very risky. So, lithium, for example, it’s kind of the canonical, why didn’t China do lithium? And it’s like China produces most of the world’s lithium and the cathodes and the batteries, and what they don’t control is the actual upstream supply of Spodumene, which come from mostly Latin America, specifically lithium triangle specifically Chile, and then Australia, U.S. treaty ally on the other side is where China’s getting most of its lithium.

So, you see them, this thing I mentioned before, increased domestic development of lithium, which is kind of a terrible source. It’s a lepidolite, which is not commercially attractive, and China’s investing in it just to have it. But I think that’s an example where Beijing’s going to be very careful about a blanket ban on lithium exports because they’re so upstream and upstream dependent. But there’s some really interesting intermediates, CAM, the cathode active materials, and pCAM which is the precursor cathode active material that stuff I feel like you could mess with that market if you wanted to, maybe more subtle than an export restriction.

China has a lot of control over those markets, right? So, the main thing that I would flag is that the whole response playbook has become much more diversified, obviously, in terms of tools available. It’s also become more creative within those tools. I think we’ve seen much more creativity within the application. And so, that’s why I’m thinking more broadly about rather than just it’s magnesium, it’s titanium, right? Yes. But what else?

I would just flag that there’s more space, that the possibility space is broadening. And that’s what makes it so difficult. And that’s why we go through, not just at a high level, but we literally do this mapping on a component and input basis because there’s so much stuff that parts. There’s a lot of possibility space there.

Andrew: Well, thanks for these kind of more detailed looks at what may be coming. We’re at over an hour already. And I want to make sure that I respect everybody’s time, especially our guest, Gerard. But I want to sort of give you a last word here, Gerard. We’ve kind of been thinking about what’s coming down the pike. And one other interesting argument you made in your paper, I thought, was that the threshold for usage of these various economic coercion measures is falling. And then you specifically pointed to the 1260H list, which is a Defense Department list that the Defense Department expanded and China responded to.

Talk to us about your thinking about sort of that lowering threshold and what you think that means going forward in terms of how China approaches these issues.

Gerard: Over the past year or two, China has been responding in a tit-for-tat way to pretty much everything the U.S. or the Europeans, to some extent the Japanese are doing, there’s more to a political side to that, with measures that it’s designed to be somewhat parallel. So it used to be, say, 10 years ago, China did retaliate in certain cases, but it was typically through import restrictions. So, messing with Australian wine exports to China, for example. They now have a parallel legal architecture, and the threshold for using it is basically if the West does anything it thinks crosses the line, it has a parallel response.

This has happened even in the past few weeks, with the U.S. adding Entities for the Uyghur Forced Labor Protection Act, and then China having a parallel act. They’re not necessarily doing it to pose massive cost. What they’re trying to do is signal for everything you do, we have a response. And that response is becoming more powerful. And if you take the intermediate goods argument seriously, as I think you should, over the medium term, it becomes more forceful and more responsive to those actions, which means that the big sort of geopolitical so-one of all of this is that China is trying to teach the West and has, I think, to some extent, taught President Trump, that they don’t have unilateral freedom of action when it comes to imposing offensive measures on China.

And it has real bearing on policy debates even now. So, I think there’s an actual debate in the administration of what to do about the Chinese open-weight models, particularly after Moonshot and K3, I think you guys had a separate episode on this, and people were expecting, and we are expecting some response to that, but it’s not clear what the response is. And part of the reason for that is, there’s maybe some commercial reasons, but it’s also that the U.S. White House is aware if they do something as aggressive as, say, banning Chinese models, then China is going to respond. And we know what they’re going to do.

They’re going to probably do something with rare earths, and then the U.S. will probably have to back down. And so, expect that equilibrium. Think of it as like an arms race where now both sides have demonstrated weapons. Both sides have shown they can shoot as weapons. And now it’s new equilibrium. Now, maybe the positive spin on this is like an arms race. If both sides know the other is armed, then it actually could be stabilizing somewhat perversely, right? It’s a little bit of mutually assured destruction.

But both sides can misread each other. I think the U.S. certainly misread China’s response to the 50% BIS rule last September, and they were not expecting China to respond so forcefully with its own rare earth export patrols, which were later shelved as part of the Busan truce. So, I think both sides are sort of learning, and they’re trying to teach the U.S. and Europe, basically, like, “Don’t mess with us, we’re going to punch back.”

And if that is accepted, or to the extent that it is accepted, it just means that policy in the West going forward has to be more careful and probably has to rely less on things like export controls and maybe to some extent tariffs than it has so far. And that means what’s left is more domestic industrial policy, which is still more or less in play for the West. But for reasons I already expressed, that’s not the comparative advantage of the West. So, that is it’s overall tilting the field towards China’s advantages.

Andrew: Yeah, great points. I think we should leave it there.

I’ll just, you know, speaker’s or host’s prerogative, make one final point, which is I would love it if the U.S. moved in that direction without getting too much on the soapbox. I think we should compete with China, right? You know, instead of complaining about China cheating and trying to hold them back and all this stuff. Yeah, we need a multifaceted toolkit, of course. But China’s on the playing field and they’re competing, and they’re trying to assert their interests.

Let’s assert ours by trying to invest at home, make sure that our companies are world-leading, that we’ve got the supplies we need. I don’t know if you call that more offensive or defensive in this context, but just kind of investing in our own capabilities, I think, is a longer-term and more sort of productive and proactive approach.

Hopefully, that’s a lesson we learned, and we can evolve and maybe become better at kind of that domestic investment that, as you say, we’re kind of currently disadvantaged at. So, that’s my hope. I’ll leave that hopefully for everyone on an optimistic note. But with that, Gerard, thanks so much for the time. Great discussion as always. Great to have you back on, man.

Gerard: Thank you for having me.

Andrew: And Dinny and Cory, thanks as always, fellas. Good to see you.

Cory: Cheers.

Andrew: And of course, thanks to the listeners. We appreciate it. We’ll see you next time. Bye, everybody.

• And this time, officials did something they rarely do – naming exactly which US actions they were responding to and why.

On this episode of the Trivium China Podcast, Andrew Polk sits down with Cory Combs (Head of Supply Chain and Critical Minerals Research) to unpack:

• What exactly landed in MofCom’s four-part policy package — from countersanctions on US biotech and compliance firms to China’s first ever foreign-trade national security investigation

• Why this round of retaliation was aimed squarely at the FCC and DHS, and how it traces back to actions on robotics, drones, and forced-labor sanctions

• Whether Beijing’s unusually direct language about the Busan detente is a warning shot or a sign the deal is really at risk

• Why neither side seems ready to blow up the agreement just yet, even as both keep testing its edges

Transcript

Andrew Polk: Hi, everybody. Welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium Co-Founder, Andrew Polk. And today we’re doing another quick reaction episode. I’m going to be talking with Trivium’s Head of Supply Chain and Critical Minerals Research, Cory Combs, about the latest economic coercion measures or retaliation measures, as they would see it, taken by China. But first, you know, Cory, how are you doing today, man?

Cory Combs: Doing very well. Thank you. Yeah. Happy to get into this.

Andrew: Yeah. Good to have you back. So, I already teased it — China dropped a large batch of retaliatory economic restrictions on August 5th. These were kind of against a range of U.S. actors and entities. The measures included some formal counter-sanctions and a spate of other things that we’re going to walk through. We’re going to talk about exactly what was done, what actions were taken by the Ministry of Commerce, which was the one officially putting these measures forth, the context that provoked these actions, and then talk about what it all means both for the short-term in U.S.-China relations and more broadly for that economic relationship. So, let’s get into it.

All right, Cory, like I said, August 5th. So, we’re recording this on August 10th in the afternoon, East Coast time, 5.45 p.m. It’s been a few days, but I was on vacation last week. So, I wanted to get you on the horn as quickly as I could once we were back to work. But why don’t you just start by walking us through what actually landed here? What actions did MOFCOM announce?

Cory: Yeah. So, on August 5th, we have two sets of documents. We have two orders and two announcements. And the orders are these kind of overarching orders signed by the minister. And the announcements are largely implementation of policy. So, I’ll kind of walk through all four documents in order. Order No. 2 has six counter sanctions. Specifically, these appear to be direct responses to the UFLPA, or Uyghur Forced Labor Prevention Act sanctions from the U.S. side.

And so, they’re applied to six different entities, including Applied Sciences DNA, Stratum Reservoir, Altana, folks in bio might recognize some of these names, as well as some compliance and human rights groups. So, we have Responsible Business Alliance, Verite Group, which is a labor practices group, among other things, and then Human Rights in China, HRiC. So, the order sanctions their business activities within China. So, they’re basically, they’re not on the ground anymore. It’s a sudden abrupt change, direct countermeasure against UFLPA.

We have Order No. 3, which is a countermeasure under the Anti-Foreign Sanctions Law. So this is, again, quite literally, a counter-sanction against the FCC measures in the U.S. Specifically, these are applied to U.S. Compliance Testing LLC. Beijing has accused this company, and let’s just be very clear, I’ve seen a couple places, it’s like someone has mistranslated this is applied to U.S. compliance testing companies. It is the name of an actual company, an actual LLC, Compliance Testing, right? Beijing has accused them of assisting in the FCC’s investigation and ultimate actions that in China’s, this is translated verbatim, ‘actions that harm China’s sovereignty, security, and development interests,’ right?

And so, these compliance efforts are deemed anti-China, right? So, the broad question here is, first, you have all the Chinese entities are now prohibited from engaging with that LLC in any business activity. That obviously means they can’t do much on compliance work of Chinese companies or anyone working with Chinese companies. So, one of the questions immediately is, is this going to be a broader issue with compliance? So, we’ll get to that. So, those are the orders. The announcements: the first is Announcement 33 of 2026. These are numbered annually.

And this starts a national security investigation into foreign trade regarding, and this is a really interesting one, imported printing, copying, and office equipment. So, this is not exactly what you’d think of, at least for me, as kind of a national security imperative, but it’s under the hood. What’s really targeting is foreign-developed software. And that software is used in imported office equipment. They’re not naming specific entities, but there’s a lot of prime candidates here. I mean, in the U.S., you have things like HP, you have Lexmark under Ninestar, you have Xerox.

In Japan, you’d have entities like Canon, Ricoh, Kyocera, Konica, right? So, just to be clear, it didn’t name those entities. I don’t want everyone to be like, “Okay, this is happening to this company.” But this is a broad national security investigation into foreign trade associated with those foreign office equipment and other products. So, it sounds a little bit niche, but I want to flag, this is China’s first-ever foreign trade national security investigation of this type. So, it’s kind of an odd one, but it’s also the first in this front.

So, very notable. I think it’ll be referenced a lot as we move forward as we’re trying to piece… trying to take out the lessons from this will be tricky. And then finally, you have announcement 34, which strengthens the export control specifically on dual-use items “related to drones,” right? So that’s pretty broad. You might imagine a few things. You have propellers, you have the batteries, you have all that stuff. Every affected export to the U.S., specifically, will undergo strict review.

And it also makes very clear there’ll be no fast-tracking or simplified approvals. Basically, we’re looking at a very high-friction process.

Andrew: Okay, great. Thanks for laying out the details. I want to get into the implications of each of those, but maybe before we do that, we start with the trigger. Why did this happen now? Why did China take these actions? Walk us through the thinking there. I mean, this isn’t conjecture. They were pretty forthright about this, right?

Cory: Yeah, MOFCOM’s spokesperson, they had a press conference and they were very clear that these are all responses to, again, China’s language, ‘negative China-related measures,’ and particularly the FCC and DHS. So I’ll talk about those two in particular. But the concerns here from China’s part, from Beijing’s part, date back to a number of things, a number of actions on drones, optical cables, and others. So, the FCC regulations in particular, it’s the July 28 ban on imports of Chinese humanoid robots, quadruped robots, power inverters, etc. Basically, the FCC has build this as a way to protect the U.S. AI industry, including not just power inverters is really talking about batteries and energy supply for data centers, but then you have the embodied AI, the humanoid robots and all that stuff.

So, the FCC is explicitly targeting this to “protect” the U.S. from Chinese capabilities there. This is also, by the way, there are reports that the administration is drafting a much broader ban on Chinese data center components and various other things. Of course, this is very problematic for China from its view, because those are very high-value exports in things it’s very good at and trying to develop. So again, very much in China’s economic model is increasing exports of these high-value things. Then you have July 31st, you have the Department of Homeland Security announced an expansion of the UFLPA entity list.

And again, that’s the Uyghur Forced Labor Prevention Act entity list. And so, these are companies that the U.S. alleges are involved in human rights abuses in Xinjiang, basically. It added 43 companies, and they span a whole bunch of different areas, a lot of them in minerals. I mean, we have steel, copper, lithium, caustic soda, and some other stuff. Also, notably, there are several biopharma and biochemicals companies as well. So, bio is in the list for the first time ever, but it is a notable issue.

Anytime you’re targeting Chinese bio right now, it’s very sensitive because that is one of the future industries that Beijing is really looking to develop. Those are the two main sets of actions that I think triggered all of this.

Andrew: Yeah. And we’ll get into this a little bit more in a minute in terms of how this may impact the Busan Agreement that occurred in November of last year and is expected to be renewed in the upcoming, you know, talks between the U.S. and China with Xi Jinping coming to Washington, D.C. in September, of course, next month. I will just say, I think from the U.S. side, I had heard that various parts of the U.S. government were looking for ways to continue pressing China that was “outside the eye of Sauron,” by which they mean, frankly, the White House.

The White House has been, I mean, this public reporting, very, or has taking a strong interest in tamping down any actions towards China in order to maintain stability, to maintain the Busan Agreement, to have a productive and well-received trip to the U.S. by Xi Jinping. And I think the thinking was basically the FCC’s a little bit more ancillary. It’s not a big legislative move. It’s not a tariff. It’s not an export control. So maybe we can get away with this, right? Both get away with this by effectively end-running the White House’s desire or, you know, command for more stability. And sort of same on DHS, right?

This is kind of like, it’s not a new action per se. The legislation’s already been put in force, and they’re just adding a few more names to the list. So these are not kind of what we-

Cory: Which happens regularly.

Andrew: Yeah. It’s kind of like, these aren’t the big lead moves. They’re the AAA moves, if you will. And that’s, I think, what the people who were kind of in charge of these were thinking, right?

Cory: Were thinking, yeah.

Andrew: There are ways we can continue to press China without kind of disrupting the core of what was agreed to in Busan and the core of the ongoing negotiations. China saw it differently, which we’ll get into in a minute. So, you know, people thought they were being nuanced, maybe, or I don’t know, being, I don’t know what the right word is, that they were able to get around kind of the White House desire. And I think some of them may have thought, you know, also China wouldn’t respond.

Or maybe there are elements out there that want China to respond because they don’t like the stability, but that’s conjecture.

Cory: But one can imagine that there’s this view that you can be tough without being provocative. And maybe that’s, you know.

Andrew: Yeah. Good point. Good point. You can imagine that.

Cory: I’m not sure I’d buy that, but one could imagine.

Andrew: I’m with you. Yes. Okay. But we’ll get more into that in a second. Before we do that, talk to us about the real ramifications of this. So, there’s MOFCOM Order No.2, which sanctioned the six entities you talked about. Then there’s the counter-sanctions order, which was in response to the FCC enforcement. Then there’s the Announcement 33, which is the national security investigation on foreign software or in the printing industry. And then there’s the tightened export controls on drugs. So, those are the four things. Start with thus No. 1, MOFCOM Order No.2 on those six entities. What are the real-world implications here?

Cory: Yeah, I think a couple of the main ones for a lot of MNCs is just that, I mean, some of these entities are essential to getting facts on the ground for their compliance efforts. And so, I mean, at risk of stating the very obvious, a lot of the entities or several of the entities in question were involved in UFLPA compliance. And so, if they’re not on the ground, they probably can’t be involved in compliance.

And so, all these American companies and anyone else operating in the U.S. who has to comply, they to figure out, if they’re working with some of these entities, what their backup plan is. So, that’s a very concrete, and it is distinct from the type of counter-sanction out of the Anti-Foreign Sanctions Law, but effectively, it is a means to undercut the ability of foreign companies to comply with American law. I mean, that’s effectively what this does. And obviously, it makes things a little harder for the bio side on those companies that are affected on that side as well.

Andrew: Okay. What about Order No.2, the compliance testing LLC piece?

Cory: You know, still working through this one, but I mean, long and short is that I think the medium-term risk here is that compliance itself becomes a battleground. That is not good for anyone because compliance, by necessity, when it comes to this type of trade, you need… the whole point of compliance is to verify what’s happening on one side from the other side. I mean, it’s probably not going to work for most countries outside of China to be like, well, we had a local Chinese body, you know, certified compliance with something that like you copy or whatever else.

So, you need reciprocity, bilateral access when it comes to this type of compliance. And so, if compliance and testing types of companies are getting squeezed by counter sanctions, that’s a dangerous path to go down. And so, the implications aren’t super clear to me yet, honestly. I’m sure someone in an office somewhere is, “This is what it means for me.” And I know there are going to be specifics that we’re still working through, but I’m mostly concerned about that medium term.

And to be very clear, I do not see this as Beijing trying to systematically target compliance or testing or anything like that. This is a specifically targeted thing. But if this becomes a center point of U.S.-China lawfare and economic coercion and counter-sanctions of anything, that becomes rather dangerous very quickly. So, I’d rather we not go down that particular route.

Andrew: Okay. So before we move to the other two pieces, how big, scale of one to 10 in terms of real-world implications are these first two things we’re talking about? I guess another way to say it is, you know, what’s Beijing’s intention here? Is Beijing really trying to hit back with full force? Or is this something that’s marginally disruptive for some companies?

Kind of like not symbolic, but a little bit of a more sort of protest type retaliation to throw some further friction in the works, but not fundamentally make it so that… I mean, Beijing doesn’t want these companies to leave. They’re going to have to do compliance. Is it more of a disruption or how do you see it?

Cory: Yeah, no, I think on one hand, these are intended to demonstrate that China’s very serious. I mean, Beijing did not view this as tough, but not provocative. This was very clearly provocative. These FCC and DHS actions at the same time, exactly as you said, they’re not trying to escalate the situation per se, and they’re not looking to destroy the Busan truce or détente, right? And so that’s a fine line to walk or find a kind of tightrope there.

But I do think that is the intent. Not escalate, but show that we take this very seriously. I think it shows the willingness. In some ways, you could argue it’s increasingly creative. I know creative is probably too positive a term for this kind of action. I’m not trying to, you know, it’s not a good thing. But in terms of it’s not so straightforward as, well, if you do this, we’ll just hit the next rare earth. You know, it’s much more dynamic. It’s much more involved. There’s much more optionality, basically, so I’d put it. And I think that demonstrates that willingness to be serious, but also not escalating.

Andrew: Yeah, I think the challenge with these moves, as we’ve seen in our work, is almost by design, not almost by design, by design- these moves have asymmetric impact. And I don’t just mean asymmetric to U.S. moves. What I mean is they impact you as a company. They impact you pretty significantly, potentially. But if you’re not dealing with one of the compliance testing LLC, maybe it has no impact on you whatsoever. And so, unlike a tariff that kind of impacts all companies in that industry equally, these kinds of moves impact companies disproportionately. And that’s the challenge, I think, for companies.

I think, originally, Beijing was trying to use that as leverage. When I say originally, like months ago in the U.S., China back and forth to try to get the U.S. business community to go to the White House and say, listen, “We as X company are getting absolutely hammered here.” I think Beijing now realized that doesn’t work as a piece of leverage per se to get companies to change the White House’s approach. But the ultimate impact for companies is still quite disproportionate, depending on where you happen to land on that.

Cory: Absolutely. You know, there’s not perfect visibility on Beijing’s side either. You can’t guarantee anything, but I would nearly guarantee that Beijing does not have a perfect mapping of all the companies that rely on… right? And so, all their consumers and clients and everything. So, I think in that kind of environment of uncertainty about like, how serious is this? One counterfactual that is helpful for understanding Beijing’s positioning is if Beijing wants to do more, what could it have done?

And it could have done after everyone who does publicly work with the Responsible Business Alliance. It did not. And I do not anticipate it doing that. So, that’s a good example, I think, of just kind of ordinal ranking of actions it could have taken and kind of contextualizing. But absolutely. And this is not equally deployed. And it is a huge problem for individuals. But at a macro level, we tend to, and I recognize, that as you’re saying, you’re absolutely right, we tend to think of these things in terms of kind of broad macroeconomic impacts.

And a lot of the times they aren’t. These particular moves won’t have that type of impact, but that doesn’t mean they’re not incredibly impactful for individual. Yeah. A hundred percent with you.

Andrew: Yeah. And I mean, I think additionally, like Beijing is probably trying to limit the collateral damage to the extent it can, but kind of probably is like, there’s going to be some collateral damage. If you’re going to make an omelet, we have to break some eggs kind of thing. So, I think, you know, they’re going to probably try to map it out best they can, but they’re not going to do a ton of work to make sure no major company’s impacted. It’s just going to whack some folks, right? And that’s just part of it.

Okay. So quickly, the last two, practical impacts of Announcement 33, which is national security investigation into the software piece, and then Announcement 34, the export controls and drone-related. Both of these strike me as, as you said, the foreign trade national security or investigation is a brand-new mechanism, but both of these strike me as pretty tame. Yeah. Real world impacts. Tell me if I’m wrong.

Andrew: No, I agree. And I think, I think specifically we’ve seen a number of national security investigations and other types, or other types of commercial investigations, pardon me, that tend to get used as leverage, right? This is the kind of thing that Beijing is willing to trade more of. When it comes to a counter-sanction, that’s serious. So, like, okay, as long as the sanctions in place, the counter sanctions in place is the default presumption.

Whereas investigations, obviously with commercial investigations, trade investigations, that is obviously a little bit less… I mean, we don’t really have precedent for this, as noted. So, it’s hard to say with too much confidence, but I do think that, one, the national security investigation is inherently a bit more serious, frankly, than some of the trade investigations. But at the same time, most of these investigations have been opened in response to something, and then once that issue is kind of tamped down or there’s discussion, negotiation, those investigations tend to lead nowhere or be repealed or formally or informally. Assuming things don’t get worse, that’s what this strikes me as. And that could be proven otherwise, but that’s my default.

Andrew: Right. Well, that’s assuming things don’t get worse is an important caveat.

Cory: Right. Always a caveat.

Andrew: Yeah. Well, a couple of things. One is Beijing has shown a clear pattern, putting up countermeasures so that it can roll them back, right? Like putting entities on the Unreliable Entity List so that it can take them off as part of a negotiation, opening investigations so that it can roll them back as part of a negotiation. I think that might be part of it here. But your other question, again, we’ll get to your point that we’ll get to again later on, assuming things don’t get worse. A lot of our clients are saying, “Well, is this the first in a series of moves?” And the answer is totally path dependent.

Does the U.S. ramp things up? Do the FCC take more moves? China is not trying to, in my view, up the ante. Officials feel compelled to respond. But the point is we don’t really know where things go from here. Beijing is highly unlikely to continue ratcheting up without further provocation from the U.S., we can say that, I think.

Cory: Yes, I agree with that.

Andrew: Okay, so let’s talk through some of this stuff. So, you’ve written in some of your work, writing about some of this stuff, just how Beijing’s being more direct. They didn’t hold punches, they were very clear, this is retaliation. Talk to us about how you kind of think about that piece.

Cory: Yeah, I mean, I think there’s a couple ways to look at this. I mean, I think fundamentally, the strategy around messaging has become, the clearer, the better, not in every single instance, right? There’s definitely some obfuscated policymaking. I don’t want to overstate that argument. But when it comes specifically to countermeasures against the U.S., I mean, we used to have, you know, well, no, the export controls aren’t retaliatory. You know, they’re in the interest of national security, and say, okay, given three days after the action that you’re very symbolically nearing, okay, sure.

And now we have the MOFCOM spokesperson saying, since Busan, I’m paraphrasing from my personal translation here, the FCC has ignored strong opposition from China, right? Continuously broadening the concept of national security, and particularly the U.S. has repeatedly ignoring China’s negotiations, yada, yada. And so, we’re doing this, you know, these actions. And direct quote, “I want to emphasize that China’s countermeasures have generally been restrained. China values the hard-won stability of China-U.S. economic and trade relations,” referring to Busan on that list.

So, I mean, there’s no playing coy there. It’s like, “Hey, we’ve worked really hard for stability. You’re only screwing it up.” I mean, you don’t have to agree with it, but that is the messaging, right? And it’s just such a turn. And I think a logical turn. I mean, this is probably, I think I’ve been saying this for a long time. I think we’ve all on the side been saying, if you want to get through to the White House, don’t play coy. Tell them exactly what you’re trying to do and what you’re mad about. And I don’t think subtlety is the name of the game in this context.

And they seem to have gotten a memo. At least MOFCOM has been very straightforward in this case.

Andrew: Yeah. And I think that’s a really important piece to point out. We had been hearing that Beijing was frustrated about these ancillary moves, the moves outside of the eye of Sauron, as we said. And, again, you know, whatever the motivations were, it was pretty clear this was coming to a head, and Beijing felt as though it had to respond. So, let’s talk a little bit then about how you think this impacts the Busan détente. I mean, how seriously should we take Beijing’s claim that the U.S. is abrogating the Busan agreement? And what should we expect moves like this to mean for that agreement, which is, up until last week, kind of expected to be pretty smoothly rolled over for at least six months, if not to the end of Trump’s term?

Cory: Yeah, I think bottom line, there are positions on both the optimistic and pessimistic side of the spectrum that I think would be reasonable here. For me personally, I’ll be very curious to get your view. I take this very seriously. I think Beijing genuinely views, you and I have discussed this before, Beijing views these types of affairs out of the U.S., whether by the White House or not, whether with a direct approval or not, they view this as directly violating the spirits of the stability that the U.S. and China have formed. And they view this as a direct attack on, especially when it comes to like biotech and things like that. These are direct attacks against China’s economy in the perception of Beijing.

And so, the motivation there doesn’t really matter. They have to hit back. And that phrase, the relationship that undercuts the spirit of Hussain. Now that said, I don’t think we’re at the breaking point yet. Personally, I think it’s quite clear to me that Beijing is very broadly committed to, or really wants the stability to be maintained. They want to have an agreement to postpone export controls further by November. They want to move forward with more constructive trade and economic relations. And they’d really like to see the relationship not fray further. And in fact, that it will get better.

And I think in the White House, you see a lot of interest in that direction too. And so structurally, I think the case for optimism is that both sides have structural strategic interests in maintaining the state option. I think that is essential. If we didn’t have that, there wouldn’t be much room for optimism, but I do think that is still there. The question now is, to me, and there’s many other ways of looking at it, but my question is, first and foremost, do we continue forward with FCC and some congressionally directed actions that just fray the relationship too far where Beijing kind of, it’s like, “Look, we’ve had enough. We need to start from scratch. We’re not playing this game anymore.” Do we hit that or not?

And I think that’s largely, but not entirely in the White House’s control as of right now. That could change. Obviously, Trump can be more or less personally involved in things. But I take it very seriously. Beijing is putting up a warning flare. It’s saying, “If this path continues, we will not end up where we want to be.” So, I take it seriously, but not a doomer about it. So anyway, I’m curious of your take here.

Andrew: Yeah, yeah. I think that’s all right. I mean, I would say it’ll be really interesting to see if we start to get some reporting that the White House is putting the FCC on a tighter leash, and maybe DHS as well. DHS has its own political challenges among the leadership with MAGA and all the immigration stuff that’s happening. So, you know, that might be one way to… even another reason to rein in DHS. I don’t know, just speculation.

But I guess the way I think about it is the White House, as far as we understand, has been very clear to Treasury, not that they need to be as clear with Treasury, but to USTR, to the Department of Commerce — hey, we are putting actions against China on pause while we try to negotiate some kind of stability. So, all the entities, the U.S. government entities that were told explicitly, hey, it’s time to pause have paused. But now it’s the ones just outside the circle, right? Who weren’t explicitly told that are now moving.

And so, do those folks get slapped down a little bit and said, “Hey, we didn’t tell you before, but now we’re just making it crystal clear.” So, I wouldn’t be shocked if we saw some kind of messaging or reporting about that kind of messaging from the White House. And then the other thing I was just thinking as you were talking was, you know, for anybody who thinks that China might be trying to blow up the deal, I mean, this just wouldn’t be the path they would take. If they, for some reason, wanted Busan to blow up, they would just reinstitute export controls.

That’s the path of least resistance. They don’t need to create some kind of cover for blowing the deal up. They don’t need to create some reasoning, some rationale. They would just blame the U.S. no matter what and say, “Guess what? You guys are being jerks. We don’t think you’re living up to what we agreed and we’re reinstating export controls.” They wouldn’t be coy about it.

Cory: Yeah. I’d say they already have enough, like, if that were the path they’re going to do, they’d say that what we’ve seen so far is enough to do that. And they’re actively trying to say, again, you don’t have to agree with the statement, but they’re like, China’s measures or countermeasures have been restrained, right? Like they’re trying to, you know… they wouldn’t say that. They would just go for it.

Andrew: Yeah. They’re trying to be as clear as possible. I think that’s right. So, I mean, all that is to say, of course, you have to… with any government readout from China or many places, but China in particular, you got to sort of understand the Party speak and the goals and kind of what the angles are. But I think this one’s pretty straightforward. They’re trying to say…

Cory: Usually, yeah.

Andrew: Yeah, yeah. We don’t want this to blow up, but we feel compelled to respond. And so, this is the response. So, I think we can leave it there. I’ve already taken up more of your time than I expected, so I appreciate that. Just one quick 30 seconds if you’ve got it. The next day after these announcements on August 5th, on August 6th, the cybersecurity regulator announced an investigation, or not an investigation, a review of products sold by Palo Alto Networks, a cybersecurity firm. Do you think that’s related to this or is that separate?

Cory: I think that probably is separate. I mean, this is very similar to the CAC’s cybersecurity review into Micron in 2023, right? It fits a different pattern. It is very confusing when these things overlap, obviously. But I think broadly, Beijing has been expanding its reviews into foreign technology it considers risky to use. And so, there’s a lot of different motivations for that kind of review. And the tech team, I think Kendra will have so much to say about that. That’s beyond me, but I do think that’s kind of separate.

But on the other side, I mean, one thing that you do see as, I think, very specifically interesting about where Beijing retaliated and why Beijing retaliated against these efforts were, one, again, the MOFCOM spokesperson specifically singled out U.S.-restricted measures against China covering telecoms, covering consumer-grade routers. These are pure kind of core tech when we think of tech. And then submarine optical cables, right?

These are more a little bit further afield, but also kind of in that core space. And then AI. The other side of it is biotech. And so, I think there’s going to be a lot more overlap. There are going to be these cybersecurity reviews, these kind of broad technology reviews. For much the same way that FCC is arguing that Chinese technologies pose a risk to the U.S., I mean, a lot of Chinese authorities are looking at this the same way. Like, yeah, U.S. technologies that China’s dependent on have back doors, right?

We’re going to start being a bit more cautious about that and reviewing this stuff more carefully. And so again, Kendra and the tech team have much more to say about that than I will. But on that, you have that piece of it, which is a whole separate dimension of tech review, in addition to these retaliatory kind of actions. And then on biotech, it’s probably up there with embodied AI in terms of… I think embodied AI is certainly the sexiest, if you will, in terms of getting the most attention. But biotech is an industry that Beijing hopes is on the precipice of a massive development spurt, with huge TFP gains and just total value add for the economy.

And if it starts facing tight restrictions that either undermine development of the domestic biotech industry or that prohibit or prevent the export of key technologies or key products really using those technologies, Beijing’s going to hit back very hard against those because they’re such strategic industries. And that’s going to overlap with all the cybersecurity, data protection, all these other governance regimes. They’re going to all be stacking up on each other. And it’s probably going to get difficult to tell some of them apart. And it’s going to be essential that we do because those reviews will all serve different functions. It’s going to be important that we don’t mix the signal there.

Andrew: Yeah, great points. I’m glad that you pointed out that you think that the Palo Alto networks thing is separate. I think that’s an important point. We may or may not have a chance to pick that up with Kendra at some point. But it just also brings up the point that China is still also hitting back in certain ways. Like that Palo Alto thing may have happened even absent this retaliatory back and forth. And so, both sides are trying to test the limits of where they can continue to assert their interests without blowing up the Busan deal.

So, that’s an interesting dynamic. And then the other piece I was just thinking is, I also wonder if, to an extent, maybe taking the action against the FCC on the back of their move against robotics. The reporting is that the FCC is also looking at a ban for certain inputs into data centers. Right?

Cory: Yes, it is. That’s correct.

Andrew: And once you take these actions into the realm of AI, which is one of the key things propping up the Chinese economy and exports of those components into data centers are a real big driver, or one key driver, China’s export performance recently. Maybe China’s trying to head that off. Like, hey, we can see more and more coming out of the FCC. We want to nip this in the bud. I don’t know. Maybe that’s part of it as well.

Cory: No, I think that that stands to reason. And it’s especially because the reporting, the public reporting around this has been so clear that it seems like there’s a much broader interest in not even decoupling, but preemptively making sure that Chinese tech is not throughout the data centers, which on the energy side, at least, is difficult because a lot of what you need is made best and cheapest by China. And so, that is just a difficulty for hyperscalers. And it’s a practical challenge and a security challenge and all this stuff.

And the problem is when we decouple the technical and security reviews, like the legitimate kind of teardowns and then figuring out any backdoor issues, that’s stuff you just do as a matter of course, versus kind of general narrative and geopolitical. There are a lot of things that frankly do not need to be banned, right? But there are things that do, right? We’re in that middle space where your value set kind of dictates. But if everything gets lumped together, that would definitely be viewed as excessive harm to China’s economy and an ideological as opposed to market-driven approach.

And so, that’s where things start to get very complicated. And unfortunately, policy, one, often doesn’t play with that type of nuance in many cases for political reasons. But also, even if it does, it can be very difficult to actually execute in a nuanced way. I understand that. And I know it’s very easy for us analysts to kind of be like, “Well, actually, you really should have a 17-point framework for analyzing every component.” That’s not realistic. We get that. For all the policymakers listening to the naive people, we get that, right? At the same time, separating out things that bear technical risk and need to be handled on a technical basis versus things that we don’t want it because we don’t want it, those are different things.

And so, I think for Beijing, being able to signal which actions are on which side is very geopolitically and practically important in terms of how they might counteract, what measures they might respond with.

Andrew: Yeah. Yeah. All good points. All good points. Well, we’ve already, like I said, gone over a little bit longer than we…

Cory: Sorry.

Andrew: No, no, not you. This is a great discussion. The only other thing to talk about is sort of where all this goes. But I think time will tell and we’ll have plenty of chances to kind of discuss that with the Xi Jinping meeting coming up. I think we’ve already touched on enough to say we still think both sides, despite showing some cracks, have a strategic interest in maintaining the Busan deal, extending the Busan deal. Whether or not someone on either side decides we want to blow this thing up, we don’t seem to be at that point yet.

Cory: 100%.

Cory: So, I think we can say that with confidence. Great. And also, I think the main point here was just to lay out the key details of what happened for listeners. And this was all kind of a complicated mishmash of stuff. So, I appreciate you just laying out the details and making it clear as to what exactly happened and what the likely near-term impacts are. So, thanks for that, Cory. I really appreciate it, man.

Cory: Absolutely. Always a pleasure.

Andrew: Yeah. Well, this has been great. Thanks for your time, Cory, and thanks, everybody, for listening. We’ll see you next time, everybody. Bye.

• There’s a reason for that, and we break it all down in today’s podcast.

On this episode, Andrew Polk sits down with Dinny McMahon (Head of Markets Research) to unpack:

• The five core arguments in MOFCOM’s new position paper on overcapacity, examining which ones hold up and which ones stretch too far

• Why Beijing dropped the word “overcapacity” for “involution” 18 months ago, and what that rhetorical swap is designed to do

• How China frames itself as both free trade’s champion and its victim, and why that framing leaves little room for compromise

• Why the US may have the least at stake here economically, and why Europe is where this fight actually gets decided

As always, we hope you enjoy the discussion – reach out and let us know any thoughts or feedback.

Transcript

Andrew Polk: Hi, everybody. Welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium Co-Founder, Andrew Polk. And today I’ve got with me Trivium’s Head of Markets Research, Dinny McMahon. Dinny, welcome back to the pod, man. How are you doing?

Dinny McMahon: Thanks, mate. I’m doing well.

Andrew: Good to have you on. I am having Dinny on today because we want to get into MOFCOM, the Ministry of Commerce’s official response to accusations of overcapacity from the West. This is the first time the Chinese government has really come out with a sort of meaty riposte to the idea that they have overcapacity. And specifically, it held a press briefing, released a big comprehensive position paper responding to these accusations about industrial overcapacity that have taken place over the past several years.

Pointedly, the paper was titled, China’s Position on the So-Called Excess Capacity Issue. You can just kind of feel the sass in that. So, we’re going to get into that. We’re going to get Dinny’s reactions to that, specifically as it impacts macroeconomics and trade. But before we do, we got to start with a customary vibe check. Dinny, how’s your vibe today, man?

Dinny: Mate, I’m living life on the edge. I’ve got two kids in the house, and I’m recording this podcast from my living room. So, if we can get through this without sort of a minor catastrophe, I should buy a lottery ticket.

Andrew: Yeah, that really is living life on the edge, man. That’ll keep your, not anxiety, your adrenaline up during the pod. So that’ll keep you focused. That’s good. Yeah, my vibe is chill. I’m about to go on another holiday for a week. Next week, I’m actually going to be down sort of near SU in North Carolina with the family, just chilling out in the mountains. So, ready to get out of D.C. again for a bit. It’s always nice to get out of D.C. But actually, before we do that, really looking forward to this conversation, which we will dive into in a second. But we also have to, of course, do the quick housekeeping.

Just a quick reminder, we’re not just a podcast here. Trivium China is a strategic advisory firm that helps businesses and investors navigate the China policy landscape. That, of course, includes domestic policy in China, a longer range of areas, a light range of issues: tech, macro, autos, minerals, you name it. And we’re going to talk about some of those policies, like industrial policy and policies that lead to overcapacity, or not, as the Chinese would say today.

But it also includes policy towards China out of Western capitals like D.C., London, Brussels, and others. So, if you need any help on that front, please reach out to us at hq@triviumchina.com. We’d love to have a conversation about how we can support your business or your fund. Otherwise, if you’re interested in more Trivium content, check out our website. Again, triviumchina.com. We’ve got a bunch of subscription options as well on the site that you can sign up for, again, focused on things like tech, macro, business environment. Check those out. You’ll definitely find the China policy intelligence option you need on our website.

And otherwise, please tell your friends and colleagues about Trivium. We really appreciate those word-of-mouth recommendations. They help us grow the business and grow the listenership. So, please do that. All right, Dinny, let’s get into it. We are going to talk about this MOFCOM Presser and this position paper. I think first, what we should probably do is lay out the key arguments that MOFCOM makes. I will note some of them are somewhat contradictory, shocking. But I’ll go through kind of the key arguments and then you can kind of lay out how you think they stand up.

So first, the paper argues that there’s no such thing as overcapacity, that no one- no economists, not the IMF, not the World Bank- can agree on a definition. I got to say, I have a little bit of sympathy for that. What exactly is overcapacity? You know, you always have a little bit more capacity than you’re going to use. Are you expected to use 100% of your capacity? Should you have zero exports? I don’t know. Okay, so but that’s argument one. Argument two says that these sorts of major shifts in industrial capacity have happened periodically throughout history.

So, you know, the bulk of industrial capacity moved from the UK to the US to Japan over time. And then that this shift now is part of a natural part of the global economic order. These shifts over time are part of that natural global economic order. Third, it spends most of the time rebutting the criticisms, of course, that have been against it, like that industrial subsidies, especially, have led to overcapacity. And it argues that everybody uses subsidies and that subsidies are WTO-compliant. So, you know, that it’s operating within the rules.

Fourth, it argues that, you know, other countries should stop griping about trade surpluses so much because many countries, it points to Germany, Japan, and the U.S. have historically run large surpluses without being accused of overcapacity. Of course, the U.S. doesn’t run a large surplus now, but historically it did. And then it also argues that the trade surplus is a result of U.S. debt in the EU underinvestment, not weak Chinese demand, which the paper says has been growing strongly, which is true- not as strong as in the past, but it is still growing at a decent clip- and that Chinese demand is an anchor of Chinese growth.

Again, I will say I have a little bit of sympathy for this as well. There are flip sides of the Chinese trade surplus, which is that many countries run deficits, most notably the U.S. Of course, I acknowledge that these are arguments that are defending the Chinese position. And they’re made partly disingenuously and partly out of legitimate analysis of how China fits in the global economy. But we’ll get into all this. And finally, the last piece, the fifth piece, there’s an argument that industrial growth has been driven by innovation and that China’s competitiveness stems from genuine technological progress.

This is not a subsidy story. This is not a margin story. This is not a scale story. This is a technological progression story. So those are the five major arguments, Dinny. What do you think about all of them? Just give us your broad thinking as to how these stand up.

Dinny: Yeah, well, on one level, it’d be easy for us to sort of sit here and go through each of those arguments and debate the merits or the economic rounding of them one by one. But that would kind of defeat the point because although this is framed as an economic rebuttal, at the end of the day, this is a political document. This exists because China is trying to do two things. One, it is trying to frame itself as a champion of free trade.

I mean, in this article, when it’s not defending itself against overcapacity criticisms, it’s talking about how it wants to see further trade liberalization, further liberalization of cross-border investment. It wants what it calls an open ecosystem of innovation. So, it sets itself up as both a champion of the prevailing global free trade regime, not just the status quo, but as the one who wants to push it further. So, that’s the first thing.

It’s setting itself up as the champion for the regime that we all say has benefited humanity incredibly over the last 50 years. And the other thing it’s saying, it’s trying to do, is frame itself as the victim. Because, even as it is the one that is steadfastly defending this system, it is the one that is sort of suffering the slings and arrows of the U.S. and the EU unilaterally imposing protectionism and putting up trade barriers.

And so, that ultimately is kind of what China is trying to achieve here. This is a framing for the current trade wars and the trade wars to come that try to position China as both champion and victim at the same time. And this is kind of something we’ve talked about before on the podcast, just how the West, sort of the broadly, the U.S., EU, maybe sort of the ecosystem nations around them, and China see free trade differently.

So, the West broadly sees free trade as a principle, and then they kind of built this sort of edifice of first GATT in the World Trade Organization, sort of edifice of rules around it to try and codify that principle into kind of some sort of working arrangement, imperfect as it may be. China, on the other hand, sees free trade as a set of rules. It came to the free trade world late, got accepted into WTO in the year 2000. And so, it sees the free trade as being the set of rules that exists to maintain this free trade regime.

And so, that’s a really big distinction because as far as the Chinese are concerned, compliance with those rules makes you pro-free trade, makes you a champion of free trade, makes you a party which is preserving the free trade regime. Whereas in the US and the EU, it’s a completely different outlook because you can kind of be adhering to those rules, but if those principles have kind of broken down, then, well, we don’t have free trade anymore.

Now, of course, when we’re talking about principle, the West has never been entirely pure in its commitment or even its defense of free trade. I mean, countries have run large, persistent trade surpluses for a long time. I mean, most notably Japan and Germany. Countries have used subsidies liberally. They’ve defended, they’ve pursued carve-outs for certain industries that are politically sensitive in their own economies.

Even when it comes to the principle, the free trade regime as it’s been built has never been kind of this, you know, pure thing. It’s been a real, just an effort to kind of build a scaffold around the principle. And so now China is-

Andrew: Yeah, let me just make a quick point there before you move on. Well, I’ll make the point that you made a great point, which is I think you’re fundamentally right that China does see these as rules to be followed, right? It doesn’t care about the principle of free trade so much. It’s like, hey, we’re operating within the system that you built. But I will say no one’s blameless here.

Kind of just like the U.S. and other Western countries, or at least used to, talk about free trade as a good in and of itself, but didn’t always adhere to the rules, China also understands that they’re not adhering to the spirit of free trade often, and so makes an argument that, while I think you’re right, that they fundamentally, they’re like, “Well, we truly are following the rules,” but they know that they’re following them while also bending them and not adhering to the spirit of the design.

And so, all that is to say everyone here is making arguments that are fully in their self-interest, and we’re aware of that, but we’re just going to kind of deconstruct what we think the merits are and I guess the non-merits, where these arguments fall flat. So, that may be a bit of a framing piece, but anyway, go on.

Dinny: Yeah, well, I mean, it’s a good point you make because I think just going back to what I was saying about subsidies and carve-outs and whatnot, China kind of pushes, sort of points to areas in the West, you know, where the Western nations haven’t kind of adhered to the principle and kind of go, “Look, you guys have never lived up to your own principles. Why are you pointing the finger at us?” And in the MOFCOM essay, they talk specifically about, look, you know, big Western countries have run persistent trade deficits. And I think here, there’s certainly a degree of cynicism involved in MOFCOM’s essay, because one of the examples they give is that, look, the United States in 1953 accounted for 44% of global manufacturing output.

And its point is like, look, we’re not even at that level. Although the United Nations, I think it was the UNIDO, has a well-published sized estimate or forecast that by 2030, if things continue the way they are, China will account for 45% of global manufacturing output. So, it’s interesting. Oh, that is the track that we’re on. MOFCOM saying, hey, the United States was in exactly the same position in 1953. Of course, the difference is the U.S. was in that position because we just had a world war which had completely destroyed the industrial stock of both Europe and East Asia.

And so, I mean, for China to kind of go, “Hey, we’ve been here before, you did it, why not us?” I mean, it is a little bit cynical. And there’s also an element of false equivalency as well in the way that the MOFCOM essay talks about subsidies as well. It’s the same argument. “Hey, look, you guys use subsidies all the time. We’re using subsidies. We’re compliant with the rules. Sort of back off.” But of course, the OECD recently published a report which said that China’s industrial subsidies are anywhere between three and eight times the level of any other country in the OECD.

So, yes, China does it. Yes, everybody does it. But China is doing it to a degree of magnitude far beyond what anybody else is pursuing. And I think that kind of comes back to sort of the principles of free trade again. It’s like, sure, Western countries have never purely adhered to the principles of free trade. But in some ways, there was kind of a dance or, you know, there were certain acceptable levels that everyone kind of sort of were willing to live within. And China, with the scale of its trade surplus and the scale of its subsidies, seem to have blown past those informal limits and is now going, “But there were never any limits. You do it. We’re doing it. What’s wrong with what we’re doing?” That’s why I kind of feel the essay is perhaps a little bit cynical.

Andrew: Yeah. I mean, it’s definitely very cynical. Both things can be true at the same time, but it makes some good points and is very cynical. It’s like having a political argument with someone on the other side. The points they may be making may be generally true, but they’re usually taken to such an extreme, no matter which side you’re on, that they become sort of cynical. I don’t what the right word is. They just become kind of disingenuous at a point. But anyway, so I think that’s what’s happening here.

But what the next question for you is, you’ve laid out kind of what the arguments are, what you think about them. You made the point that China is trying to play the victim. Why is it doing that?

Dinny: Yeah, I think it’s laying the groundwork for a protracted trade war. I think it’s trying to establish a theoretical foundation and justification for pushing the back against the EU and the United States. And I think it’s trying to frame it in a way whereby it can say it has the moral high ground and that it will champion a global free trade order and that gives it legitimacy for why it will not back down in the face of U.S., EU, anybody else’s efforts to try and reduce China’s trade surplus, to try and rebalance the imbalances.

Andrew: Well, that’s somewhat daunting and are definitely kind of pessimistic, but I think you’re probably right there. Let’s talk about some of the specific arguments. So, let’s start with the title itself. It’s about “so-called excess capacity.” First of all, there’s the ‘so-called.’ Secondly, it says ‘excess’ instead of overcapacity. That word choice is very specific to say, kind of, to reframe the argument and to basically say we don’t accept basically the overall framing that the West is using. So, sort of that whole, again, back to the political argument, you know, I disagree with the premise of your question, sir, kind of thing.

So, how significant do you think it is that Beijing is explicitly rejecting the framing outright rather than sort of just contesting the specifics?

Dinny: Well, at this point, I don’t think we should be surprised because Beijing does not talk about overcapacity, and it hasn’t for about 18 months. It talks about involution. Now, if I remember the milestones properly, it was in December 2024, that in the Central Economic Work Conference readout, the big end of the year to get together of all of China’s top economic policymakers. In the readout of that meeting, we saw mention of overcapacity.

One of the big challenges in the year ahead was we return to industrial overcapacity. And this was something that we hadn’t seen in government documents for at least a few years. I mean, overcapacity is a recurring theme in China’s economy. It goes in waves. It pops up. Beijing spends years dealing with it. You have a lull for a while, and then it comes back. And so, you know, end of December, all of a sudden it was back on the agenda. And that was kind of the first and the last we saw of it. And then in the new year, after a few months, it was replaced by this word, involution.

And I think that was a deliberate political choice, largely because when they used the word involution in December of 2024, the U.S., the EU, they all jumped on it. They were like, “See, see, you have overcapacity. We want to work with you to get rid of your overcapacity.” And Beijing was having none of that, and so it reframed the issue. Involution isn’t just another word for overcapacity. It reflects a very fundamental difference in understanding of what the problem is. So, overcapacity is used by the U.S. and EU to kind of look at Chinese industry and say, look, you’ve overbuilt. You have too many factories. You’re driving prices down. You’re driving out competition.

Our firm should be competitive, but because you have massively over-invested, we can’t compete on what should be a fair market basis. So, you need to close down your factories. So, China’s approach, though, is that the issue isn’t that there’s too much installed capacity, that the issue is one of pricing. The issue is of excess competition. And so, whereas foreigners talk about overcapacity as a way to get China to close down capacity, China talks about involution as a way to get Chinese firms to stop running each other into the ground, stop competing each other, stop their race to the bottom.

And so, it’s about stopping Chinese firms overly aggressively driving prices down. It’s about ultimately trying to restore Chinese firms to profitability by stopping them from cutting prices overly aggressively. And so that’s what involution is about. It’s about what they see as being excessive and detrimental and damaging competition. And they don’t see the root cause as being overinvestment really in anything. And so, of course, when you frame it like that, the solutions are different and the ultimate beneficiaries of success of policies to deal with those problems are different as well.

If China successfully deals with overcapacity, then the EU and the U.S. should expect to come out in front in some way. Where, if China can successfully deal with involution, then the winners here are Chinese firms that will see their profits rise and the Chinese state that will see an increase in tax revenue.

Andrew: This one isn’t on our list, but we find it at the top. So, I’ll just throw it in here. What do you think make of the argument about our trade surplus is just driven by the competitiveness of our firms, right? That we’re just better than yours. Because I feel like this an argument they’re making more and more directly that I’m hearing to European officials in particular, to a lot of companies even, to other officials. We heard it sort of at the CDF, the China Development Forum in the spring. You know, it’s another one where, like I said, I have a little bit of sympathy.

I actually do think the Chinese companies are really good, and the products are really good, especially when you think of the big core exports that are growing quickly, the renewable energy stuff, the clean tech stuff, the AI link stuff. These companies are good. Yeah. And the products are cheap. They’re cheap, but good. I talked with Cory yesterday about the battery tech, for example, is like world leading and will continue to be, and that pod will come out next week. And it’s the cheapest in the world. So, I don’t know. What do you think about that part of their argument?

Dinny: It’s complicated because it’s not just the quality of their innovation and the technology. I mean, the crucible that is competition in these cutting-edge industries in China at the moment is like nowhere else on earth. I mean, the sheer intensity of the competition is crazy. And yet, part of the problem here is that we all kind of pretend that we’re all operating or running on the same economic model. China is doing something completely different. I mean, we assume that when firms compete, they’re competing for profit. They’re competing to maximize returns to their shareholders.

Chinese firms might get to that point eventually, but at the startup stage, it’s all about competing for market share. I mean, that’s not unusual. You’ll see the same in Silicon Valley as well. It’s just that the ability of Chinese firms to survive far beyond when market forces should dictate that they collapse is something that’s fairly unique to the Chinese system. That’s why you had hundreds of auto companies, electric vehicle companies. That’s why you still have about 80 of them; that they managed to compete far beyond what their sales and their profit margins would typically allow them to do because they’re getting support from all sorts of different corners of the economy.

They might be getting explicit subsidies, cash subsidies, sure. They might be operating on cheap, free, or subsidized land. They might have their utilities subsidized. They might be getting direct capital injection from a local government. The local government may have secured for them contracts. For example, if you’re making cars locally for me in this area, then all taxis in this area have to be that brand of car. Local governments can put up trade barriers between other cities and other provinces.

There’s just all these mechanisms which allow Chinese firms, both at the cutting edge and even in traditional industries, whether it be steel or aluminum or whatever, to survive on non-market terms for far longer than would ever be possible elsewhere, which allows them to drive prices into the ground, which allows them to drive out other Chinese competitors. But once they go overseas, also allows them to sort of drive out foreign competitors as well.

So yeah, Chinese firms are innovative. Yes, the crucible of competition in China at the moment is second to none. Chinese efficiencies in the factory floor are fantastic. But the fact that it’s running a trillion-dollar annual trade surplus isn’t necessarily indicative of all of that. And putting aside everything I just said, and this kind of brings us, leading to the next issue I wanted to talk to you about — The other question then becomes, why is China incapable of producing so little of what it produces. And understandably, it doesn’t have to consume everything it makes.

That’s what exports are for. But even if it’s not consuming what it makes, why is it so incapable of importing from the rest of the world, to a comparable degree, the volume of what it’s exporting? And that’s kind of the issue here. It’s not about the quality or the innovation of what China produces. It is about why the domestic economy is so incapable of consuming far more than it actually does, such that you end up with this earth-shattering global economy redefining trade surplus.

Andrew: Yeah, that’s a good point, really good point, which we’ll pick up in a sec. Also a good point about all the companies. I just had a buddy who was down with his family in Costa Rica was telling me about all the Chinese EVs he saw there, and they were super cheap and pretty good. They weren’t always the high end, but he said a bunch of brands he’d never even heard of. And this guy follows this stuff pretty closely. And so, I do wonder what element of it is because of just the sheer number of companies and their ability to kind of compete on cost. It’s one I’ll have to think through.

I’m just thinking through it in real time. Because what I always say is like, actually, the worst thing in the world would be if like there were only two very dominant Chinese companies because they would just like run everyone else globally into the ground. So, maybe it’s actually good, like careful what you wish for kind of thing in terms of like saying, oh, you need to consolidate. Then you have two super profitable, super healthy companies and they just dominate. But that could be one problem. But then I also wonder how the number of companies plays into it.

Which one of those is worse? Which one would drive more of a surplus? Anyway, just kind of thinking out loud on that. But let’s get back to the consumption piece because the interesting part of that is, of course, this is something that the white paper that MOFCOM puts out, basically doesn’t even engage with this issue. And you kind of highlighted that when you wrote about this in our daily note. And this is the idea that relative to the size of the economy, Chinese households consume less than basically anyone else on earth, right?

And so, they talk about Chinese consumption growing quickly, which is also true, right? The economists talk about the consumption paradox. It’s so low as a percentage of GDP, but it’s also growing quite quickly at the same time. So, that’s a little bit of a paradox. But again, the paper doesn’t even really engage with that much at all. So, talk to us about what you mean by this. You know, just expound a little bit more on what you were just talking about in terms of weak consumption, the inability of the Chinese economy to absorb imports at all, etc.

Dinny: Yeah, so it’s interesting because, as you said, this MOFCOM essay was like, look, you know, Chinese households are spending more and more. It’s becoming a bigger share of our economy. Clearly, weak domestic demand isn’t contributing to overcapacity, which that is not the argument anybody’s making. The problem, the reason China’s trade surplus kind of exists is because Chinese households consume so much, not in absolute terms, because it’s the second biggest economy in the world.

China’s households are becoming more affluent, you know, compared to almost anywhere else in the world other than really the United States. Yeah, as a group, the Chinese consumer population consumes a huge amount, but that doesn’t matter when we’re talking about what that population is also producing. What matters is how much they are consuming relative to the size of their economy. Chinese households, in terms of end consumption, they consume far less than perhaps any other economy in the world. I think as a percentage of GDP, it’s about 45%, and most other countries, use about 65%, 70%.

So, it is a massive, massive shortfall. And this is where we kind of get into the territory of Michael Pettis’s arguments, and he probably explains it far better than I ever will. But he’s also not the only person who makes it as well. I mean, inside China as well, academics like Liu Shijin make this exact same argument that Chinese households do not consume anywhere near as much as anyone else does. And ultimately, they need to consume more to be able to create a sustainable source of demand. So, the issue here is that if the nation isn’t consuming, if households aren’t consuming, what it effectively means is that the national wealth isn’t going to households.

It’s being distributed in some other way. And that other way really is that the wealth is pooling in the hands of firms. Now, of course, firms can generate wealth, but then distribute it back to households, either as wages or bonuses or as dividends or even as taxes, which then get redistributed to households, right? But in China’s system, the national wealth disproportionately avoids household and pools with firms. And what has happened is that China has one of the highest savings rates in the world, something like I think 55% of GDP is saved, or maybe it’s 50% relative… I think the global average is something closer to 25%.

So, all those national savings, about half are being saved by households and the other half is being saved by companies, by corporations. So, what it means is when you’re saving, you’re not spending. And when you’re saving, savings, by definition, are being used for investment. So, the system by definition has been set up to provide a self-replenishing, cheap source of funds for firms to invest because the cheapest source of funds is retained profits for firms, right? They don’t have to go out and borrow. They don’t have to issue shares.

And so, having this system which kind of recycles money back into the firms, it creates all these resources that have to be invested. And, of course, you know, what are these mechanisms? Look, you look at the state sector, which accounts for a significant portion of economic activity. Sure, they pay dividends, but they pay dividends to the government. And in most cases, they then get handed straight back to the state sector as capital injections and as subsidies. You look at the Hukou system. The Hukou system is effectively the household registration system whereby people who move from the countryside to the cities, because they’re legally not really supposed to be there, it means that employers can pay them less.

It means employers avoid making their social security contributions because they don’t really have any political connections, political protections. And so, you’ve got a system, again, whereby the labor system is effectively set up in a way to provide an implicit subsidy to employers. The property system, although we look at it as a mechanism, as an engine for generating wealth for China’s middle class, that wealth was never realized. They were all paper gains. The property system was also a massive tool for extracting wealth from households by local governments through inflated land prices that then recycled the money back into construction companies for infrastructure investment.

I mean, it’s almost every layer of Chinese economy in some way or the other was tooled to either minimize the degree to which wealth was flowing into households or, in some ways, extracting wealth from households to support the corporate sector. And what that’s resulted in is these huge pools of savings, which, by definition, end up in investment. And those investments then result in greater industrial output, and somebody has to buy that output. But because Chinese households aren’t spending, because they get such a relatively small share of the national wealth, well, that output has to go somewhere else.

And it turns into exports. And so, this is kind of the recurring problem of China’s economy. All these arguments in the MOFCOM essay, so many of them are like, this is just the way things are. We have the great surplus…

Andrew: This is the way of the world.

Dinny: Exactly. This is the way of the world, right? It’s like other countries have big surpluses. Where now this is a period of technological innovation. Every industrial and technological revolution results in overcapacity because old plant gets superseded by new machines. We can get used to it. This is just the water we swim in. This is how the economy works. Whereas the reality is China runs such a big trade surplus because of this savings and consumption imbalance, and that’s a political decision.

That is a decision China made, really 40 years ago, and it was a decision made by so many other developing countries, particularly in East Asia, as a way to generate wealth, to supercharge domestic development. But we’re now at a stage where that sort of economy works really well when the sheer needs of the domestic economy demand large-scale investment. So, China needed that when the housing stock was absolutely lousy, which it was at the end of the 1990s.

And you need it when the population is rapidly expanding or migrating to the cities because they need housing, and they need infrastructure. And you need it when your economy is advancing because you need to upgrade infrastructure. There is legitimate reasons for a domestic economy to need to shortchange households in the interests of investment because everyone’s better off. But China’s not there anymore. China has a surfeit of housing. It doesn’t need to invest in infrastructure the way that it used to.

And yes, it has all these savings and an under-consuming household sector. So, you have this massive imbalance that’s getting worse and worse, and the adjustment costs are being forced on the rest of the world.

Andrew: Yeah, this is definitely the point where they lose me in terms of what I was saying before, you know, some of their arguments are grounded in reality. Some of them are legitimate. They just take them to the extreme. This one, just not engaging with this idea of underconsumption and the need to do some sort of rebalancing and just saying this is kind of the way of the world and how it works. It’s a bridge too far for me. And I think it really kind of undercuts the whole argument. But then, again, this is not really an economic argument they’re trying to win.

It’s more of a political thing, as you said. And so, this kind of brings us back to another one of the off-putting parts of this whole effort, which is this idea of China being a victim. And in particular, a victim, at the same time that is supposedly a champion of the global trade regime. I mean, the question is sort of how is the U.S. or EU even supposed to react to that? It’s not like they’re going to look at themselves and be like, “You know, actually, you’re right. China is playing by the rules that we set up, and we should just accept this and move on. And it is the natural order of things.”

I mean, that is just not happening. So, where does that leave us in terms of any kind of response that the U.S. or EU would make? I guess there’s not going to be a massive feel. They will not feel a need to respond, but also what does that tell us about this whole effort at all?

Dinny: Yeah. Look, the way that I see it is that this sort of framing from MOFCOM doesn’t really set the stage for compromise or for finding mutual ground.

Andrew: You don’t say!

Dinny: I mean, I think, if there was any ambiguity about that, I mean, you look at sort of how China has engaged with the trade wars over the past year, I mean, it’s become pretty clear that it’s built up an arsenal of tools which it can deploy quite successfully against the protectionist measures of other countries. And so, as much as anything, I think this essay signals Beijing will continue to do that. And what it’s signaling is that it has the high moral ground when it does deploy those tools. And so, I mean, as you were just saying, where does this leave everybody else? Because if we go back to first principles, the global free trade regime wasn’t supposed to look like this.

I mean, sure, plenty of countries have abused it over the years with all that stuff we talked about; persistent trade surpluses, subsidies, whatever. But the foundational principles of having a free trade regime in the first place was that everybody would be better off, right? So, sure, countries would see some of their industries suffer because you bring down the trade wars and the tariffs and the trade barriers, and other countries would do certain things better than you did, and so your domestic industries would suffer in some areas. But other domestic industries would do far, far better, and net-net as a nation everybody would be better off.

The idea was that by opening ourselves up to free trade, the benefits net-net would justify any adjustment costs, but that’s a mile away from what’s going on at the moment. And I think Europe is really the canary in all this, because they’re increasingly at a point where they’re going to have to decide whether they are willing to accept the cost of protecting their own domestic industries. And that’s kind of the first step. And then the second question becomes, well, if they do, what comes next? What is the trade regime that replaces what we currently have?

So, at the moment, it kind of feels like the inevitable direction on the path, that sort of feels like the path that we’re on, because China is arguing that the system is currently operating as it should. So, if that’s the case, then it’s no longer really in the interest of many countries to adhere to that system anymore. And the only thing keeping them in line and adhering to, at least paying lip service to the current order is the threat of Chinese repercussions. And I think, increasingly, that’s kind of where we’re at. I mean, I think we’re going to see a lot more deep thinking about what we replace the current water with.

Andrew: Yeah, I think you make a good point about Europe. I’ve always thought it was a little weird that the Americans are making the overcapacity argument or leaning into it because I don’t think Chinese overcapacity really impacts the U.S. economy all that much. It’s in the stuff that we tend to buy from China is a little low-value add. We have decided not to allow Chinese EVs into this country. I talked with Cory on this podcast that we’re going to release next week while on vacation, we talked about the battery sector, and I was just talking about how I don’t think it’s tenable to just shut down our economy, or not shut down our economy, shut out Chinese products from our economy, like with the robotics thing that happened this week and with the EV thing that’s happened before, and which may happen with batteries.

I think U.S. companies understand that this tech is really good and they want to license it. They basically want to work with Chinese companies. So, long term, I don’t think that’s a strategy from the U.S. side. And it doesn’t work long term to just kind of turn towards autarky or cut out China of the global trading system, say, “We’re not going to buy any of your products,” because, as you said, China will retaliate. And we want them to allow our companies to operate there. We do want them to buy some level of our exports. But all of that is to say the overcapacity, excess capacity, whatever, is a moot point, I think, in the U.S.-China relationship for the most part.

Europe’s where the rubber meets the road. And the EV thing obviously is the most kind of front and center, hollowing out the German car industry in particular, potentially the broader European auto sector; clean tech’s another area. And so, I do think it’s an interesting idea that China is ramping this up with the Europeans in mind and is ready to really play some hardball. And I think you’re right. The Europeans are going to have to decide. Do they want to take the path of the Americans and say, we’re just shutting this out? I don’t think that’s a viable option. Like I said, for the U.S., it’s more viable. But I don’t think that’s viable for the Europeans for a bunch of reasons, for political reasons, for economic reasons.

So, we’ll see. And then we’ll have to see, do the Europeans have the stomach to fight against China? Because you know that China, once gloves go off, they’re going to be nasty. So, I just don’t think, as I’m just talking this through, I guess somewhat concerning that MOFCOM is putting this out because it may be a sign that this Europe-China fight might get even nastier than it has been.

Dinny: Yeah. I mean, the way I see it is the way Europe works is everyone keeps talking until everyone arrives at a compromise. And I don’t think that can work in China-EU discussions at this point. To the extent that that may have happened in the past, I don’t think it’ll happen this time. And I look at an essay like this, and China is very much nailing its colors to the mast. It’s like, we are the victims here. We have become the champions of the trade regime that you built. It is not us to make compromises, and we will defend our position. That’s what’s… I was going to say, between the lines in this essay, but I’m just…

Andrew: Decide between the lines.

Dinny: It’s all the subtext.

Andrew: Totally. Well, I’ll just say, I’ve said this a few times before on the pod, and elsewhere, I think China’s increasingly saying the quiet part out loud. They’re basically saying, the model is the model, get used to it. We’re better than you because we’re more competitive and more innovative. And if that leads to exports, so be it. So, that to me is the kind of change that we’ve seen since, again, I first started hearing that message back in March this year. And I think that’s pretty telling because once they make it official, so to speak, like that, you know, it’s one thing when they kind of do it subtly and won’t kind of be that blunt about it and won’t negotiate, but then try to change things at the very end.

But they’re just kind of putting it out there and saying, “This is how it is and we’re not backing down.” Now, the whole adding — “Oh, and we’re the victim,” that’s the part of the Chinese system that drives me crazy, or of any authoritarian system where it’s like this brittle, like can’t deal with any criticism. Yeah, it just drives me nuts. So, I could do without that. But I just find this whole get used to it attitude concerning and interesting from an analytical standpoint. What are your thoughts on that?

Dinny: Yeah, I think interesting is the right word because China is in a position at the moment, given how weak domestic demand is, I mean, the economy is exports, right? I mean, their ability to sort of maintain growth, to sort of sustain this massive industrial investment that they’ve been pursuing over the last, what, six, seven years, I mean, it relies on the rest of the world buying more and more Chinese stuff. And so, on one level, that’s quite a vulnerable position to be in. But on another, I think Beijing feels like it holds all the cards.

I mean, you look at how they managed the U.S., sort of pushing back with rare earths and not, I think it feels like it’s an even stronger position in dealing with the Europeans. And so, even on one level, their economy is vulnerable to a decline in exports. I think they think they hold all the cards because no one’s going to sort of push back to a degree that would really result in a significant hit to the export machine.

Andrew: Yeah, that’s interesting. We have not seen China take that approach yet. And by that approach, I mean, if an economy like the U.S. has done restricts imports or tariffs something. So, I guess, obviously China used the rare earths vis-à-vis the U.S. on tariffs. But they haven’t done it specifically to say like if the U.S. or another country says we’re not going to buy X from you, they haven’t said, “Well, if you won’t buy X, then you can’t buy Y. You have to buy both.”

And that would be an interesting development of the Chinese lawfare toolkit, right?

Dinny: Absolutely.

Andrew: Well, on that very happy note, Dinny, it’s definitely depressing. It’ll be interesting, again, from an analytical standpoint. I always try not to use the word interesting because usually we’re talking to clients and they have a problem, I’m like, “Oh, that’s interesting.” And they’re like, “No, it’s a problem.” Anyway, from an analytical standpoint, we’ll be watching how all this plays out. I really appreciate you taking the time to walk through this. Pretty fascinating that they put this out, and I think worth dissecting and kind of going through kind of how they’re trying to frame this up. So, thanks for that, man.

Dinny: Yeah, no worries, mate.

Andrew: And thanks, everybody, for listening. We’ll see you next time. Bye, everybody.