Some context: Manus is a Chinese AI agent startup that relocated to Singapore in June 2025. In December 2025, Meta acquired the company.

• Beijing was never going to let that slide — and we flagged back in January that intervention was coming.

• On April 27, China’s macro planner (NDRC) issued a one-sentence notice ordering parties to the Meta-Manus deal to unwind the transaction.

Rather than invoking antitrust regulations or export controls, the NDRC has chosen to act through a little well-known mechanism: The Measures for Security Review of Foreign Investments.

• This regulation requires foreign acquisitions of Chinese companies in sensitive sectors to undergo a national security review before completion.

The picture is still coming into focus — and there are two open questions we’re tracking closely.

The first is jurisdiction.

• The 2020 measures apply to transactions within the territory of the PRC — since Manus relocated to Singapore before the acquisition, the entity Meta purchased is not technically within Chinese territory.

• Beijing may argue that the original Manus parent entity still has an in-territory footprint that triggers the rules, or that the technology should never have been transferred abroad in the first place — effectively arguing China never lost jurisdiction.

• The theory Beijing settles on matters enormously, because it will determine how broadly this precedent can be applied to other Chinese startups that have relocated overseas.

The second question is enforcement.

• If the measures determine an acquisition shouldn’t have proceeded, regulators can order the transaction to be unwound.

• If parties involved refuse, then the state can “order them to dispose of their equity or assets” and take further measures to restore the pre-investment situation — ominous in theory, but unclear in practice, particularly since neither Manus nor Meta is in China.

If Beijing wants to send a real message, it may need to mix and match the investment review rules with other regulations that carry heavier consequences, such as export controls with criminal liability.

However, a heavy-handed approach risks undermining China’s business environment.

• If companies can’t clearly determine what constitutes a prohibited “technology transfer,” risk-taking will slow, compliance costs will rise, and founders may become overly cautious or even opt for pre-emptive relocation.

The bottom line: The bigger picture here goes well beyond Meta and Manus.

• If Beijing cracks down too hard on tech companies moving abroad, it risks incentivising founders to avoid starting companies in China in the first place.

• But if Beijing lets this slide, what’s to stop more strategically important startups, like DeepSeek, from doing the same?

We’ll be tracking this closely for our Tech Daily subscribers — unpacking how Beijing’s regulatory thinking evolves and what it means for businesses exposed to China’s tech sector.

• Click here to sign up for a free 30-day trial.

Kendra Schaefer, Head of Tech Research, Trivium China

What you missed

U.S.-China

A delegation of five U.S. Senators led by Steve Daines met with Premier Li Qiang, legislative chairman Zhao Leji, and top diplomat Wang Yi on Thursday, wrapping up a five-day China visit.

• Beijing views Daines as a useful backchannel to Washington in the run-up to U.S. President Donald Trump’s hotly anticipated visit on May 14-15.

• Both Li and Zhao wanted to discuss Taiwan, calling the issue a “core interest.”

• At minimum, Beijing expects Washington to stick with its longstanding One China policy — though leaders may also view Trump’s upcoming visit as a chance to extract some concessions on Taiwan.

On Thursday, Semafor scooped that U.S. officials are assembling a CEO delegation to accompany U.S. President Donald Trump on his state visit to Beijing next week.

• Bigwigs from Nvidia, Apple, Exxon, Boeing, Qualcomm, Blackstone, Citigroup, and Visa head a growing list of invitees.

• According to Semafor, a 500-plane Boeing MAX order and soybean purchases are in the offing — but Chinese EV manufacturing in the U.S. is likely not.

Foreign affairs

On Wednesday, top diplomat Wang Yi had a debrief on U.S.-Iran negotiations from Iranian Foreign Minister Abbas Araghchi in Beijing.

• Araghchi implored China to help end the conflict: “Iran…looks forward to China continuing to play an active role in promoting peace and ending the war.”

• Wang said China is willing to “play a greater role in restoring peace” and fostering regional stability — but in a supporting role: “The Gulf and Middle Eastern countries should keep their destiny in their own hands.”

Econ and finance

China’s secondhand housing market may finally be in recovery mode. According to April data from China Real Estate Information Corp. (CRIC):

• Across 20 major cities, resale transaction volume by floor space jumped 17% y/y — a sharp pickup from the 6% y/y growth posted in March.

• Shanghai (+20%) and Chengdu (+18%) were among the top performers, helped by supportive local policies rolled out in Q1.

April PMI data suggests China’s manufacturing base is holding up better than expected in the face of the Iran war.

• The RatingDog PMI surged to 52.2, up sharply from 50.8 the previous month.

• The NBS manufacturing PMI edged down marginally to 50.3, from 50.4 in March.

• But all three enterprise size categories — large, medium, and small — registered above the 50 threshold simultaneously, only the second time this has happened since 2024.

Business environment

On May 2, China’s Ministry of Commerce (MofCom) directed Chinese entities not to recognize, enforce, or comply with U.S. sanctions on five Chinese refiners blacklisted for handling Iranian crude.

• This marks the first invocation of MofCom’s 2021 Blocking Rules.

• The moves is a response to the U.S. Treasury’s April 24 announcement that it had sanctioned a fifth Chinese teapot refiner — Hengli Petrochemical (Dalian) — for processing Iranian crude, having added the first four last year.

China’s financial regulator (NFRA) has reportedly told major state banks to pause new loans to five U.S.-sanctioned refiners while they review exposure.

• The U.S. Treasury blacklisted Hengli Petrochemcial and four other Chinese refiners in late April over their Iranian oil purchases, warning banks they risk secondary sanctions for supporting these transactions.

• Beijing is trying to project defiance publicly while protecting its systemically important banks from losing U.S.D clearing access.

Tech

On April 30, Bank Indonesia announced that its national QR payment system (QRIS) is now interoperable with China’s QR payment ecosystem.

• Chinese travelers can now use domestic mobile apps — such as Alipay or UnionPay — to scan QRIS codes at over 40 million Indonesian merchants.

• Indonesian consumers likewise can use their domestic e-wallets to pay Chinese merchants.

• Settlement runs through the direct rupiah-RMB mechanism established by Beijing and Jakarta in 2020, bypassing the dollar.

On May 3, Qiushi published an in-depth review of China’s AI industry.

• The report acknowledges that compute shortages are dragging on China’s AI R&D and attributes this entirely to U.S. chip controls, while omitting that Beijing has left Nvidia H200 compute on the table.

• It also argues that AI competition is a full-stack competition: “What we face is not a bottleneck in any single technology, but a full-stack competition spanning everything from underlying hardware to upper-layer ecosystems.”

Net zero

On Thursday, the Party Central Committee and State Council general offices issued measures to evaluate provincial progress toward Xi Jinping’s flagship “Beautiful China” environmental initiative.

• These come hot on the heels of a new landmark provincial cadre climate accountability system released two weeks ago.

• Provinces will now be graded against KPIs covering air quality, water and marine ecology, and soil health, as well as progress on low-carbon transition, pollution control, and environmental safety.

Politics

On Thursday, Wei Fenghe — Minister of Defense from March 2018 to March 2023 — was convicted of bribery and sentenced to death with a two-year reprieve.

• Li Shangfu — Minister of Defense from March to October 2023 — was convicted of both accepting and offering bribes, and received the same punishment.

• The investigations into Wei and Li kicked off in 2023 as part of an unprecedented military anti-corruption campaign that has since purged roughly 90% of China’s senior generals.

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 first half of this week’s Trivium China Podcast, host Andrew Polk is joined by Trivium’s Head of Supply Chain and Critical Minerals Research Cory Combs to unpack what China’s latest legal and regulatory moves mean for the future of US-China economic competition and sanctions enforcement.

The two discuss:

• China’s first-ever use of its blocking rules

• Why Beijing reacted so strongly to new US sanctions on Chinese refiners

• The growing risks facing banks and firms caught between US and Chinese legal systems

• How China’s broader counter-sanctions toolkit is evolving

• Why uncertainty itself may be part of Beijing’s strategy

Then in the second half of the pod, Andrew is joined by Trivium’s Head of Markets Research Dinny McMahon and Lead Macro Analyst Joe Peissel to break down the latest signals from China’s economy following a surprisingly strong Q1.

The three discuss:

• Why China’s economy outperformed expectations early in the year

• How the Iran war is affecting inflation, exports, and industrial costs

• Beijing’s renewed push on infrastructure investment

• Why consumption remains the economy’s weakest link

• Whether China’s export machine can continue powering growth through the rest of 2026

Together, the conversations offer a timely look at how Beijing is navigating mounting geopolitical pressure while trying to keep the economy on track.

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 Supply Chain and Critical Minerals Research, Cory Combs. Cory, how are you doing, man?

Cory Combs: Well, good to be back.

Andrew: Yeah, always good to have you. I’m having Cory on again for his second go around recently, or a quick return to the pod, primarily because we want to talk about China’s first-ever use of its blocking rules to counter U.S. sanctions on Chinese companies, which took place on Friday after the U.S. sanctioned some Chinese companies tied to purchases of Iranian oil. We’ll talk about that. We’ll talk about what it means for the future of sort of economic coercion and economic competition and warfare, if you want to call it that, between Washington and Beijing.

After Cory and I speak, this is the first half of the pod, I’m going to speak to our Head of Markets Research, Dinny McMahon, and our lead China Macro Analyst, Joe Peissel, about the latest on the macro economy. So, listeners will want to stick around for that in the second half of the pod. Two very interesting conversations and very timely. So, we’ll cover a lot of ground today. But before we get into all of it, we have to start with our customary vibe check. Cory, how’s your vibe?

Cory: I’m excited. There’s a lot going on right now, but I’ll be in Philly for a conference here shortly with the Penn Project. I’ll be doing some other just kind of interesting subnational work over the next few months. And so, it’s nice personally, I’ll just say, to have, in the midst of all this kind of big picture statecraft stuff, to also have some sub-national engagements, trying to move the needle forward on clean tech and a few other things of personal passions of mine. So, yeah, it’s a lot going on, but it’s a good time.

Andrew: Nice. Glad to hear it, man. Well, I, for my part, I’m feeling pretty energetic. I think I talked about this last week when Kendra was on the pod, but just kind of a lot of good things cooking with the business, which I’m really pumped about, which is awesome. And kind of simultaneous to that, I am, after years, I’ve been a runner for a really long time, but I’ve also been a business owner for a really long time.

And the business owner, the unhealthiness of being a business owner has offset the healthiness of being a runner or has outweighed. So, anyway, I’m back into running. I’ve been running a lot in 2026. I did a 13 miler on Saturday. First time in a while. I’ve done basically just a half-marathon on a Saturday. So, racking up the miles, feeling good, getting kind of my speed back. Anyway, people who are out there who are runners will know what I’m talking about. When you kind of hit a little bit of a groove, it’s really good.

Cory: Just a little humble bragging. I love it.

Andrew: It’s not a humble bragging. That’s for runners. Yeah, I mean, well, that’s not what I meant for it to be.

Cory: Not at all.

Andrew: All right, all right, all right. I’ll own it. But my point is I think a lot about running and the discipline of running and how it feeds into other parts of my life, including running a business and being a researcher. And, honestly, like most days, it’s just a boring slog when you’re running, and research is the exact same. And then every once in a while, you have this like, you know, really great run or race or something, you know, you publish a paper. And so, it’s just like miles and miles of slog with the staccato of actually, really, really exciting moments. So, I don’t know.

Cory: That’s great. We take the wins. Absolutely.

Andrew: Yeah. Anyway, that’s the energy I’m bringing to my life and this podcast in particular. So, everybody better strap in. All right. That was an extended vibe check. Hopefully, we still got our listeners with us. We’re going to get into the meat of the discussion in a second, but we also have to do the housekeeping real quick up top. Just a quick reminder that we are 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 policy towards China out of Western capitals like D.C., London, Brussels, and others. So, if you need any help on that front or on following domestic Chinese policy and analyzing domestic Chinese policy, 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 are interested in receiving more Trivium content, check out our website. Again, triviumchina.com, where we have a bunch of different subscription products, both free and paid. You will definitely find the China policy intel option that you need on our website. And finally, tell your friends and colleagues about Trivium, both about the podcast and the company. Like I said, we’ve got a lot of really good things going at the business. We’re growing. And a lot of that’s because of our listeners either engaging us for work or telling others about us. And those word-of-mouth recommendations really mean a lot and help us grow the business. So, with that, well, let’s just jump straight into it here, Cory. We’re talking about the blocking rules and China’s use of them. But why don’t you just set the table very basically, set the stage. What happened here? Walk us through the details.

Cory: Absolutely. So long and short is China has issued or deployed its blocking rules for the first time. And these are rules that were set up in 2021. They’re part of China’s broader counter-sanctions playbook. But this is the first deployment of them. And so there’s a lot of industry and political attention, both geopolitical attention, on what these are and how they might be used moving forward. So this is really the question mark. There is no precedent. This is the first issue. So, I’d like to give just a little bit of context of how we got here.

The proximate trigger here was that OFAC, the Office of Foreign Assets Control, sanctioned Hengli Petrochemical for its role in importing sanctioned Iranian crude. Now, there’s a bit of other context here, as folks watching the media coverage might be aware, OFAC is sanctioned for what are known as teapot refineries for other Chinese refineries over the last year. They started in March or April of 2025. And we saw a series of four different separate sanctions last year.

Beijing did not deploy a meaningful playbook against that, seems to have tolerated those actions. But on April 24th, we saw OFAC designate Hengli for sanctions under an executive order there. And in addition to Hengli, there were 19 Shadow Fleet vessels and about 40 affiliated shipping firms. There’s a number of other entities here, but the real focus is st Hengli refiner. In response to that, and in the broader provocations here, MOFCOM on May 2nd announced the deployments of the blocking rules. This is the first deployment again since they were issued in 2021.

Andrew: Okay, thanks for laying out those details, but it still sort of leaves a question open for listeners, what exactly are the blocking rules? Can you kind of tell us exactly what they do so that listeners can understand kind of the mechanism here?

Cory: Absolutely, exactly. So the formal name, and listeners will realize why we use the short name, the formal name is the Provisions on Counteracting Unjustified Extraterritorial Application Of Foreign Legislation and Other Measures. So, mouthful, but very clear about what this is. Basically, where Beijing deems that you have taken extraterritorial actions that unduly harm China’s interests, they reserve the right now to push back on that and to say, “You’re not allowed to comply with the foreign sanctions.” So, in this case, what the blocking rules are doing is saying that you are not allowed to comply with the U.S. sanctions on Hengli, on the refiners, or on the vessels in the Shadow Fleet, etc.

So, this is a very direct way of saying Beijing not only has the ability to issue its own sanctions, but to block, at least theoretically, it’s saying it has the authority to block the execution of other countries’ sanctions. This is loosely modeled on the EU blocking statute. There are differentiating factors, of course, but basically, yeah, it’s a prohibition on foreign measures. So, there are a few kind of factors here I think it’s worth noting. One is who does it apply to? Technically, it applies to anyone in China, and that includes foreign actors, right?

So, anyone involved in China can, or working in China, operating in China is not allowed to recognize, enforce or comply with, as the official language, the named sanctions. The other really two interesting pieces of this, one is that there is flexibility. And I’d say there’s more flexibility here than some of the other sanction toolkit measures as well. The first is that you have an exemption mechanism. So, the way all the blocking rules will work is that the Ministry of Commerce, MOFCOM, has to conduct an investigation to say, “Were these extraterritorial rules undue, unjust?” So again, there’s the names is unjustified extraterritorial application of foreign legislation.

This isn’t about anything that affects anything the U.S. does extraterritorially. It’s only if it’s considered unjustified. That explanation lies with MOFCOM. And specifically, a major piece of how MOFCOM is looking at this, there’s obviously the geopolitical angle, but at a technical level, Does it harm sanctioned Chinese parties in a way that is considered unjust? So, what’s the two pieces of the mechanism that allow for flexibility here? Basically, if you have certain interests, you can apply to MOFCOM for what’s known as an exceptional hardship exemption.

And basically, you can argue to MOFCOM that, “We’re not able to not comply with the U.S. sanctions. Please allow us to comply with the U.S. sanctions,” without also then getting countersanctioned by China, right? So, there is technically an escape valve here, the exemption mechanism. On the flip side, if you are a sanctioned Chinese party, you, under the blocking rules, have the right to sue entities that do comply with the sanctions that harm your interests in Chinese court. You can sue them for damages. So, this is going to be one of the dimensions of the implications. So, there are several, but this is going to be one of them.

This is not something we’ve really seen happen. So, a lot of the implications, I think it’s going to be a lot of very interesting legal analysis to come out of all of this. But so again, you can apply for an exemption or you can, in principle, sue a foreign actor who, or technically a Chinese actor, I guess, too, who is complying, who harms your interests. So, broadly speaking, the blocking rules are at least billed as, and I’m sure we’ll get to how this fits in the broader picture, but broadly, this is billed as a defensive mechanism.

It’s billed as a way to protect Chinese interests. And part of that means that Beijing has to allow for that flexibility so that it doesn’t just automatically, by definition, hamstring all Chinese actors with significant U.S. exposure. At the same time, it is a very clear statement of we can reduce the impact and we can directly interfere with the imposition of foreign sanctions, specifically U.S. sanctions. That’s what this is all about.

Andrew: That’s interesting. You made a point that this only applies to legal entities in China, is that right? So, it’s not a mechanism for extraterritorial jurisdiction by China. It’s jurisdiction, I guess, right?

Cory: That’s my understanding of it, yeah. And I’m sure, I mean, I’m sure that there will certainly be extraterritorial, you know, implications, right? If you’re a foreign actor operating in Hong Kong, one really interesting piece here, actually, is as far as I understand, as of recording, there’s still a little bit of uncertainty around the role of Hong Kong. Is Hong Kong in scope or out of scope? The May 2nd order didn’t, to my reading, make that super clear. In dome discourse, maybe that was deliberate. Others, Maybe it’s, anyway, to come. But yes, in general, yes, it’s really to defend China against imposition from abroad, not going abroad in this case.

Andrew: Helpful. Cool. Thanks. So I wanted to pick up on, you mentioned, interestingly, I think that these rules are sort of defensive in nature, which I agree with, right? as opposed to sort of the more offensive pieces of the legal toolkit as we kind of think about it, which would be export controls, anti-foreign sanctions law, unreliable entities list. But how do you think about it in terms of how these blocking rules fit into the wider lawfare toolkit that China has been developing over the past close to a decade?

Cory: Yeah, it’s actually almost exactly a decade. Yeah, the National Security Law, I believe, came out 2015. Is that right?

Andrew: I think that’s right.

Cory: Yeah, that was the legal foundation for all of this. It took a few years. I mean, the unreliable entity list appeared in late 2020, I believe it was September 2020. But yeah, so we’ve been seeing the buildup of this toolkit for a while. So the way I would frame it, and there’s probably other ways to conceptualize this, but my framing for now, I mean, one piece is clear, the NSL, National Security Law, is the underpinning of this, right? It’s the legal authority for China to sanction, counter-sanction, right? The main three pieces that I would flag, you’ve already listed, right? There’s the unreliable entity list. Effectively, this is a trade and investment blacklist or restrictions list, that’s outward-facing.

That’s actors who are flagged as, well, unreliable, that China is basically blacklisting. You have the Anti-Foreign Sanctions Law, which is, again, as the name very clearly indicates, sort of countermeasures, right? This includes asset freezes, visa bans, things like this. Again, it’s more outward facing, though. It’s looking at actors abroad who are affecting China’s interests. But then you have the blocking rules. They’re very inward-focused. And basically, what they do is they claim the authority to void foreign sanctions within China, basically a private right of action.

So, that’s how I would kind of pitch those. And across those, you see, basically, this maps on pretty, you know, not one for one, but in terms of function, we see a pretty clear mapping between U.S. and EU capabilities for sanctions, counter-sanctions. China has been building up the playbook to be able to match or in some cases exceed those authorities across various tools. And this is the piece that I’d argue is more defensive in nature, but it really helps round out the toolkit within China.

Andrew: Yeah. And I mean, we’ve been following this very closely as a company. I’ve been writing and analyzing all these moves out of China a lot for the past several years for clients. And I wrote a paper with Evan Medeiros a year and a half ago. Maybe it was just a year ago. I forget. Anyway, but kind of documenting just the pace, the accelerated pace with which all these tools are being used — Anti-Foreign Sanctions Law, Unreliable Entities List. Obviously, the export control regime, since April of last year, has come fully into force. But each of these tools is being used more aggressively, more proactively, more frequently. This just happens to be the first time that the blocking rules have been enforced. I mean, what do you make of the timing of that?

It’s obviously in response to the latest sanction, but is there anything broader to read into the timing from a strategic point of view, or is this just a tactical reaction to what the U.S. administration did?

Cory: Yeah, I mean, like so often, I feel like the answer is probably both and more. But there’s a few key pieces to unpack here. Absolutely. So one additional bit of context for diving into some new points is this is approximately about Hengli and refining, right? This is about the sanctions on China’s use of Iranian oil. From the U.S. perspective, this is ostensibly about Iran, at least officially speaking. And from China’s perspective, obviously, this is U.S. policy toward China in this case, right? So, there’s that kind of perception gap. And not that either side is completely unaware, but I think the framing is broadly in those different camps, so to speak.

The other context here is that mid-April, this is just over a week before the actual sanction on Hengli, Secretary Bessent, Treasury sent warning letters to two unnamed Chinese banks, warning about secondary sanctions exposure to transactions, right? So before it was Hengli, we have a very clear indication of, hey, your banks might be embroiled in this, and heads up, right? So, I think that is one critical piece of information. We also then need to talk a bit about China’s refining industry. We need to understand more, like, what is the playing field we’re operating in? In this case, it’s the refining industry. And so, there’s some critical details there that I think the White House’s own language budged a couple of things that are really important nuances to understand in China’s refining industry. So, I’d like to make those clear. But broadly, it’s not just about the oil. It’s also about the bank exposure as well.

Andrew: Yeah, well, we’ll come back to like whether or not China is going to sort of roll out these, what the timing means, and whether or not China is going to lean more on the blocking rules going forward in terms of, once we talk about the implications. But before we do that, you’re right. We should talk about sort of the bigger context of the refining industry and sort of how that fits into this story as well. So why don’t you go ahead and do that for us?

Cory: Yeah, absolutely. So we won’t wonk out too much, but a little bit. There are two or three, depending on how you define it. I would argue there’s kind of three parts of China’s refining industry. There’s the state majors, where you’ve got SINOPEC, CNPCC, the state refiners are massive. They’re massive global actors, they’re obviously massive Chinese actors. They dominate China’s refining capacity. They are global actors. They have incredibly deep, unavoidable, inextricable linkages to the dollar system. They can’t really not work within the USD system. And so they tend to comply with U.S. sanctions. And Beijing is not going to get in the way of that at this point. It just can’t. Then you have the independent refiners. And this is where I want to make a critical distinction.

A lot of people are familiar, if not before Iran, certainly now, with what are known as the teapots. the teapot refiners. These are traditionally the smaller, we’re talking kind of under 100,000 barrels per day capacity, but smaller entities, mostly in Shandong. They tend to be relatively low tech. They’re very local.

I mean, in Chinese, they’re literally, dúlì liànchǎng, so local refiners. The emphasis there is these are the actors that can absorb in China a ton of sanctioned crude. These are the refiners, the teapots that have bought up sanctioned Russian oil, sanctioned Venezuelan oil, and currently, in very large quantities, A lot of the Iranian crude as well. The notable feature of the teapots is that they have very limited exposure to the dollar. They are able to operate while sanctioned very effectively. A lot of the banks that lend to them, China has adapted. The system has adapted over years of U.S. oil sanctions.

And so you have this, not only the refining industry, but also the financing behind it has been able to adapt to operate, again, at smaller scale, but to be able to operate more renminbi denomination, less direct exposure to USD, fewer liquidity issues in global markets, right? And so, that’s why the teapots are able to basically get away with operating under sanctions. There’s a separate segment of the independents, though, which are what you might call mega refiners. There’s various ways to phrase it, the big boys of the independent side.

These are not what I would call a teapot, right? This includes Hengli. The mega projects are anywhere over 300,000 up to 800,000 plus barrels per day of capacity, of processing capacity. These are world-scale projects. And they’re integrated projects, right? These are not the kind of niche teapot things. These, again, including Hengli, have one, more exposure to the U.S. dollar system, and two, more of a need to participate globally in a global ecosystem. So, there’s deep petrochemical integration across the production chain there, but most importantly, they have major credit lines with mid-tier Chinese banks, which do have USD exposure.

That is where this becomes very different from the teapot. The official U.S. language says teapot refiner, Hengli, I would say that’s a mischaracterization because again, the teapots can operate in a sanctioned environment. Hengli is going to have a much harder time, specifically the banks that backstop Hengli. So, going back a little bit to that first question, or the first two questions — one, what happened in the background? We have four genuine teapots got sanctioned last year, throughout 2025. Shouguang, we’ve got Shengxing, we’ve got Jincheng, we’ve got Hebei Xinhai, I believe it was. You didn’t see much of a reaction, and I doubt most people have seen those names in reporting unless they’re specialists, right?

And then you get one sanction, suddenly huge reaction. Why? This is why. It’s that exposure. So yeah, so happy to talk about kind of Hengli in more detail. A bit of interest, but that’s the key point here.

Andrew: Yeah. Well, tell us a little bit more about Hengli itself. Why do you think the U.S. administration took such an interest in that company specifically?

Cory: Yeah. So, there’s a few of the mega projects or mega refiners, Zhejiang Petrochemical, the biggest ZPC is known, it’s one of the biggest complexes in China, and the biggest of the private refineries by far. Number two is Hengli. This is the second biggest private refiner and mega project in China. It’s ahead of Shenghong, which some other folks working in this space will be familiar with. Specifically, Hengli is, of these, the one that has certainly the most direct involvement that we can trace in purchasing sanctioned Iranian crude. Now, a lot of the Iranian crude has been, let me put it this way, if you look at the trade data, things don’t add up, right?

And so what we’ve discovered through a lot of satellite analysis and others, there’s specialists in this who’ve been tracking the flows, and what appears to have been happening is a lot of relabeling of Iranian food off the coast of Southeast Asia, a lot of “Indonesian oil” crude coming in. Hengli is buying a lot of that. So, there’s a direct cause and effect here. I think there is a technical a credible foundation here for why Hengli specifically was targeted. But again, it does not operate the same way as the teapots who have been absorbing a lot of capacity.

It’s also important to note how, you know, we have this question of USD exposure, renminbi settlements, and this ties into sometimes that Dinny has talked about as well, it’s like are we moving to de-dollarization in oil markets and stuff like that? And it happens at the margins and certainly it happens a bit, there’s a lot of renminbi-denominated deals in the oil and gas industry when it comes to sanction actors. But the critical thing is you cannot do that at scale without the U.S. dollar. So, when you’re the size of Hengli, you are dealing with the dollar, and certainly the banks you’re dealing with are big enough that they’re also dealing with offshore investment, with overseas exposure, etc. So, there’s a lot of USD exposure there as well.

Andrew: Okay. Well, I mean, speaking of the exposure, why don’t you walk us now through what you think some of the impacts of both of these movements are, both the sanctions by the U.S. government and maybe even more so in particular, the blocking rules, the imposition of the blocking rules by the Chinese side, because a lot of times, especially in the run-up to this meeting between Xi and Trump, right? The Chinese, I think, in general, obviously, not obviously, but they feel like they need to hit back against sort of any move by the U.S. And that’s especially true, which we’ll get into a little bit more in a minute about the context with the upcoming Xi-Trump meeting and how that all fits in.

But they particularly feel like they have to retaliate or at least react to everything right now that the U.S. does. But a lot of times they do that just more out of a symbolic, like we want to register our displeasure. And sometimes it’s an actual thing that matters, like in the real world, like the export control. So, if the export controls is the extreme thing, and shaking your fist at the kid on your lawn is the symbolic thing, where are we on that spectrum?

Cory: Yeah, absolutely. The shaking your fist side might be the investigation China has into U.S. clean tech protectionism, which is very symbolic because it doesn’t actually change much of anything. There’s not much of an industry to reshape right now. So, I think it is a good example of the symbolic side. But yeah, so in terms of impacts, yeah, let’s break it up. We have the Chinese actors. Obviously, there’s the impacts of the sanctions, which I think we’ve talked about enough, but the impact of the blocking rules on the Chinese actors. And then I think of concern to a lot of listeners is going to be the direct and second-order impacts to non-Chinese actors. All of this, I think, flows through the banking side, right? The first thing to note is coming back to earlier, You know, I noted the exemption mechanism.

A natural question, I think, should be or would be, is every bank exposed to oil and gas in China at risk of being counter-sanctioned? No, not really. I think, first of all, there is specialization within the banking industry. And generally speaking, what we see is mostly a lot of the banks that are directly involved in this industry, the parts of the industry that, you know, engage with Iranian and other sanctioned crude tend to be the mid-tier commercial banks. Critically, and I should have probably just said this up front, it’s not the big four. It’s not the central bank. It’s also very, very, very likely, in my opinion, that the big four will seek exemptions and probably get exemptions from MOFCOM so that they can formally comply with U.S. sanctions.

Again, the exposure is too much it’s not worth actually blocking them from complying because the implications for china are simply too big. So, really what’s going to happen, I think, is a squeeze on the, or is happening, is going to be a squeeze on the mid-tier banks. Now, I should know, why do I say will happen, not is happening? Because, technically, OFAC provided a 30-day window, right? So they have a month basically to wind down any support for actors involved in sanctioned activity, so Hengli and others and the refiners. So, technically, they have until, as of recording, a couple more weeks until full implementation, right? So this is coming.

I just want to note that as well. But here’s one of the issues with the mid-sized banks or for the mid-sized banks. And I think it’s not just an issue for the banks. I think this is arguably why, part of why Beijing has taken this case so seriously, the exposure of mid-tier banks seriously, most mid-sized Chinese banks are broadly exposed to the dollar, both directly and indirectly, right? Directly through off-tour accounts and indirectly through derivatives, Hong Kong, etc. As I noted, the small refiners can use renminbi, but you can’t settle the amount of crude imports that Hengli processes without, you know, kind of going into the USD system.

So, those banks are exposed to both renminbi-settled and USD-settled trade. The punchline of all this is the midsize banks need USD liquidity. These are the funders, they need USD liquidity. On the flip side, they can’t just stop supporting the refining industry. I mean, apart from the fact that it’s lucrative, Beijing has a vested interest in making sure that these non-state, these private refiners continue to process the cost-effective oil, There’s a huge refined products and a petrochemical fuel export sector. It’s very significant for China’s exports as well as domestic consumption.

So, refined products and fuel exports. So, you’re not going to see these banks just pull back from the sanctioned activity. They realistically can’t, but they still need USD liquidity. So, this is where this potential for a squeeze comes in. We have already seen that US activity has changed the risk calculus for these mid-tier banks. We’ve seen, for example, cross-border lending has decreased over the last few years due to heightened risks, but they still need that liquidity. Right now, the more they’re sanctioned, the less liquid they become, or at least the risk becomes that they lose that liquidity. These are not banks that have… you know, they don’t have nearly the diversity of funding and revenue that the big four have.

They are much more vulnerable to USD liquidity issues than, say, the big four. So, this is not to say, you know, there’s an immediate risk of financial contagion from the mid-tier banks. But this is the kind of thing that Beijing, I would have to presume, I think reasonably, look at and say, this is the kind of thing that leads to a liquidity crisis in your mid-tier banking. And there is the potential for broader issues. So, I think that’s part of what China takes very, very seriously about this.

Andrew: Well, I mean, so do you think the U.S. sanctions are going to have that kind of impact? Or is this, everything you said, correct me if I’m wrong, is sort of this could happen if they are squeezed this hard? They could also just pull back some of their lending to some of the refiners, potentially. I mean, what are their options here? And I guess the question I’m trying to get at, yeah, how bad is this for these guys?

Cory: Yeah, first off, I agree. This is not an imminent crisis at this point. I think part of the response is to say, you’ve pressed a button, right? This is not what you might call a mere political concern. This is the type of thing that can become a real problem. And so I think part of the signaling exercise is to say, “Look, we take this very seriously.” Like this is not imminent crisis, but we take this issue very very seriously, and if we continue in this direction, we will make bigger moves. I think you know in terms of realistically for this particular case, I do think there’s flexibility.

I think you’ll see a lot of finagling financing to make sure that everything gets what it needs to operate. But again, it’s the principle behind it. With a lot of the true teapots, the teapot sanctions, they don’t really affect that much. They’re largely political. They’re signaling. This is a change. This is a type of thing that was characterized as a teapot sanction. That is not what I would call an actual teapot sanction, right? It has potential. So that’s the bottom line. This is a different type of provocation. And so it’s a different type of response.

Andrew: The timing issue. So, it sounds like the response is sort of because, well, I guess there’s a bunch of things here. I mean, let’s talk about this in the context of the Xi Jinping-Donald Trump meeting next week. Is this a big enough deal to derail the meeting? It doesn’t seem like it to me, but you’re kind of making the case this is sort of a step change in the sanctions regime. Now, I would say, my guess, this is not inside knowledge, but my guess is that this is not a move by the Trump administration aimed at China per se. It’s aimed at the Iran war, right? It’s aimed at Iran.

Cory: I agree.

Andrew: And in the administration’s mind, those are probably two separate issues. And China’s sort of collateral damage. Of course, it’s aimed at China insofar as they are supporting Iran, but it’s not in their mind part of the direct to U.S.-China sort of economic negotiations and all of that stuff. But in China’s mind, it absolutely is, I would surmise. So, anyway, just talk to me about what you think about all this in terms of the context of the upcoming meeting.

Cory: The good top-line news is I really don’t see this derailing anything. I agree, I think this is not framed, from the U.S. side, as, you know, this is not being used intentionally, at least as leverage ahead of the summit, in my view. And there are legitimate interest in, hey, insofar as the U.S. is pursuing action on Iran, within that, not commenting on the kind of the strategy here, but within that, given the objectives with Iran, at least the ones that are clear, Chinese purchase of sanctioned Iranian crude directly undermine what the U.S. is doing.

And so it makes sense that the U.S. is treating this like a very kind of just a tactical problem with, you know, its near-term imminent objectives, what it’s trying to achieve in terms of cutting off Iranian revenues there. For China, of course, none of these things are separable, as you say, in political discourse, in the way the behavior speaks, like the kind of revealed preference kind of stuff, it doesn’t look like China’s ever going to separate the stuff, and reasonably so from their perspective given their interest in all this. But the good news is I think everyone is aware of all these things. I think Beijing has demonstrated over the last year, really, of U.S. actions, and understanding that a lot of things are problematic.

And Beijing evidently, again, observed behavior feels the need to push back, but also often is not like trying to derail things with their response. I think that suggests an understanding that the U.S. might be overstepping or mixing issues that Beijing doesn’t want to from Beijing’s perspective, but that Beijing isn’t going to fundamentally derail, you know, certainly the summit, but even a lot of other efforts as a result of it. And for that matter, I think every indication we’ve heard from all quarters is that everyone, generally speaking, both sides of leadership want the summit to happen and want it to be productive, right? So, I don’t see this derailing it, but it is critically important, I think, as a… I mean, the first time anything happens, it always sets the precedent, right? So, I think that’s the critical juncture is this is the first use of the blocking rules.

I mean, this is all we have to go on in terms of understanding when and why Beijing might use blocking rules. So again, top line, we’re okay, not worried about the summit for this reason at least. But more broadly, it’ll certainly come up the question of, you know, there’s a big question – does U.S. need China when it comes to resolving the iran situation and kind of coming to an end of the conflict? Personally, I think yes. How does this all factor in? There’s going to be that kind of strategic discussion, but it’s going to be a broader discussion of which this is a part this is not the main focus of that. This is, though, a major focal point in a separate conversation of China’s evolving counter-sanctions toolkit, if that makes sense.

Andrew: It does. And I’ll just ask you one last question. I mean, I hinted at this a little bit earlier. I mean, I think the timing of this partly is tactical, right? That with the understanding that was agreed to in Busan, China’s strong position is that we have agreed to fully cease all hostilities. And so anything that the U.S. does, even if the U.S. administration thinks that they are sort of operating on separate issues, like in the case of the, I think the sanctions, the secondary sanctions related to Iran, China still feels the need very much at this moment, as I already said, to make sure like, “Hey, we agreed we’re not going to do this kind of stuff. So if you do anything, we absolutely have to match it.”

That said, I mean, there’s reporting by I think Bloomberg today that like officials are telling these banks to kind of pause lending to the refiners. So they’re instituting the blocking rules, but at the same time, encouraging the banks to comply with the sanctions while they kind of figure out the ultimate ramifications. And so that sort of leads me to believe we’re more on the symbolic side of the use of the blocking rules. But I think that’s the tactical piece. But the question then becomes like, in theory, Beijing could roll out the blocking rules, you know, against a host of previously imposed sanctions, right? Like we don’t really know where it will end or where it could end and what the breadth of the use of these new tools will be when and if Beijing tries to pursue them further. What do you think about where that goes?

Cory: I agree entirely. And the challenge with all this stuff is the possibility space is very wide. It’s very large. And all we have to go on is relatively sparse observations, like a low end if you’re talking in terms of number of observations. And you have to make a lot of inferences about what China’s intent is around its reaction function, right? And that’s the hard part. But I think we’ve talked about this in a different context, but I think that uncertainty is part of the playbook. I’ve argued in a couple of different fora that, as much as these tools are the center of the toolkit, but another tool in the toolkit is optionality, right? Beijing leaving itself space to ratchet up or down in position.

If there is a super clear line of when each tool would be deployed, one, it’d be easy to game that line and kind of walk up to it without crossing it. But two, China would lose some leverage. I think a lot of the issue, I mean, certainly the practical challenge for foreign companies, but also the strategic leverage for Beijing is that no one knows exactly how things will be implemented, when, on what basis. And we can, obviously, there’s an extent of uncertainty that becomes counterproductive if it’s just random, like certain policy actions in certain countries can seem a bit random.

Obviously, you kind of lose pull. But if Beijing is able to say, look, here are types of things we don’t like, here are types of ways to respond, we’re not going to tell you exactly how we respond in each particular case. You have the leverage there to say, to basically kind of warn off certain types of behavior, or at least try to. And I think that uncertainty is… there’s also, let’s not, you know, make everything out to be 4D chess. I mean, there’s certainly operational and certainly how this works on both sides. I mean, as you said, I think there’s a lot of, how does this actually materially work?

I think MOFCOM, and others, are probably still working through that realistically. But there is also that strategic element where I do think a degree of uncertainty is strategically useful. A degree, not an excess, and we might be seeing more than is strategically useful, but I think that is part of it and will be maintained forward. What I’m saying is I don’t really anticipate a world in which this is ever completely clear. I mean, it might be worth, just on a final note here, I’d add, I mean, one of the direct implications, among the huge possibilities based on what we don’t know, but one of the direct implications is, as of now, every bank with assets or exposure to China or to Hong Kong, because we don’t know about that piece, insurance markets, right? P&I in the maritime space and transportation, logistics, MNCs with exposure to any of this stuff.

You now have to ask yourself for every relevant OFAC announcement going forward, if it affects China or a certain interest, will China respond with blocking rules? Like, your risk assessment just got more complicated. It’s been getting more complicated progressively over the last few years. Hopefully, this is one of the last major new pieces, I hope, for a little while. Hopefully, the playbook’s pretty clear now, or pretty, not clear, but all the pieces are on the board, so to speak, I hope, at this point. But as of now, if you’re in any of those noted actors, you have to factor in OFAC announcements and the potential for Chinese response, and probably a lot of other U.S. actions as well, and potential Chinese response.

And the critical risk, which you flagged before, a long time back and recently, is the worst case. We haven’t seen it happen yet. We don’t know when it’s going to happen or where it’ll happen, but we’re waiting for it to eventually happen is that some company gets caught in the crossfire, is sanctioned by the U.S., can’t do something, is counter-sanctioned by China, can’t not do something, and you’re done, right? That is the worst spot to be, especially if you don’t know when it’s coming or if it’s going to be your company. So, I mean, if I can make a kind of a pitch to everyone, just from a risk standpoint, as you’re doing horizon scanning, as you’re doing kind of longer term risk analysis and scenario analysis and planning, factor this in, and try to figure out if, hopefully it won’t be, but if through bad fortune, it happens to be your firm, your company that gets pins up between these, how will you respond?

I think having at least a general notion of your risk tolerance on either side is essential. And there is a diagram. We can go back to our favorite grad school two by two matrices, right? And plot, you know, do you have high China exposure, high U.S. exposure, high low on either side or low in both cases, not really relevant. But if we expect the actors with high U.S. exposure, low China exposure to comply with the U.S., reverse it, comply with China. If you’re in both, scenario plan now just so you’re not caught flat-footed.

Andrew: Yeah, well, I’ll wrap this part of the conversation up here to say this is, I have said it many times, I think, on the pod and elsewhere, just another step on the path towards what I think is an increasing inevitability that some major company, Western company, likely a U.S. company, is put in a position where it is either in major contravention of U.S. law or of Chinese law. And what said company does in that situation and how the two governments react, and once that sort of situation inevitably comes to a head, is going to be, you know, I think really shape how these two legal systems, the clash of these two legal systems, ultimately plays out and how companies… It’ll set a precedent on kind of how companies ultimately have to react once they’re in that situation.

We’re not there yet, but I just feel we’re inching ever closer. I mean, the blocking rules basically are, they’re very explicit. The U.S. is saying, “You can’t do business with these companies,” and the Chinese rules are saying, “You can’t not do business with these companies.” We’re not quite there because, as you said, this is mostly aimed at Chinese entities. For the most part, Chinese banks are the biggest entities that are impacted or the most impacted entities. And they’re just trying to get some exemptions. And I’m sure the Chinese government will sort of work with them on that.

But once you get foreign companies in the mix, I think it’s going to be a disaster. But we will be here watching it all play out, analyzing it, helping companies to deal with it as well as this train just keeps rolling on. But in the meantime, Cory, I really appreciate you walking us through these latest developments. Very helpful. Thanks for being here today.

Cory: Hey, thanks so much for having me back. I appreciate it.

Andrew: Yeah, of course. And stick around, everybody, for my conversation on macro issues with Joe Peissel and Dinny McMahon coming up right now. Thanks!

I’m joined now by Trivium’s Head of Markets Research, Dinny McMahon, and Trivium’s Lead Macroeconomic Analyst, Joe Peissel. Dinny, how are you doing, man? Welcome back to the pod.

Dinny McMahon: Thanks, Andrew. Good to see you, mate.

Andrew: And Joe, welcome as well. Good to see you.

Joe Peissel: Yeah, cheers, Andrew. Happy to be here as always.

Andrew: Yeah, glad to have you guys back on. We are going to talk, as per usual, about the latest macroecon developments out of China. I just had a good conversation with Cory Combs about China’s economic lawfare movements or the most recent economic lawfare actions. So now we’re going to talk about macroecon. Just jumping into it, we’ll talk about the sort of Q1 economic data. We’re now into May.

This data came out in April, but still kind of gives us a good chance to get a read on where we are at this point in terms of China’s economic trajectory. So, the economy really got off to a pretty cracking start for the year. Much better, actually, than anyone was really expecting. Real GDP grew by 5%. Nominal GDP was 4.9%. And that’s actually the smallest gap between the two in three years, which is a consequence of producer prices finally turning positive after years of factory gate deflation.

So, this, of course, begs the question, how did China manage to do so well in spite of the Iran war? And why wasn’t the war or the impacts of the war showing up more in the data? And to the extent it did show up in the data, what are we seeing from that? So Joe, let me just throw to you. Tell us about Q1 growth and the, of course, the big thing hanging over every economy throughout the globe is the Iran war. So, talk to us a little bit about what you’re seeing from that, either positively or negatively in the Q1 data as well.

Joe: Sure. So, well, the short answer is the Iran war did show up in the data, but only in March. So, if you look at Q1 headline data, it looks pretty good, as you just said, Andrew, like decent growth, way above our expectations, a narrowing of the gap between real nominal growth. So, the GDP deflator is starting to bottom out. However, if you look just at March’s monthly data, that’s where the negative impacts of the conflict really show up.

Everything, and I mean everything across the board, slowed relative to growth that we saw in Jan and Feb — industrial output, investment, unemployment ticked up, rates of consumption declined even further. So yeah, again, if we look at the quarterly, the headline data, it kind of masks the impact of the Iran war a little bit, but that’s just by virtue of the Iran war happening in late Feb. So, it’s only shown up in the March data. I think the most obvious area it shows up, as you mentioned, is the price data. So producer prices, after more than three years of decline, I actually think it’s closer to three and a half years of decline, they finally moved into black.

They grew just 0.5% in March. And I mean, that’s significant less for the number. 0.5% growth isn’t much, but it’s significant because of the cause. This was imported cost push inflation, the worst type of inflation that policymakers can wish for. So generally, there’s two ways to inflate an economy. There’s a demand pool. This is where there’s so much aggregate demand that businesses, suppliers feel they can push up prices. Generally, that’s quite a healthy form of inflation because it means there’s a lot of economic activity. And then there’s cost push, which is because input prices go up.

So, manufacturers or suppliers are forced to raise prices. So, we saw that starting in March. We haven’t had any hard inflation data released for April yet. That will be next week. But there’s other metrics or proxies we can use. If we look at raw material prices, anecdotal survey evidence or PMI measures, this is firm-level survey data. This is all suggesting that we’re going to see an extension of these cost-push inflation into April, really across China’s industrial base. So, things like oil, fertilizers, plastics, chemicals, you name it. If it’s an industrial input, the odds are the price is going up.

Andrew: Thanks for that, Joe. Good explanation of kind of where we are. But kind of looking forward, would you say this is the end of deflationary pressures or is this more of a pickup in inflation in terms of cost pressures? I know that sort of seems like a splitting-hairs difference, but which one is overriding here? Is it the upshot of prices or is it really deflationary dynamics that are sort of petering out?

Joe: Yeah, so certainly it’s an uptick in long-term inflation, at least for half of the economy, which is China’s supply side. So, producer price deflation, that’s what I was talking about a few minutes ago about this, we had almost three and a half years of decline in producer prices. That was already starting to bottom out. And the Iran wars just accelerated that process. So, there’s now going to be a long period of rising producer prices, again, accelerated by the Iran war.

That’s one half of China’s economy. That’s the supply side. I think the big nuance or the question I’m looking at is, are we going to see that spill over into consumer prices? So, consumer price deflation, the decline in consumer prices, this actually ended about six months ago. And since then, consumer prices, CPI, has been growing very, very slowly, but it has been positive. Now, what I’m interested in is, are suppliers going to pass this cost per inflation on to consumers? I.e., are we going to see a huge spike in consumer inflation?

And from China’s macro perspective or China’s macro economy is really stuck between a rock and a hard place here. Because if manufacturers or suppliers more generally don’t do this, if they absorb this cost push inflation that they’re importing, mainly because of the Iran conflict. Well, that means they’re going to have a reduction in profits. And this has negative spillover effect on the broader economy, reduction in investment. Firms will scale back output. It’s going to impact the labor market. There’ll be an uptick in unemployment.

But on the flip side, if suppliers do pass these costs on, so we see this surge or this sharp increase in consumer price inflation, then that’s going to weigh on consumption, which is already really fragile. And it’s going to undermine real income growth, which again is already really fragile. So there’s no real good outcome from this. But in terms of understanding the trajectory for China’s macroeconomy in the coming months, it’s a really important question to be following.

Andrew: Yeah, well, you’ve written before, this was not the way that Chinese policymakers wanted deflation to end, right? This is sort of the, if you had to pick a way to end deflation, this is almost the worst possible way. Is that right?

Joe: Yeah, totally, totally. As I say, the economy is really between a rock and a hard place because there’s no good outcome from this cost-push inflation.

Andrew: Well, while we’re on the Iran war piece, the other big, there’s obviously the price impacts, but the other big impact was on exports. So exports rose more than 20% in January or February, then absolutely collapsed in March to only 2.5% year-over-year growth. Now, we have to warn, of course, that monthly export numbers are always pretty volatile. There’s a lot of seasonal factors that impact the numbers in any given month, you really can’t learn a lot about the fundamental state of China’s export regime. But tell us about the export numbers and how the Iran war is impacting this.

Joe: Yeah, so I think the general narrative is that the Iran wars massively undermine China’s export growth. I actually want to push back on this a little bit. I think there’s other factors at play unrelated to the Iran war that explain this huge drop in export growth. As you said, we went from, what, 20 plus percent to 2.5% in March – massive drop. But I don’t think this is really related to the Iran war. So, I think the first factor at play is base effects. So exports in March last year grew by double digits, they researched. And that was driven by exporters or buyers of Chinese goods trying to front load demand prior to the U.S. tariffs coming in.

So, we have this base effect impact, which artificially lowers export growth this year. And then beyond that, there’s also seasonal disruptions from the Chinese New Year. So, that happened in February, but it was longer and happened later than normal. And so, as a consequence, factories are still struggling to catch up with production. What’s quite interesting is that factory disruption, we see that most clearly in the manufacture of lower value goods, which rely more on migrant labor. And we know in China, it’s migrants who often are delayed return to factories during Chinese New Year because they travel back home to rural parts of China.

And we see that in the export data. Exports of low value ad manufactured goods. So think about things like toys, furniture, other cheap consumer durables — that’s really where growth declined the most. If we look at the export of higher value-add goods, anything like EVs or semiconductors or solar panels, growth was still pretty solid. I mean, that gives us a lot of evidence to suggest or tentative evidence to suggest it’s not really the Iran war that led to this sharp drop in export growth. It’s this combination of seasonal disruptions from Chinese New Year and base effects.

Now, in terms of what we expect from the Iran war, it’s actually very hard to conclude what the net impact would be at the moment. There’s clear downside risks. The main one being is the spike in oil prices erodes purchasing power or household incomes of some of China’s most important markets. So, the demand for Chinese consumer durables will decrease in places like Southeast Asia, South Asia, Africa, because these economies are so dependent on fuel imports. And so, the consumers there are most badly hit by the spike in oil prices. But I also think there are some upside risks to China’s exports, which haven’t really been talked about.

The first being Chinese manufacturers relative to the rest of the world are actually quite well shielded from the rise in energy prices because a lot of China’s energy is sourced domestically from coal. And that means that manufacturers, relative to foreign competitors, are actually going to become more competitive. And so that could potentially give them an edge in foreign markets. I think the second big upside, which no one again is really talking about, is that if this rise in oil prices is sustained over several months or longer, this is going to accelerate foreign governments’ demand or strategy to switch to cheaper forms of energy, renewable energy, solar panels and wind farms and all this sort of stuff, as well as electrify the grid and switch to electric vehicles.

All of these areas of, you can think of this as like clean energy or new energy industries, which Chinese exporters absolutely dominate. So some potential upside for specific sectors as well coming out of the Iran war.

Andrew: Yeah, great. Thanks for that. I think we’ve covered pretty well the sort of external dynamics, specifically the spillovers from the Iran war. I think, as you pointed out, it was really only in the March data where the export weakness started to show up and the trajectory, I think, arguably, as you made the case, is uncertain. We don’t know that ongoing tensions or ongoing war in the Middle East will undermine Chinese exports. And you made the case that actually there’s reasonable strength to be expected. Exports definitely supported the economy in Q1 in the first couple months of the year, leading to that sort of higher than expected overall GDP growth rate. I want to pivot now to the domestic part of the economy, the key parts of which, of course, are consumption and investment.

Dinny, I actually want to bring you in here because another big piece of the outperformance and growth first part of the year was this investment piece. And it seems in the midst of external uncertainty, weak consumption, that we’ll get into in a minute, authorities are really trying to front load some of the investment activity. Walk us through what’s going on on that side.

Dinny: Yeah, it’s interesting with investment because it’s not necessarily because of global uncertainty that we’ve seen kind of a ramping up of infrastructure investment. So firstly, the numbers. In the first quarter, China’s local governments issued about just shy of one trillion renminbi’s worth of special-purpose bonds that were earmarked for infrastructure investment. Now, that’s more than 17% higher than the first quarter last year. So, that in and of itself speaks volumes. I mean, that is a big increase in the amount of financial resources that local governments are deploying to infrastructure at the very beginning of the year.

The other thing going on is that, additionally, every year, the central government, as part of its ordinary budget, allocates a certain amount of money that will go into infrastructure, what it calls the two major projects. But anyway, it’s code for big, important, strategically important infrastructure projects. And the budget for this year is 800 billion RMB. And the economic planner, the NDRC, has already allocated, I think, 72%, 75% of those funds already. End of April is when they announced that. Now, by way of comparison, in the middle of May last year, the NDRC had said that they’d allocated 62% of the full year’s 800 billion RMB.

So, again, we’ve seen a real acceleration in the pace at which the state is allocating funds towards infrastructure. Now, of course, the question is, is this all about Iran? And seemingly, it’s not. You look at investment last year, and particularly in the second half of the year, and it’s slowed. I mean, infrastructure investment contracted, what, 2% last year. That’s mind-blowing. I mean, that does not happen in China. Infrastructure has been like one of the pillars of growth for years, it doesn’t go into reverse.

But last year, it was slower than the year before. Fixed asset investment in manufacturing slowed last year. Property was a bloodbath again. We wrote about this in February, I think. Beijing was just sending out constant signals that infrastructure is going to be important this year. And then the NPC happened. And usually, we get from the Two Sessions, we get some pretty clear signals as to how much money is going into infrastructure. But it was really blurred this year because of the infrastructure investment tools, special purpose bonds, special treasury bonds, so where the money was going from those bonds just isn’t as clear as it used to be four or five years ago.

So, we had the numbers of how much debt local governments and the central governments and the policy banks were going to raise. We didn’t really have a clear indication of how much of that would be going into infrastructure or would be going into activities that are explicitly stimulatory. All the signs were there. Beijing kept saying infrastructure is important, very important, but we just didn’t know. And now with these numbers about how much the local governments have actually issued what was earmarked for infrastructure, we’re like, “Okay, clearly this is a priority for the year.”

So, I think this would be happening regardless of global instability and what was happening in Iran. I think Beijing had already very much decided that we can’t see a repeat of 2025. We’ve got to ramp up infrastructure investment. Now, of course, this raises a bunch of questions because it feels like given the pace of the allocation and the issuance of these bonds is far faster this year than it was last year, what does it mean for the last quarter of the year? What does it mean for the second half of the year? Is it just going to peter out?

And I think at this point, we’re pretty used to Beijing reeling back around in, say, August, September, October, and saying, “Hey, guess what, everybody? We’re going to allocate a bunch of new funds that no one was expecting to infrastructure.” And I think it’s pretty clear we’ll see more of that towards the end of the year as well. But regardless of how much that is and when they announce it, I think it is pretty clear at this point that they’ve ramped up infrastructure investment. They see it as a big part of the economic mix this year, and it would be happening regardless of what was going on in the Middle East.

Andrew: Yeah, super helpful. So, infrastructure investment, strong, external environment, especially exports, uncertain with arguably some upside. What about on the domestic side of the economy consumption, Joe? What are you seeing on that front right now?

Joe: Pretty bad. That’s my answer. Shall we say more?

Andrew: Next.

Joe: Yeah. So, I mean, the consumption rotation in Q1 was really disappointing. I think retail sales of consumer goods grew by about 2.5%. Retail sales of services grew stronger. I think it was around 5% or slightly over 5%, which is a decent clip, but slowing. So, again, I talked about this earlier. We saw a slowdown across the board in March relative to January and February growth. That applies to consumption as well. And importantly, confidence dropped as well. So, the Stats Bureau has a consumer confidence index. They actually survey households about how confident they’re feeling.

And it’s been gradually improving over the past months. I mean, consumers on net are still pessimistic, but it’s been improving. And then in March, we’ve seen another sharp drop in consumer confidence. So, it’s all pretty dire news. I think, broadly, and this is maybe simplifying the framework a little bit, but there’s really three structural issues undermining China’s consumption. So the first is the property market, which we’ve talked about at length, but property prices are down at least 25%. So, that’s a quarter of household wealth just wiped out over the past few years. And then the second structural issue is there’s this absence of a robust, reliable social security system. And I mean that in the broadest sense.

So whether that’s universal healthcare or pensions or high minimum wages or help for those who are unemployed. And the third factor here, the third structural issue is slowing income growth. And that’s really pertinent because we saw that super clearly in the Q1 data. So, real household incomes per capita, disposable income growth grew 4% year on year in Q1. And that is way down from historical levels. Pre-COVID, so like pre-2019, household incomes were growing pretty consistently year on year around 6.5%. And since then, every year, it’s slowed. So in 2023, they grew about 6%; 2024, about 5%, so on and so forth. Until the first quarter of this year, they grew by 4%.

I mean, that’s over a third drop in income growth, right? And by the way, this is in real terms. So if we think about it in nominal terms, if we incorporate price effects, which is actually what’s landing in people’s pockets, right? So like the number on their payslip, growth has been cut way more because there’s been a slowdown in inflation as well. So inflation this quarter was about 1%. It’s actually 0.9%, but let’s say 1% roughly. So you take the 1% inflation plus the 4% real income growth, that’s about 5% nominal income growth this quarter, about 5%. If we look at nominal income growth pre-COVID, that was about 9.5%. So again, that’s real income growth plus inflation pre-COVID was about 9.5%. So, we’re going from 9.5% nominal income growth to about 5%.

That’s almost a 50% reduction. So, income growth has effectively been cut in half in about six years. It’s remarkable. It’s such a rapid decline in the rate that people’s disposable income is expanding. It’s kind of no wonder consumption is so low. And I think what makes, at least to me, what makes this figure really shocking, this effective cut, this 50% reduction in income growth, is that it’s at a time when the economy is supposed to be recovering. Like we’re seeing a decent GDP growth rate, we’re seeing a decent amount of industrial output and export growth. And that’s not translating into the numbers on consumers’ pay slips.

Andrew: Well, and you can see why that’s feeding into the sentiment numbers. If you only, six years ago, were expecting your wages to continue growing at a certain level, and now that your wages are growing at a half of that, I mean it just feels bad too. Not only do you have less money and you’re going to pull back, but just like your economic trajectory feels a lot more uncertain, right?

Dinny: Well, Andrew, if I can jump in here, I mean, this was always the story about when you were looking at young people buying homes in Shanghai and Beijing, right? Entry level, you were looking at paying something like 20 times your annual income, which is actually absolutely mind-blowing. Why would anybody buy a property at 20 times your annual income? But the reality was income growth was so rapid in China’s big cities that after five years, six years, seven years, the relative burden of paying, of servicing that mortgage plunged, not because the value of the mortgage had changed, but because what you were earning as an individual had just gone up exponentially. And so that’s the significance of expecting something between 8% and 10% annual income every year. It really impacts what the debt burden that you’ve taken on feels like.

Now, if all of a sudden, if you take on that mortgage and the expectation of like, my wages are going to keep going up like that, and all of a sudden they stop, then the relative burden of that debt that you’ve taken on, I mean, at the moment, not only is your house worth far less than you ever expect it to be worth. Secondly, the market value might be less than what you actually paid for it. And in addition to that, the burden of the mortgage is far greater at this point than you perhaps anticipated because your wages haven’t been going up.

Andrew: Yeah, totally. Totally. And again, those are real, not real as in real versus nominal, but like actual developments that impact your finances, but it also impacts your psyche. Just how you feel. I think how people feel about the economy, it’s become over the past few years very apparent to me how important that is both in the Chinese economy and the U.S. economy, where obviously I live. We’ve seen successive U.S. administrations kind of have a disconnect between what the official numbers around the economy say and their messaging around the economy versus what actual people care about and how far their dollar is going.

And that can have a real impact. And I’ve thought now for several years, basically, we’re in a similar situation in China, where people, even though the numbers, we just said Q1 GDP growth exceeded expectations and exports held up well and investment is humming, but people aren’t feeling it. So, I think that’s certainly a challenge for the Chinese leadership. I appreciate you guys walking me through all this. I just want to end up with kind of a little bit of a projection. We had a pretty solid Q1. What are you expecting, Joe, in the rest of the year, whether it be from the economic trajectory or from policy? I’ll pose that to both of you guys, then we’ll wrap up, but we’ll start with Joe.

Joe: So I think looking ahead, there’s a lot of certainties in China’s economic performance. We know the property sector will continue to decline. We know the industrial base will continue to grow. And we also know that consumption is going to underperform. I think what the big question mark is, and actually what’s going to be a really decisive factor for China’s economic performance is what happens to exports. And this relates back to what I said earlier, that there are clear downside risks from the Iran war, but I also think there’s upside risks that haven’t been talked about. Last year, China’s trade surplus accounted for about a third of China’s GDP growth.

So hypothetically, in a hypothetical world, if China hadn’t run a trade surplus, its economy would not have grown much faster than the U.S., for example. It’s not a very useful comparison because China did run a large trade surplus. But I’d make that comparison to demonstrate how important China’s trade is in terms of driving economic growth. Well, the same applies this year. So, looking ahead for me, I think as a business or as an investor, I think as a China watcher to understand what’s going to happen if China can hit its GDP growth numbers, what’s going to happen to the trajectory of the economy over sort of the medium term.

I’m talking like six to 12 months. It’s the exports, and it’s the trade surplus that are going to be decisive. Yeah.

Andrew: Yeah, that’s a good point. And I also will reiterate what I said last time you were on the pod when we had Jeremy Stevens on, and I was in Beijing, and that is simply that… I mean, that’s really the plan. Like, it seems like policymakers are saying to foreign officials and foreign companies, “It’s an export model, get used to it. We’re going to keep leaning on this. And we feel that our companies are just more competitive than yours. And we hear your complaints, but we don’t really care about them. And so that’s our path to nirvana and we’re going to stay on it.”

So. anyone out there who thinks they’re going to try to convince Chinese companies or Chinese officials to somehow dial back the export machine, just not happening. That’s the bet they’re placing. So, yeah, thanks for that, Joe. Dinny, your thoughts on what might be next?

Dinny: Yeah, well, I think they’ve built in a little bit of wiggle room with this year’s growth target. The fact that it was a range that they set it at 4.5 to 5%. And then Li Qiang said, “We’re going to,” you know, what was, I forget his exact wording, “but we’re going to try to do even better.” And I think if the Iran war hadn’t happened, looking at the first quarter, they would have been fairly confident about being able to do a little better. But with everything that’s going around, they’ve sort of built in a little bit of flexibility into their goals this year.

So, they can hit 4.5, which is a significant slowdown from last year, and they will still be within their range. They would have hit their target. Politically, everything’s cool. Yeah, look, I think what Joe said is incredibly insightful. I mean, you’d imagine that in this environment, global demand weakens, exports get hit, but China is in this really odd position where a lot of what, you know, it’s competitiveness and a lot of what it’s selling might actually see an increase in demand. But if that doesn’t eventuate, then at least Beijing is already shown itself willing to tolerate slower growth this year rather than last year.

Andrew: Yeah. Well, and I’ll just wrap up by saying, I think a lot of folks looked at China’s economy, in the wake of what was happening in Iran, and said, “China’s really vulnerable. And it turned out that they had done a lot of things to make their economy resilient to those external shocks.” And now everyone’s saying, “Oh, okay, China’s going to be the one who sort of can ride this out.” And so all that is to say, you know, anyone who’s thinking economic vulnerabilities are going to shape China’s geopolitical realities, I just don’t think it’s the case. I think they’ve created a lot of resiliency. And to that point, we’ve got an upcoming meeting with Donald Trump and Xi Jinping next week, which of course we’ll talk about probably on the pod two weeks from now.

But anyone who thinks that China’s domestic economic challenges are going to weaken its hand in negotiations with Trump, I think, are likewise have their analysis misplaced. But we’ll have a lot to talk about on that front in the next couple of weeks. We will be back revisiting all this, of course, as things develop. Guys, this has been really, really helpful really insightful. Joe, thanks a bunch for your thoughts today. I appreciate it.

Joe: Yeah, thanks, Andrew. It was good fun as always.

Andrew: Dinny, thank you as well, man.

Dinny: No worries, mate.

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

Earlier this month, within a single week, the State Council released two regulations that sharply expand how Chinese authorities can push back against foreign sanctions, export controls, and extraterritorial enforcement:

• Regulations on Industrial and Supply Chain Security (RISCS), released on April 7

• Regulations on Countering Improper Foreign Extraterritorial Jurisdiction (RCIFEJ), released on April 13

Don’t mistake the back-to-back rollout for a knee-jerk reaction to external events. These are the latest moves in a multi-year effort to harden China’s anti-sanction architecture.

• Both regulations were approved at a State Council executive meeting in March, and drafting almost certainly began in 2025.

• They come from Beijing’s sober, long-term assessment of just how exposed China’s industrial economy is to Western pressure.

The new regulations target two pain points Beijing has long struggled to address cleanly: How to prevent foreign governments from reaching Chinese companies under their own domestic laws, and how to prevent foreign actors from severing key links in China’s supply chains.

• Taken together, they represent multiple new tripwires for foreign companies.

RISCS is China’s first dedicated supply chain security regulation, giving the state legal cover to penalize foreign actors for disrupting Chinese supply chains – with potential countermeasures spanning immigration, trade, investment, international cooperation, and foreign aid.

• It also tightens scrutiny of research into Chinese supply chains, complicating MNCs’ efforts to map and manage their sourcing and third-party risk.

• What’s more, it grants the state emergency powers to compel businesses – including multinationals operating in China – to produce goods deemed critical to “economic, social, and national security.”

The language is deliberately vague – covering foreign actions that “violate normal market principles, interrupt normal transactions, or impose discriminatory measures causing substantial harm to Chinese supply chain security.”

• That’s broad enough to catch foreign companies that exit Chinese supply chains in ways that harm domestic producers, or withhold key components under home-country export controls – and even companies in control of global transport nodes that act in ways deemed to disadvantage Chinese industry.

RCIFEJ empowers the Ministry of Justice to designate specific foreign laws or enforcement actions that Beijing wants to block.

• Once designated, all entities and individuals in China are prohibited from complying.

• The Malicious Entity List adds visa bans, asset freezes, and trade restrictions for foreign businesses tied to formulating or enforcing those measures.

The regs mostly target government actors – but the lobbying clause is the kicker.

• A new Malicious Entity List creates a mechanism for visa bans, asset freezes, and trade restrictions against foreign businesses involved in formulating or enforcing the listed measures.

So what’s next?

Beijing’s best-case scenario is that the regs’ existence alone will serve as a compelling deterrent.

• By putting foreign businesses on the hook in China and threatening foreign governments with trade and investment countermeasures, Beijing hopes to dampen the appetite for new anti-China sanctions and export controls.

That said, Beijing will likely take some action to show it means business – but not so much that it hands China hawks new ammunition to push for faster decoupling.

So we expect early tests of both regulations – but carefully calibrated ones.

• Beijing’s likely opening move will be to launch investigations against a handful of government actors as early warning shots, without imposing formal penalties.

• Companies are likely safe for now, given the collateral damage to foreign investment and China’s business environment that hitting them would entail.

Get smart: Regardless of whether Beijing ever follows through, the risks to foreign companies just went up a notch.

• Companies should map their exposure now – sourcing decisions, relocation plans, and even lobbying efforts could all fall into Beijing’s crosshairs.

The bigger picture: Beijing is going on the front foot to protect its industrial base – and the work here’s far from done.

• Get in touch if you need help with wargaming your China exposure.

Ether Yin, Partner and Head of Policy Research, Trivium China

What you missed

Foreign affairs

China’s strategic patience with the EU is showing signs of strain.

• On April 17, China’s commerce ministry (MofCom) warned of retaliation if the EU moves forward with cybersecurity regulations that exclude Chinese tech products from EU markets.

• Then, on April 24, MofCom placed seven EU entities on its export control list.

• Finally, on Monday, MofCom took aim at the EU’s proposed Industrial Accelerator Act (IAA), blasting the law as “institutional discrimination” and warning of possible countermeasures.

U.S.-China

On Wednesday, a group of 73 House Democrats signed a letter to US President Donald Trump urging him not to allow the import of Chinese cars to the US, warning of “profound and irreversible” damage to US automakers.

• In January, Trump told the Detroit Economic Club that he was open to Chinese carmakers entering the US, saying: “I love that. Let China come in.”

• Trump could strike a deal to open the US auto market to Chinese participation during his upcoming state visit to China.

• This could see high-quality, competitively priced Chinese EVs enter the US market, giving American automakers a run for their money.

Econ and finance

An influential policy adviser is calling on Beijing to load up on off-balance-sheet debt to juice the economy.

• Yin Yalin believes consumers are stuck in a negative feedback loop, where sluggish income growth leads to weak consumption growth – which in turn undermines income growth.

• Fiscal support was heavily front-loaded in Q1, and much of Beijing’s budgeted firepower for the year will be exhausted by end-June.

• To avoid a fiscal cliff later in the year, Yin called for: “Studying options to expand ultra-long special treasury bond issuance in H2 to fund follow-on investment projects.”

Tech

On April 24, DeepSeek finally shipped its latest model – V4.

• Despite the hype, the new model landed flat: It clearly lags behind leading US models, and it’s not even obvious that it beats top domestic rivals.

• However, V4 does come with deeper integration with Chinese chips – especially Huawei Ascend – and introduces a new model architecture designed to squeeze more out of limited compute.

On April 26, the Central Committee and State Council jointly released a high-level policy directive on strengthening the management of “new employment groups.”

• That covers China’s roughly 84 million platform workers, including delivery riders, couriers, and ride-hailing drivers.

• Through this policy, the Party is officially recognizing gig workers as a collective and distinct labor demographic.

• That places gig workers alongside other major labor demographics like factory workers, service industry workers, and migrant workers, meaning they can benefit from targeted policy support.

Commodities

On Tuesday and Wednesday, multiple outlets reported that state-owned oil majors Sinopec and CNPC are applying for permits to export gasoline, diesel, and jet fuel.

• Beijing reportedly ordered a freeze on refined fuel exports in early March, halting shipments that had not cleared customs.

• The move exacerbated shortages in parts of Asia, prompting several governments to quietly seek relief from Beijing.

Politics

For the first time in decades, an outsider is set to lead the Ministry of Agriculture and Rural Affairs (MARA).

• On Wednesday, the Central Organization Department announced Zhang Zhu as MARA’s new Party secretary, replacing Han Jun. Zhang will likely be appointed as minister soon.

• Zhang has a very different profile from the last three MARA bosses – he has never worked in the central government, nor held a top provincial job.

• By contrast, all of Zhang’s predecessors since 2009 had experience governing a province, and all had spent decades shaping agricultural policy within central institutions.

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.

In this week’s episode, Trivium China Podcast host Andrew Polk is joined by Trivium’s Head of Tech Policy Research Kendra Schaefer to unpack the latest in the Meta-Manus acquisition saga and what it reveals about China’s evolving approach to tech regulation and national security.

The two discuss:

• Why Chinese regulators ordered the Meta-Manus deal unwound

• How Beijing is using dormant foreign investment review powers in new ways

• The role of VIE structures and “Singapore washing” in cross-border tech deals

• China’s growing concerns around technology outflow

• What this all means for Chinese startups, founders, and the future of U.S.-China tech competition

Andrew and Kendra also explore how both Washington and Beijing are increasingly converging around the same core question: who gets to control strategically important technology?

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’m joined today once again by Trivium’s Head of Tech Policy Research, Kendra Schaefer. Kendra, how are you doing?

Kendra Schaefer: I’m doing good. How are you?

Andrew: I’m great. Good to have you back on. You’re a pod favorite, a fan favorite, so you got to give the people what they want. And excited to talk to you today specifically about our key topic, which is going to be the recent reporting around the Meta-Manus deal, which Beijing has taken exception to and effectively decided to unwind. So, we’ll get into the details. For anybody who’s unfamiliar with it, Kendra will run down the details behind the deal, but I assume most of our listeners will know about that. But it’s got big implications for U.S.-China tech. It’s got tech competition, it’s got big implications for the U.S.-China tech competition.

It’s got implications for domestic tech environment and innovation in China. So, we think it’s an important news development in its own right, but there’s a lot of other things going on here that we want to get into, which we will do shortly. But of course, before we get into it, we have to start with the customary vibe check. Kendra, how’s your vibe? I’m jazzed right now, actually. My summer travel plans are coming together. I am going to be in Taiwan with the Brookings Institution delegation on the first week of August.

Andrew: Amazing.

Kendra: Yeah, I’m excited about that. And then I’m going to go to the Mainland, and I’ll be there for three whole weeks. So basically, the whole month of August, I’ll be in Asia. So, if anybody’s going to be around, please reach out. I’d love to hang.

Andrew: Nice. Well, you will definitely get some emails on the back of that. I have found that narrating my travels through the world, through the podcast, definitely helps to get some meetings. So, I’m sure some folks will reach out to you. That’s great. That’s exciting. My vibe is similarly upbeat. I don’t know. Maybe it’s just the weather, right? Weather getting sunny. I feel like we’re really in the heart of spring in D.C., a lot of interesting things happening in our business. So, I’m just like really excited about everything. And then the weather being good on top of it — I don’t know, it’s the cherry on top.

So, definitely good vibes for me today. I’m mostly though, going to be asking the questions, just asking questions. So, we’re here for your expertise, which we’ll get into momentarily after we go through the other quick item up top, which is the housekeeping. Got to go through that quickly. So, first, 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. And that includes policy towards China out of Western capitals like D.C., London, Brussels and others.

So, if you need help on that front or on domestic policy, understanding domestic policy in China, please reach out to us. You can find 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 receiving more Trivium content, check out our website. Again, triviumchina.com, where we have a bunch of different subscription products, both free and paid.

You’ll definitely find the China policy intel option you need on our website. And finally, tell your friends and colleagues about Trivium. We really do mean that. It helps us out a lot. It helps us to grow the business. It helps us to grow the listenership for the pod, which also helps us to grow the business. So, we really appreciate any word-of-mouth recommendations that are out there. All right. With that, let’s get started here, Kendra. Tell us about the Meta of the Manus deal. Why don’t you start with sort of the background? What deal are we talking about? Why is it important? And then we’ll get into the most recent development. So, what happened?

Kendra: All right, cool. Well, I’ll keep the background short because I imagine many of our listeners probably already know what it is. But basically, a few months ago, Meta announced that it was going to be acquiring Manus, this Singapore-based AI agent startup that was originally founded in China. And that deal was reportedly worth about $2 billion, right? It was crazy because Manus is barely nine months old at the time that the acquisition was announced and basically invisible to consumers.

But it had built this general purpose AI agent that runs in a sandbox virtual computer and can actually sort of plan and execute tasks and produce real outputs, similar bucket of technologies to OpenClaw, which is exactly the kind of thing Meta wanted to plug into its AI assistant. Unfortunately, after the deal was announced, things got a little spicy. In January this year, China’s Ministry of Commerce launched a probe into the deal, and it only got worse from there.

On April 27th, so that was just this Monday, China’s National Development and Reform Commission formally ordered Meta and Manus to unwind the transaction, with Chinese authorities basically saying that the foreign acquisition had sort of violated domestic regulations. And so, this left us with a bunch of open questions, but two in specific – One, how is China claiming jurisdiction over what is presumably a U.S.-Singapore deal, right? And then secondly, what does this mean for Chinese startups and cross-border acquisitions in the future? So, that’s sort of the backstory.

Andrew: Thank you for that. That’s super helpful. And we’ll get into those questions, but I think maybe before we get into these what-does-it-all-mean questions, why don’t you talk to us specifically a little bit about what Chinese regulators, specifically the National Development Reform Commission, said when it came out and said, “Okay, we are officially not cool with this deal.” What did they say and what were the ramifications?

Kendra: Right. So, I’m actually going to get really in the weeds here because getting in the weeds, it’s going to help everybody understand why we think what we think about what’s going on behind the scenes on the deal. And so, I’ll start by actually reading out loud the text of the announcement that the NDRC released. And it’s only one line long. It said, “The Office of the Working Mechanism for Foreign Investment Security Review at the National Development and Reform Commission has made a decision to prohibit foreign investment in the Manus project in accordance with laws and regulations and has required the parties involved to withdraw the acquisition transaction.”

So, that word-for-word was what it said. And even though that’s only one line long, we actually get a lot of information from the way that it was worded. Specifically, there were three interesting parts of that that I’ll call people’s attention to, right? So, the first one is the part where they say, “…in the Manus Project, in accordance with laws and regulations.” And the reason that’s weird is because past announcements like this, past announcements from Chinese regulators in which the regulator is announcing that they’re kicking off some kind of investigation into a foreign company almost always include a list of the specific laws and regulations upon which that investigation is based.

And this one did not. In fact, when DiDi, I guess this was, God, when did they launch the Didi investigation? It was like 2019 now, 2021?

Andrew: I think it was 2020… I was in the States. So, it was after the pandemic had started. I think it was 2020.

Kendra: Yeah. I’m going to go with 2021.

Andrew: Yeah. Maybe 21. Yeah.

Kendra: But when they first announced that they were going to launch the investigation into DiDi after DiDi, you’ll remember, tried to list on the U.S. stock exchange after regulators specifically told them not to, and they kind of gave regulators a finger and tried to list anyway, and then, bam, they got slapped with this cybersecurity probe. That announcement was also one line long. But it said, I have the text here in front of me, it’s actually quite different, it said, “To prevent national data security risk, safeguard national security, and protect the public interest in accordance with the national security law of the PRC and the cybersecurity law of the PRC.”

They said it’s this law and this law, and they name a couple of regulations as well that it’s based on. And so this announcement, nada, zit, bupkis. And so, what that kind of tells us was, or it gave us a little clue, they don’t want to lock themselves in to a specific set of laws and regulations that this is based on because it’s a little bit shaky.

Andrew: We’re mad about it and we don’t know why yet.

Kendra: Right. But yes, in that bucket, we don’t want to explicitly say which rules yet because we’re still figuring that out. So that was clue number one.

Andrew: I do this with my kids all the time.

Kendra: Because I said so?

Andrew: Can’t do that. Well, you can’t do that. Why? Yeah, I don’t know. But I’ll get back to you. Anyway.

Kendra: So that was one thing, the accordance with laws and regulations piece. And the second part that’s a little bit weird is you’ll notice that they call Manus a project. They don’t call it a company. They said – has made a decision to prohibit foreign investment in the Manus project in accordance with laws and regulations. That’s a bizarre phrasing. Put a pin in that, so I’m going to come back to it later. But the third and arguably most important piece of this was that they explicitly specified which office in which regulator was releasing this rule. So, which one was responsible for this investigation. And that is the Office of the Working Mechanism for Foreign Investment Security Review. And we saw that name, and everybody in the kind of team was like, who’s that? We don’t hear from these guys very often.

This isn’t a very big and visible regulator like the CAC or the, you know, CAC is kind of the office that does the cybersecurity investigations or SAMR’s Anti-Monopoly Bureau, which does a lot of anti-monopoly investigations. So, we know who those guys are, but these guys are sort of new, new to us. So, we started digging into that, and that’s a whole…

Andrew: Well, let’s get into it. What is this office, and where did it come from? What did you find?

Kendra: Okay, I’ll skip the story of how we backtrace this. But basically, in 2019, so the starts in 2019, China’s legislature passed the foreign investment law. And that foreign investment law, I think it’s like Article 35, blah, blah, required the state to establish a review mechanism for foreign investments into Chinese companies into sensitive sectors so that the order to create this mechanism comes out in 2019. In 2020, the NDRC creates the mechanism. It was around the end of the year, December 2020. And so, basically, they released this regulation called the Measures of the Security Review of Foreign Investment.

Those measures take effect in 2021. They basically do two things. They create the office that runs these foreign investment investigations, and they also list the rules by which an investigation has to take place and the powers the investigators have and the penalties they can kind of impose and what triggers that investigation, that kind of thing. Basically, this office, I mean, the headline is that this office was set up six years ago as a regulatory weapon into foreign investment, but has basically been lying dormant this whole time. We couldn’t find any evidence that they have done any major, certainly no investigations that have made headlines over the last six years.

We found a little bit of interesting evidence that the NDRC had already been conducting foreign investment investigations prior to the formation of the office. So, like pre-2020, they’d been doing a couple. We saw some like disclosures on some of the stock exchanges that they were doing that. But obviously nothing related to like a major foreign investment deal. So, here comes this new investigatory weapon. And according to these rules, basically the way that the investigations work is that both parties to any covered transaction are required to voluntarily file a declaration with the Office of the Working Mechanism, blah, blah, blah, prior to an acquisition, a foreign acquisition of a company in any one of a list of sensitive sectors.

And of course, those sensitive sectors are super broad, right? Science and technology is one of the sectors, could be any number of things. And then what’s supposed to happen is that the NDRC and MOFCOM are supposed to jointly decide by looking at this declaration whether or not they need to conduct a full review. If they say they do, then they proceed, I’m shortening things here, but they proceed with conducting the review and then they make a determination on whether or not the investment can happen.

And here’s the interesting piece, right? If they say an investment cannot happen, companies got to unwind it. Even if it’s already taken place, they have to unwind it and they have to, what’s the exact quote? “Restore the situation to its pre-investment state and eliminate the impact on national security.” And that’s basically what Meta and Manus are being ordered to do, right? Unwind the transaction and return the situation to its pre-investment state. So, interesting tool. Interesting tool.

Andrew: I’ve got so many questions. So you’re required to report after the investment’s made? Is that what?

Kendra: No, no. You’re supposed to report before the investment’s made. You’re supposed to not proceed with the investment until you receive some kind of decision back. But if the investment has already been made and you make the declaration, if by chance the acquisition has already gone through, you need to return it back if they tell you to, basically.

Andrew: I mean, this sounds like the CFIUS process in the U.S.

Kendra: That’s exactly what it is.

Andrew: Which is kind of weird because I kind of feel like some of the more recent documents that just came out, which I talked to, I think we’ve written about, I’ve talked to Cory about, I think on the pod. They’re using other mechanisms to sort of beef up a CFIUS-like mechanism. So, it’s weird if they already have one that they’re also pursuing other mechanisms for this. I mean, I don’t know. Do you have any reaction to that?

Kendra: I do, actually. And I was going to talk about it a little later in the pod, but I’ll just give you a preview, which is that actually this mechanism is really weak. They wrote it a long time ago. They wrote it pre-crackdown.

Andrew: Pre-tech crackdown.

Kendra: Pre-tech crackdown in 2021 when they went after Alibaba and DiDi and the other tech platforms for a couple of years there. So, they wrote it pre-tech crackdown. And so, the penalties in here are weak. I’ll talk about that in a bit. And the remedies in here are weak. So, they might take this and strengthen it and plug it into some of those other mechanisms, and they might work in concert with each other, et cetera.

Andrew: Yeah. Wow. Interesting. It’s weird that they had this sort of toothless CFIUS mechanism at all, right?

Kendra: I know.

Andrew: Anyway, well, we can get into more of that in a sec. But I do want to talk about sort of the jurisdiction that this office has. Can this office investigate actions that took place outside of China? I mean, you’ve already said it’s a pretty weak mechanism. I mean, obviously, this transaction took place outside of China. So, what’s the jurisdiction deal?

Kendra: Right. That’s actually one of the biggest open questions about this case. We have heard some super interesting speculation, which I’m excited to talk about. But the question is, Manus, for all intents and purposes, as far as the outside universe understands, it was a Singaporean company. So, can this regulation allow China or allow a Chinese regulator to get involved in the acquisition of a U.S. firm and a Singaporean company. And if you just look at the text of the regulations themselves, the answer is unequivocally no. No, they cannot.

The first sort of three lines of the regulation where they talk about what types of transactions these rules apply to and what can be investigated by this office, they’re very clear that it can only apply to companies within the territory of the PRC. And so, we immediately read that and thought, well, there must be some kind of footprint that Manus has or some kind of touch point that regulators think they can reach or activate that has some kind of mainland Chinese footprint if they’re using this set of regulations to go after the deal. And so, we’ve been thinking about it. We’ve been reading some pieces that some Chinese legal scholars have written about it as well. And I’m going to repeat maybe the most interesting piece of speculation from the Chinese legal universe right now.

And this comes from Professor Cui Fan. For those of you who don’t know him, he’s a very well-known sort of regulatory scholar in China. And so here’s his, you’re going to have to follow me for a second because this gets a little complicated, but here’s his speculation. Manus, the project, and we’ll come back to that term in a minute, the technology that is Manus was developed by a company in China called Butterfly Effect. I think they’re registered in Beijing. They have a branch in Wuhan. And that company, Butterfly Effect, is owned by a WFOE, a wholly foreign-owned enterprise within China. That WFOE is owned by a Hong Kong company. And that Hong Kong company is owned by a Cayman Islands company.

Andrew: Is this like the VIE structure?

Kendra: That’s right. So, that’s the supposition. And then the Cayman Islands company, according to Cui Fan, owns the Singaporean entity. So, basically, what he thinks they’re probably arguing is that if Meta bought part of the Cayman Islands entity, then if you follow the chain down, the actual controller of the Chinese mainland entity also changed. And that acquisition should have been registered. That is his guess.

Andrew: Wow. Well, I don’t want to deviate too far onto the VIE structure, but it’s like, that’s a super interesting piece of this that I don’t think is really out there. Do you want to explain VIE structures, or do you want me to?

Kendra: No, you do it.

Andrew: Okay. Well, I was hoping you did.

Kendra: Yeah, I know you, too.

Andrew: Basically, for listeners who don’t know, VIE stands for Variable Interest Entity. And it’s a way, it’s a mechanism that basically Chinese companies have used for years and years to allow foreign investment into basically the Chinese tech sector, which is barred from foreign investment. Basically, like foreigners can’t invest in certain parts of the Chinese technology sector and parts of the economy. And, basically, what you do is you set up an entity in the Caymans, usually, or somewhere offshore, and it owns an entity onshore, usually a W WFOE UFI, a wholly foreign-owned enterprise. That WFOE then has these very complex contracts with a domestic Chinese firm.

So, it doesn’t typically own the domestic Chinese firm, but it has contracts that basically give it the right to the economic output from the Chinese firm. So, now this Chinese WFOE, or this wholly foreknown enterprise in China, has this contract with a Chinese company. The WFOE is owned by the Caymans, and then foreigners can invest in the Caymans entity. This, for example, is how most foreign investors invest in big, massive Chinese companies like Alibaba. So, the issue for American investors or other Western investors when they invest in “Alibaba” aren’t investing in Alibaba at all. They’re investing in this strange structure that supposedly gives them the right to the economic output from Alibaba.

And that’s obviously a very tenuous legal claim and could be challenged both in court or through Chinese regulations. And Chinese regulators have, over the years, kept looking at the VIE structure, knowing that it’s a way to skirt the rules, wanting to crack down on it, but at the same time saying, “But it also kind of accomplishes a goal we want, which is to channel foreign capital into our tech sector without breaking these rules.” So, it’s kind of always been operating in a regulatory gray zone, and regulators kind of keep inching up to regulating it.

But simply the fact that if the Manus thing, if Cui Fan is right, the Manus thing, the VIE structure plays a role here, that just makes it even more regulatorily precarious for Manus. And I think to your point, to Cui Fan’s point, it opens them up to some real regulatory liability, which it looks like maybe that’s why the NDRC went that route. Let me ask two questions — did that make sense? Was that explanation okay?

Kendra: Yes, that was exactly right. You did great.

Andrew: Okay. And then any thoughts on the back of those comments?

Kendra: Yeah, I mean, I’ll just go on to say that it gets even more complicated than that in this particular case. Because, okay, so let’s say that you go after… everything you said is correct. It does open up the VIE structure to additional scrutiny and questions. But in this case, I just want to underscore, they’re not going after the VIE structure. What they’re basically saying is the VIE controlled a Chinese company. It also controlled a Singaporean company. And if shares, like equity shares of the VIE changed, then the Chinese company ownership changed in that company, like that should have been declared.

So, just to kind of make that clear. But there’s another piece of this. So under these rules, they can order, if that’s what they’re doing, they can order the deal unwound. But that does not solve the problem of closing the door on the egress of Chinese technology. It doesn’t fix that problem. It fixes this one deal, but it doesn’t shut the door on like, I don’t think regulators care about Manus, right? It’s like, what if DeepSeek does this? So, they need to prevent this sort of technology outflow in this way.

And so, that’s where I think another bucket of regulations is probably going to come into effect. So, now we come back to the phrasing Manus Project, right? Man, we’re down the rabbit hole right now.

Andrew: Yeah, I love it. It’s great.

Kendra: So, a project is not a company. It’s a bucket of technologies, algorithms, know-how, IP, people, right? That can be illegally exported. So, that phrasing makes me think that what they’re basically doing is saying there’s been an illegal acquisition. And on top of that acquisition, there has additionally been an illegal egress of Chinese technology that was required to, not sure which bucket of rules yet, but maybe export laws, right? Export control laws. You were supposed to get a license before you exported the Manus algorithm. You were supposed to get some kind of approval before you proceeded with the packaging and egress of this technology from the mainland entity to a Singaporean entity.

I don’t know that we have this exactly right, but I think we’re pretty close to sniffing around the edges of how they’re thinking about this framework based on that, which is a lot to get out of a single sentence, but that’s how the sausage gets made.

Andrew: Yeah, it’s fascinating. So, you’re saying this toolkit allows China to order the transaction unwound, but it does not allow China to prevent the outflow of technology developed in China to a company abroad. Is that what you’re saying as well?

Kendra: Yeah, I’m basically saying that this investment security review, the Chinese CFIUS mechanism we’re looking at right now that’s kind of just been sitting there for a while, specifically allows them to investigate a transaction of a foreign acquisition, and it allows them to unwind the transaction, but it doesn’t allow them to do much else. And on top of that, you know, it really doesn’t allow them to do much else. It doesn’t allow them, for example, to issue any kind of… there’s no financial penalties in there. That regulation doesn’t say anything. Like, if companies refuse to do this, they owe a bajillion dollars. The worst penalty listed in that reg is that the state can force a divestment by a given timeline. I mean, that’s kind of weak sauce, honestly.

Andrew: Totally. Well, and this is like, I don’t know, maybe we can get into this later, but a lot of The commentary is like, why is Meta even agreeing to this? Clearly, they could press the Chinese. And also, if this was happening in the U.S., they would go to court to try to fight the U.S. government. And they don’t appear to even be trying to fight the Chinese government. And maybe that’s because they think it was a bad investment. Or maybe that’s because the Chinese government has a bunch of leverage over them just in terms of how profitable their advertising revenue is from the China market. I don’t know. Do you want to get into that now or do you want to hold that?

Kendra: I mean, we can get into that. I don’t have too much to say about that, except I agree with you. And I think also, I mean, again, I’m just riffing here. But even though the investment regulation does not have any teeth, the export control regulations most definitely do. There are criminal penalties. There are major fines. So, if that’s true, right, and they’re basically saying you illegally exported China-developed technology from one entity to the other, and they decide to go with that as a supplementary to the investment issue, then a lot of the Manus staff are Chinese citizens, right? It’s like those people are subject to the law and they could be criminally liable for exporting technology illegally.

I’m sure Meta’s got plenty of dependencies, but at the same time, it’s like, I mean, if staff go to jail, if Butterfly Effect’s staff go to jail, I mean, that doesn’t really behoove anybody. It’s not a good outcome for anybody involved.

Andrew: Yeah, totally right. I hear you. I also just have to quickly just comment on the irony of, again, me being in D.C. and people throwing up their hands and saying, “Oh, I can’t believe China’s unwinding this deal and getting involved in the market,” which the U.S. government hasn’t done that all over the past couple of years. And also, we, the U.S., has an increasingly restrictive environment for U.S. investment into China, right? So, we’re trying to say American companies can’t invest in Chinese technology in sensitive areas. And China is basically saying American investors can’t invest in Chinese technology in sensitive areas. And we’re saying, I can’t believe China would say that when we’re saying the exact same thing. It drives me nuts. But any thoughts on that part of it?

Kendra: I mean, no. I actually totally understand why Chinese regulators are so mad. Because if you really think about it, it’s kind of like China spent the last two decades tweaking its innovation ecosystem, pouring subsidies into the innovation ecosystem, changing the way the entire sci-tech funding structure works, playing with the entire catalog of college majors to graduate more STEM students, right? I mean, this is a 20-year effort to generate companies like Manus that are globally competitive, that are desirable acquisition targets by foreign companies. And now all of a sudden, it’s like the dog that caught the car. It’s like, well, now they’ve got them. And the sudden outflow, right?

So, they incubate these companies with all of this effort and all of the state funding. And then those companies take their toys and they go get acquired by a big foreign player. And so, I understand the state basically waking up to the fact that this is a major loophole. It’s kind of a national security issue. Again, Manus is not frontier technology necessarily, but DeepSeek is.

Andrew: Right, right, right. It’s more about if this becomes a pattern and then... Right.

Kendra: Right.

Andrew: Yeah, totally. And I mean, to that point, if you just flip it around, I’m not trying to say like any kind of moral equivalency or anything like that, but if OpenAI decide to sell a key chunk of its technology to Alibaba, you think the U.S. government would be happy about that? Pretty sure they’d stop that transaction.

Kendra: Or if like a Chinese company tried to buy OpenClaw. I think that’s like the kind of equivalent. Yeah, no, it’s really interesting stuff. It’s an interesting situation. It’s a novel situation.

Andrew: Well, and regulators on both sides are trying to figure it out in real time. But speaking of figuring it out, let’s now get into a little bit further, the technology outflow question, which we’ve touched on. But what other tools does China have to prevent technologies develop in China from being transferred abroad? I mean, obviously, the point here is to nip this in the bud, right?

Kendra: The point here is to nip this in the bud. So I think, first of all, what’s coming under scrutiny is a practice that is being called Singapore washing. The actual Chinese translation is like Singapore laundering. The idea that you scrub yourself of Chinese affiliation by moving your company to Singapore. And I’ve heard a few people be like, “How could Manus be so stupid?: And I actually don’t think that’s a good argument.

I totally understand why Manus did this because hundreds of companies we’ve looked at in the past do this all the time. They just weren’t in sensitive sectors. Chinese e-commerce companies, Shein, for example, had a Singapore subsidiary and then I think they went to Ireland. There’s all these big kind of Chinese firms that have supply chains in China or were founded in China and grew up in China and then wanted to engage more with the international market.

And so, they went ahead and they launched an entity in Singapore and they went and they maybe re-headquartered to somewhere in Europe or somewhere favorable foreign transactions or tax base or whatever. So, I think the process of doing that is going to come under scrutiny. I think it’s a really interesting open question whether or not they look back at any companies that have done that in the past that I don’t think like textile companies are going to be particularly problematic.

But if any other companies have considered a similar move in the past or have executed on something like that, they’re probably a little bit nervous right now. But I don’t think it’s a matter of prevention, right? It’s like the state wants to have an approval touch point on everything that goes out. It wants to be able to say no when it wants to say no. And this just went right under the radar.

Andrew: Yeah. But I mean, just to push back a little bit, it wants to say no so it can say no, right?

Kendra: Totally, totally, totally. Oh, no. 100%. 100%. 100%. Yeah, no, I’m not saying that. I’m just saying that, like, I don’t think they want to say no companies can domicile in Singapore from now on or redomicile in Singapore. I think they want probably like an approval process where you have to submit a declaration to this body and get a stamp of approval before you re-headquarter or something like that in specific sectors or at a specific revenue target. But I don’t think it’s just going to be companies. I was talking to somebody about this the other day, and she had talked to a couple of Chinese founders who had said, “Well, then maybe it’s a bad idea to start a company in China. Don’t start it here and move it. Why don’t you just start it somewhere else? If your goal is to get acquired, right, this is just going to incentivize people to do that.”

And so, I think the bigger picture is that China’s really waking up to the fact that innovation outflow, losing innovations that they incubated is going to become a problem. And so, that might relate to licensing. It might relate to IP outflow. It will be really hard for a Chinese citizen to develop zero IP in China and fully found their first company outside of China and then develop all their IP under that external firm. So, I think probably a bunch of choke points are probably coming over the next, I’d say this is a long-term push, probably five years or 10 years of looking at the stops they can put in place to prevent that.

Andrew: Well, and are there broader implications for the Chinese kind of tech and innovation ecosystem or specifically the startup ecosystem? Because I guess I’m sitting here thinking just, I think most of our listeners will know this, but sometimes I just like to point out most of the incentives for the average person in China are the same as they are anywhere else. People are starting companies because they want to get rich, right?

Kendra: Yeah, exactly.

Andrew: They want to sell to a large technology company, whether it’s American, Chinese, European, whatever, and become a tech billionaire, right? Like that’s the dream, right? And so, they’re just trying to do whatever they can to realize that dream. And then, of course, the regulatory apparatus thinks differently. They think, well, we created the environment for you to produce this technology, and we want that technology to redound to the domestic economy and to domestic security and all of that.

And that’s exactly how American regulators think about it as well. There are tons of founders starting companies in America just because they want to get rich, but the U.S. government is like, that’s our technology. Ultimately, that’s American technology. It doesn’t matter who owns it. It’s for the benefit of America. And I don’t know. What do you think about that? Does that have a material impact on your average Chinese founder? Or are they mostly looking for exits in China? I am obviously not being very articulate.

Kendra: I understand what you’re saying. I mean, is there enough money in China to make it worthwhile? Or do founders essentially say, “Well, I’m never going to make $2 billion on an acquisition from a company here. So, meh.” I don’t know that it has that kind of chilling effect, to be honest. I mean, I’m actually torn on this. Because in one respect, I see this as very similar to what happened to DiDi. What happened to DiDi is that was vibes-based, right? A domestic company demonstrated that they weren’t acting in alignment with the spirit of the law, that they weren’t in line with the political environment, right?

They made a big, loud move that was so incongruous to what the state wanted from them, wanted them to demonstrate in terms of values, basically, right? Loyalty to patriotism and contributing to the domestic innovation ecosystem. It’s kind of embarrassing for China that some U.S. company comes along and snatches up your technology. And so, not only can the state not let that slide, lest it set a bad example, they’ve also right now, of course, they’ve identified this as well. So, I think in some respects, founders are probably going to look at this and say, well, duh, if you’re going to do something like that, you need to couch it in a way that appears to support Chinese goals.

So, one instance like that, is that going to have an entire chilling effect on the market over the long term and people decide not to start companies? No.

Andrew: Of course not.

Kendra: Of course not. But could regulators overclock on this and tighten exits so much that it becomes exhausting for a Chinese company to even try to do that, and they essentially decide that their upside potential just isn’t that far up? Sure. I think so. I think Chinese regulators are great at overdoing it.

Andrew: Yeah. Well, exactly. Someone once said to me that Chinese regulators are good at direction, bad at magnitude. And I was like, that’s right. They generally get the direction right, but they kind of over-torque. One more question before we get into the final thoughts, but what about the idea of the penalty? There is no real penalty. You talked about the part of that is because… I mean, they have to unwind the deal. But there’s no fine, right? There’s no additional fine. And there’s no mechanism for that.

Kendra: I’m waiting for the other shoe to drop.

Andrew: First of all, is that a big regulatory weakness? Will they fix that? And how do you think, I don’t know… Basically, I guess the question is, did they make a deal with Manus? Did the regulators just come to Manus and Meta and say, “Listen, this has to happen and we’re not going to fine you”? What do you make of that aspect of it? Because certainly they could have come up with some mechanism to say, “Oh, and you owe us a billion renminbi.”

Kendra: So, first of all, it’s too early to say whether or not another shoe is going to drop. I think it very well could. And if you look at past investigations, that’s exactly what happened. An announcement was made and the penalty was clarified later. We could even, I’m stretching here, but we could even look at the fact that they didn’t name which laws and regulations they were basing this on and go, maybe they haven’t figured out what the appropriate penalty is. But penalties often come months after the fact, weeks or months after the fact. So we haven’t hit a safe zone where I think everything’s cool.

I do think that because this deal is so unusual, actually, I don’t have an opinion on this. I’m repeating one of our head of policy research opinions on this, where he basically said, I think a deal was struck before the announcement was even made. I think they sat down with both sides, got them to agree to unwind it, set a series of conditions, and then made the announcement that they were asking the companies to unwind it to be sure that it was going to smoothly because, can you imagine if the state announced that this was going to occur and then both of those companies said no and then things get really, really messy?

So, I imagine that some kind of groundwork has already been laid. How far that went, no idea. But you’re raising a really good question which is like what is the or else that is on the back of all of this? So, that’s still totally unanswered i don’t know whether they say y’all violated the export control law, and therefore you’re being issued a fine based on this. And I don’t know, Butterfly Effect has to pay the fine. Does Meta have to pay the fine? Are both parties fined? I’m not sure how that necessarily works. So, that’s something to watch. I would urge listeners to keep your eye on any upcoming fines. Do you have any thoughts on maybe one thing?

Andrew: I don’t. I was just going to ask you, do you think they will make moves to give themselves the regulatory toolkit to a more robust regulatory approach to, I mean, you’ve sort of hinted at it, but where will that come from? It seems weird to me. I guess the NDRC makes sense in terms of outbound investment. NDRC has always been a little bit involved in that, but it seems like MOFCOM might be more of a natural regulator for this kind of thing.

Kendra: Well, first of all, let me answer your first question. Yes. So, before the tech crackdown, most regulations and laws had pretty low or weak penalties, and this was written before the tech crackdown. And so, during the tech crackdown, one of the that happened is regulators went through laws like the anti-monopoly law and the cybersecurity law and raised penalties from basically nothing to eye-watering amounts. Here’s one example. A violation of the anti-monopoly law, you know, if you had a merger that you weren’t supposed to have and you didn’t check with regulators when you did it, similar sort of thing, used to cost a company 500,000 renminbi, that’s like $70,000 per violation.

That’s a line item. You do a $2 billion deal, who cares if you have to pay $70,000 for that? So then when they did the revision of the law, there’s tiered penalties, but it can go like 5% of last year’s annual revenue, 10% of last year’s annual revenue. I think in extreme cases, it’s up to like 50% of last year’s annual revenue if you really, really screw up. Yeah. That’s the like-

Andrew: That’s like a death sentence, basically.

Kendra: It’s a death sentence. They’ve never come anywhere close to that. Even the most record-breaking fines on the biggest companies have only come in close to like 4% of last year’s annual revenue. They haven’t even approached their highest. But the order of magnitude difference is ridiculous, like huge, right? So, we went and read this regulation, which has no financial penalty, and then the law on which it is based, the foreign investment law, same deal, 500,000 renminbi per violation, same era of like fines, right? And so, I think it’s absolutely possible that the legislature over the next few years puts a revision to this law on the agenda and violations are no longer 500,000.

They maybe take a page out of this cybersecurity law into monopoly law book, and it’s like a percentage of last year’s annual revenue for the parties or something like that. That would take a few years to do. Legal changes take years, whereas regulatory changes can be faster. I also think it’s totally possible they add a couple of articles into this regulation that allows for criminal penalties, civil penalties, and administrative fines as a stop gap measure. So yeah, I think they absolutely could strengthen this one. And if they do that, that’s going to make this weapon just as strong.

It goes in the tool belt. It goes in the sort of weapons cabinet with the cybersecurity investigations, with the anti-monopoly stuff, et cetera.

Andrew: And do you have thoughts on like MOFCOM versus NDRC, like who’s regulatory turf this makes sense for?

Kendra: Well, my understanding is that NDRC, like as part of the investment, foreign investment investigation, NDRC is the sort of organizing agency. They organize between all the other agencies. And my understanding is it’s under them because they can tap in other agencies to participate in that investigation if they need to. MOFCOM being the primary kind of support body.

Andrew: Yeah, yeah, yeah. That makes sense. Yeah. I mean, again, for listeners, this one’s been pretty wonky generally, but this one gets really wonky where we’re like, which Chinese regulator has the turf or authority? I mean, but that’s how it works. That’s how the world works, right? Same thing in the U.S. government is you got a bunch of overlapping authorities. You got to be clear on who’s taking point and who’s doing what just to make sure the laws work appropriately. And then the other thing I wanted to say on the fines piece is, I mean, it’s a tried and true methodology in China and elsewhere.

At the beginning of last year, so beginning of ‘25 in January, I was on a trip to Southeast Asia and we were in Ho Chi Minh, Vietnam. And new party secretary, a guy named Toh Lam, had come in and really, I believe he was a new party secretary, had really consolidated power, was really kind of trying to, and is still trying to replicate the China model in a lot of ways. Vietnam feels like China in the 1980s in a way, where there’s a communist party and it’s like getting more, I don’t know, aggressive or kind of trying to increase its control, but there’s still a lot that’s permissible that’s not in China.

Anyway, they had a traffic problem. And very simply, they just raised the fines if you run a red light to like a, even if you’re on a motorbike to a crazy high amount. And guess what happened? Now the problem is that light turns yellow and everybody slams on their brakes because-

Kendra: Really?

Andrew: Yeah, almost overnight solved basically a big chunk of the traffic issues. So, it’s a pretty tried and true regulatory path. We’ll see how Chinese regulars use this in this specific area to try to keep technological outflow from happening. But it seems inevitable that they’re going to take that path. Any last thoughts before we wrap up on all this? I really appreciate you walking me through everything here.

Kendra: No, this has been a really fun podcast. Great to hang out.

Andrew: Yeah, well, we’ll see where it all goes. I’m sure there will be more developments here. We’ll have you back on to talk about them, more implications as we kind of get a clear understanding of those implications. We’ll discuss them for our listeners. So, thanks a bunch, Kendra. I appreciate it.

Kendra: Yeah, totally. And just, you know, final thought is that all of this came from one sentence. I’m just going to say it one more time. None of this has been confirmed or verified yet. So, this is just us speculating. I’m very curious to see what happens when we get some actual clarity from regulators or from the reporting over the next few weeks and months.

Andrew: Well, we’ll be here for it. Thanks a bunch, Kendra. I really appreciate the time. And thanks everybody for listening. We’ll see you next time. Bye, everybody.

Kendra: Bye.

• GDP grew 5.0% y/y in Q1, faster than Q4’s 4.5% growth, and at the upper range of Beijing’s annual growth target of 4.5-5%.

So China’s economy has shrugged off the Iran war and entered 2026 in good shape, right?

• Not so fast.

Despite the punchy headline growth rate, economic momentum was clearly fading as Q1 drew to a close.

• The war’s full impact – on supply chains, export demand, and input costs – is only partially reflected in the Q1 data.

• March’s data – which better reflects the war’s impacts – slowed across the board as the fallout from supply chain disruptions began to bite.

• This means the direction of travel heading into Q2 is noticeably weaker than the quarterly average indicates.

There are two major headwinds I want to discuss.

The first is consumption.

• Retail sales of consumer goods grew just 1.7% y/y in March, down from the already sluggish 2.8% in January-February.

Real household incomes, meanwhile, only grew 4.0% y/y across Q1, extending a multi-year slowdown.

• In the three years before COVID, disposable income grew at an average annual rate of 6.5%.

• By 2023, it had slipped to 6.1%, then to 5.1% in 2024, and then to 5.0% in 2025.

• Q1 2026 data suggests growth will decline again this year.

And the property slump continues to erode household wealth.

• Second-hand home prices fell 0.24% m/m in March, and are now down almost 25% from their 2021 peak.

The combination of slowing income growth and collapsing property values has made consumers deeply reluctant to spend.

• The household savings rate hit 37.8% in Q1, the highest level on record outside the pandemic.

Against this already fragile backdrop, the Iran war has delivered an energy price shock that could not have come at a worse time.

• Consumer transport fuel costs rose 10% m/m in March.

• Meanwhile, as I discussed a couple of weeks ago, producer prices unexpectedly turned positive in March.

The upshot: As higher costs work their way through supply chains, they will further erode real household incomes and squeeze already-limited discretionary spending.

The second major headwind is a sharp slowdown in export growth – the engine that China’s economy has relied on to offset weak domestic demand.

• Exports grew a meek 2.5% y/y in March, while the trade surplus shrank to USD 51.1 billion, the lowest monthly reading in four years.

And things could get a whole lot worse.

• The countries driving China’s export diversification push – across Southeast Asia, South Asia, and Africa – are precisely the ones being hit hardest by the global energy shock.

• These are heavily import-dependent economies, where higher oil prices rapidly feed through to broader inflation, hammering household purchasing power.

• Consumers across these markets are cutting discretionary spending and prioritizing essentials – a dynamic that will further weigh on Chinese exports in the coming months.

So what should we take from all this?

China’s strong Q1 GDP print may give policymakers a bit of breathing room – but not much.

• The Iran war has scrambled what was supposed to be an orderly exit from deflation.

• The emerging economies that China has spent two years cultivating as export alternatives to the US are now grappling with their own energy crises.

This means China’s export engine, the economy’s most reliable growth driver, faces headwinds from both the supply and demand sides.

Beijing needs to engineer a boost in domestic demand – but that won’t happen as long as income growth and the real estate market remain in the doldrums.

• We can rule out a push to reinflate property prices – as Beijing has clearly signaled that’s not in the cards.

• That leaves deep, structural reform of China’s social safety net and income distribution system as the only credible option – something Beijing has been reluctant to pursue at scale.

The big question: Will the mounting, unexpected headwinds to external demand compel Beijing to rethink its cautious fiscal stance?

Next stop: The upcoming April Politburo economic meeting could give us a read on whether that calculus is changing.

• If officials indicate willingness to go beyond incremental measures – and pursue the kind of household-focused structural support that could actually move the needle on consumption – Q2 could surprise to the upside.

• But if they stick to the familiar playbook, things are likely to get worse before they get better.

Get in touch to discuss how we can help you track policy signals and economic developments – and explain what they mean for your business.

Joe Peissel, Senior Macroeconomic Analyst, Trivium China

What you missed

US-China

With three weeks to go, we’re gaining clarity on potential deliverables for US President Donald Trump’s China visit on May 14-15.

• On Wednesday, US Trade Representative Jamieson Greer offered some color on what Washington wants out of the visit: “We’re…looking to get a commitment from the Chinese overall with respect to all agriculture.”

• Plane purchases may also be on the table: According to industry sources, Boeing has been in discussions to sell more than 500 planes to China.

On Wednesday, Reuters reported that Micron Technology has been a driving force behind the proposed MATCH Act, which would tighten US export controls on chipmaking tools used by Chinese memory rivals.

• The bill – already advanced by the House Foreign Affairs Committee – would target fabs run by Chinese memory makers like CXMT and YMTC.

• If enacted, the bill could crimp the expansion of Chinese players, and tilt the market further toward Micron and other foreign companies.

Econ and finance

The Iran war is causing havoc for China’s trade with the Persian Gulf. Per trade data released by the customs bureau (GAC) last week:

• Imports of crude petroleum from the Persian Gulf – which accounted for 42% of China’s total crude imports last year – collapsed 34% y/y in March.

• Imports of liquefied petroleum gas fell 41% y/y.

China’s Financial Law draft has raised industry concerns that it could give regulators unchecked power.

• The law is intended to be China’s first overarching legal framework governing all “financial activities,” codifying baseline obligations for market participants and enforcement principles for regulators.

• The draft authorizes financial regulators to apply quasi-judicial measures – from seizure and freezing orders to exit bans – but doesn’t clarify the procedures governing their use.

• Several experts, including a former central bank (PBoC) official, warned that the lack of constraints on regulators could leave those powers vulnerable to abuse.

Business environment

On Tuesday, the State Council issued guidelines on expanding and upgrading the services sector, setting a goal for total services output to exceed RMB 100 trillion by 2030.

• The guidelines identify priority subsectors for policy support, including R&D design, IP services, logistics and warehousing, software and IT, data and information services, finance, retail, tourism, elderly care, and healthcare.

• The policy also reiterates expanded foreign market access in value-added telecom, biotechnology, and wholly foreign-owned hospitals.

On Tuesday, CCTV exposed how local governments are using excessive subsidies and “policy depressions” to compete for investment projects, highlighting failed EV ventures in Yichun, Jiangxi province, and Nanning, Guangxi province.

• Both cities poured billions into Nezha EV’s parent company, Hozon New Energy.

• The company accumulated RMB 18.3 billion in losses from 2021 to 2023, losing over RMB 80,000 per vehicle sold.

• CCTV framed this as symptomatic of “involutionary” race-to-the-bottom competition, in which local governments circumvent fair competition rules through creative workarounds.

Tech

On April 17, China’s commerce ministry (MofCom) submitted substantial comments to the European Commission, warning of retaliation if the EU moves forward with cybersecurity regulations that exclude Chinese tech products from EU markets.

• The updated Cybersecurity Act would expand Brussels’ ability to restrict EU market access for countries that pose cybersecurity concerns and “high-risk” companies.

• MofCom warned: “If the EU designates China as a ‘country posing cybersecurity concerns’ or lists Chinese entities as ‘high risk suppliers’ [or excludes] Chinese products and services from the EU market, China can launch relevant investigations into the EU or EU businesses, and take reciprocal measures.”

On April 17, the Supreme People’s Court (SPC) released a five-year plan to improve legal proceedings related to intellectual property disputes.

• The document’s number one priority is strengthening protections for innovators to “serve high-level scientific and technological self-reliance.”

• The plan specifically calls to focus on areas such as semiconductor design and computer software.

• Courts were also directed to develop novel doctrines for emerging tech where existing IP frameworks don’t map cleanly, which would include things like AI-generated content ownership, training data rights, and gene sequence patentability.

Net zero

On Thursday, the Party Central Committee and State Council general offices issued sweeping new measures to evaluate provincial progress toward China’s decarbonization targets.

• Provincial governments will be held directly responsible for helping meet China’s official 2030 climate targets.

• Provinces will be graded across 14 KPIs tailored to local conditions, including five “control indicators” covering emissions and energy intensity reduction, fossil fuel consumption caps, and non-fossil energy share.

• Evaluation results will factor into performance assessments and promotion decisions – with officials found guilty of major breaches of duty referred for disciplinary action.

Agriculture and rural affairs

China’s bulk agricultural imports are set to fall steeply over the next decade, according to the annual 10-year agricultural outlook report released by the ag ministry (MARA) and Chinese Academy of Agricultural Sciences (CAAS).

• Significant increases in crop yields and falling stable crop consumption are driving the projected decline.

• Officials expect grain yields to rise 6.3% over the base period by 2035 – consistent with ongoing efforts to raise yields by improving farm infrastructure, soil health, crop varieties, and equipment.

• The report projects China’s grain and oilseed demand will peak at 842 million metric tons in 2032, before beginning a gradual decline.

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.

This week, Trivium China Podcast host Andrew Polk and Head of Supply Chain Research Cory Combs break down key dynamics – from:

• The evolving impacts of the Iran war and China’s responses

• China’s latest supply chain and anti-foreign coercion policies

• The US’s ongoing mass-diversification push amid Chinese export controls

• US-China strategy as the leadership meeting approaches

• And more!

With both Andrew and Cory having just returned from ~6 weeks of travel, they take stock in a wide-ranging conversation – with many questions, but also a few proposed answers.

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 Supply Chain and Critical Minerals Research, Cory Combs. Cory, how are you doing, man?

Cory Combs: Doing well, thank you. Good to be back.

Andrew: Yeah, good to have you back on. For listeners, we took a couple of unexpected weeks off. I was traveling and then on vacation and sort of unfortunately couldn’t get all the logistics together for keeping the pod going through all my movements. So, apologies for that, but you got a couple weeks off from us, I guess three weeks, and now we are glad to be back doing this again. So, Cory, glad to have you on to sort of restart here in the spring of 2026. Appreciate it, man.

Cory: Cheers.

Andrew: We are going to talk about a sort of range of things today. Kind of the biggest policy moves out of three, four weeks have been a couple of developments in terms of lawfare, by which I mean China’s ability to use its legal and regulatory system to sort of fight back against U.S. legal and regulatory moves and Western regulatory moves generally. So, we’ll talk about these lawfare regs. They specifically are, one is focused on supply chain security and another is really focused on sort of extraterritorial jurisdiction, the ability to sort of pressure companies that are complying with U.S. and other Western sanctions, and to try to kind of have a counterbalance against those.

So, we’ll get into all that. Then while we’re talking about supply chain issues, we will talk about the latest on Iran in terms of how the war in Iran impacts China with the ongoing disruptions out of the Middle East. We, of course, have talked a little bit about the Iranian situation and how it impacts China, but Cory hasn’t had a chance to really give his advice full spiel on that. So, we’ll get into that. And then we will finally touch on the upcoming Trump-Xi meeting. Cory’s got some thoughts on that he’d like to share. And then we’ll also touch on some pieces on China’s latest developments and efforts on industrial upgrading. A lot of this, so as listeners may know, I was traveling throughout the world. I was in Europe and Spain, and then was in Beijing for a week and then Bali for a week, and then took the long way back to D.C. before being on holiday for a week.

And Cory similarly was kind of around the world, was in Hawaii at a track two type thing, and then some time off in Japan, and was able to hang out in Beijing and Shanghai, and then was just in D.C. last week. So, we’ve kind of both been around. I guess we can use that as a good jumping off point in terms of the customary vibe check. After your whirlwind tour of various parts of the U.S. and Asia, how’s your vibe, Cory?

Cory: Good energized. So, the trip went on a little bit longer than anticipated originally, and partly that was to join some additional activities in shanghai, and then D.C. was a pretty sudden trip as well. We can talk about that in detail if interested but was in D.C. to talk, guess what, supply chains in Iran, but also to join a terrific conference there as well. And getting back, I was definitely pretty exhausted coming back, but it’s only been a few days and pretty energized by it. It’s good to be able to touch base on the ground, see the material realities of a lot of policies that have been going on for a few years now, and especially post-15th Five-year plan, back every couple of months, obviously.

But this has been a particularly significant time of change, and you can feel it on the ground, I think. And then being back in D.C., of course, it’s always good to see, in some ways, how quickly things change and other ways how much nothing changes. So, it’s good to touch base pretty regularly. So, it was a lot to catch up on this trip.

Andrew: Yeah, well, good. Well, I’m glad that you have been to all those places and gathered a intel and had a lot of conversations and are able to share it with me and with our listeners now. Excited to get into this. In terms of my vibe, I also am kind of discombobulated a bit having been everywhere. My last week was down in Tennessee at Dollywood with my family. And so, yeah, we were doing the spring break thing, chilling at Dollywood Theme Park. I can’t recommend it enough. Great spot, like nice middle ground between some of the smaller theme parks versus a Disney. It’s like big, price is right. Anyway, everybody go check out Dollywood in Tennessee. That’s a freebie for those Dollywood folks. So that’s my vibe.

Cory: This is not a sponsored podcast.

Andrew: Yeah, exactly. Maybe we should get a sponsorship. But anyway, I’m relaxed coming off of spring break and glad to be back in the podcast seat here. So, we will dive into it. Of course, though, we also have to do the housekeeping quickly as well. So, a quick reminder to everybody out there, we’re not just a podcast here. Trivium China is a strategic advisory firm that helps businesses and investors navigate the China policy landscape, which includes policy towards China out of D.C., London, Brussels, and other Western capitals. So, if you need any help on that front or on the domestic policy 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 receiving more Trivium content, check out our website. Again, that’s triviumchina.com, where we have a bunch of different subscription products, both free and paid. You’ll definitely find the China policy intel option you need on our website. And then finally, please do tell your friends and colleagues about Trivium, both about the podcast and about the company, generally helps us to grow our listenership, grow our business, so we can keep bringing this content to you all.

All right. Well, with that, Cory, let’s jump into it. We’re going to start with these two big docs that came out. So, one came out on March 31st. One came out on April 13th. So, we are recording here on April 22nd. So, the docs have been out, you know, one of them has been out for three weeks. One of them has been out for a little like a week and a half, both related to China’s ongoing efforts to develop its legal toolkit to fight back against Western sanctions, Western “ economic coercion,” and to bolster China’s legal avenues for its own economic coercion and its own sanctions and lawfare toolkit.

So, why don’t you just start by walking us through what these two documents were, what’s in them generally, and then we can talk about sort of why they’re important and what the implications are.

Cory: Yeah, absolutely. We’ll start with doc, let’s start with 834. The State Council is behind both of these documents. The first one’s a doc 834, and the full title is Provisions on Security of Industrial and Supply Chains. This is a State Council of order. So, just again, for those who don’t follow policy too closely, this is a technical term, a very big deal in terms of the kind of level of importance of policy document. And the regulations broadly concern, first of all, they’re tied to the national security law.

And so, this is basically making very clear upfront that this is not just a kind of routine industrial policy document. It is a big capital I important industrial policy document. And broadly what it focuses on is making sure that the state has a very active role in ensuring the security of industrial supply chains. And so, basically, what this comes down to is putting much more onus on local governments and central ministries as well to understand, optimize, and secure the supply chains necessary for China’s industrial upgrading.

Broadly, in principle, this covers all of China’s industrial chains. But looking at a couple of specific things, I’m thinking of Article 7, for example, specifically calls for the strengthening of supply chains “in key areas.” What are those key areas, right? And specifically, it calls for promotion to maintain, and I’m quoting this, “stable and continuous operation of the production and circulation of raw materials, technologies, equipment, products, etc., in key areas.” What we interpret that to mean is, basically, there has been, for decades, Beijing has been very, very forward in a way that the U.S. currently wishes it had been in terms of ensuring raw material supplies.

So, you see this historically in the investments in rare earth elements that people will now talk about how that’s been a decades old process. That started very, very early on. You can trace the roots of that supply chain security effort back to the Sino-Soviet split. I mean, this goes really far back. And then industrial development side, that goes more to the ADs, Deng Xiaoping area, etc. But always there’s been this through line of this is financially not that attractive, but it’s strategically important.

We need to make sure we have these things for military and industrial purposes. So, that has been a pretty consistent through line. And we see it more recently in the modern kind of incarnation, where, for example, and I think I’ve talked about this on the pod before, China is the world’s dominant battery maker, obviously, but also the dominant processor of lithium, which is the key input to most batteries.

But China depends on Australia, U.S. treaty ally, and in Chile for imports of raw spodumene and brine, the things you get lithium out of to process. So, what we saw a few years ago was the state started to push SOEs and other companies to start processing what’s called lepidolite, which is a very commercially unattractive mineral that also contains lithium. Why? Not because it was commercially attractive, but because they thought it was necessary to decrease foreign dependence. This is another example of the state playing a role on the raw material side. So, that’s just going to show this through line, but also more recent action.

And more recently, though, we’ve seen significant disruptions. Obviously, the most notable or at least top of mind right now come from Iran. We’ve published about the helium disruption — post bombing of facility in Qatar. And then also we have sulfuric acid has been really critical. We’ll probably talk about that more in a minute. But these are kind of the midstream things that China needs these to make other things. And then you have the technology side. We’ve seen recently there’s been a conversation, which we’ve been anticipating for quite a while now, that Beijing might become more proactive in trying to limit or curb the export of technologies that give China a leading position in certain industries.

And so, it was batteries. And now we’re looking at there’s been talks in Beijing, not yet finalized, nothing’s happened yet, but talks about potentially curbing the export of certain solar equipment and technologies. And so, we start to see this more expansive picture of what Beijing is viewing as its role in ensuring industrial security amid this grand 15-5-year plan upgrading effort. Many, many components. What this plan does, oh, sorry, not this plan, this set of regulations, this Dock 834, is basically putting Beijing and the ministries and even pressuring local governments as well, municipalities on down the chain, to have a central role in securing all of this.

It is very high level. It is very expansive. And no, this does not mean we’re going, and I just want to be very clear, if that sounded too kind of command economy style, what it means is ensuring the security thereof. Not planning every link and node thereof, but ensuring the security thereof. So that’s where we’re at. We’ll see, I imagine, a lot more granular, detailed policies following out of this. But it’s very clear that Beijing views the world as a risky place and the state as having to take action to secure the ability to upgrade.

Andrew: Yeah, great. Thanks for that explanation. Super helpful. We want to get onto the second document as well. But before we do, I’ve got a bunch of questions already for you just in terms of sort of some of the rationale behind that first document, which first of all, I believe, correct me if I’m wrong, there was a sort of government-linked WeChat account, I think, that kind of came out and said that this is partially sort of related to the disruptions from Iran. I believe that’s where that came from.

So, first of all, for listeners who don’t know, the state council level document, a sort of an umbrella framework. It’s a statement of intent. It’s kind of laying out, this is what we’re trying to achieve. It’s not granular, detailed policy formulation that comes later with the specific ministries in charge of different aspects of this. So, this is highly important, as you said, but it’s very much a signaling mechanism — this is where we’re going. Still, that said, this isn’t the kind of thing that comes out in six weeks or a month. It takes time to put something like this together. But it does seem, like I said, the state was specifically linking this to the Iran situation. So how much of this is China kind of continuing its years-long effort to secure supply chains and all those things versus sort of a reaction to some of the more immediate supply disruptions that we see from the war in Iran. Do you have a sense of that?

Cory: Great. I think it really is a case of both. I mean, the other side of this, I mean, what does it mean to secure supply chains? One of the major pieces here is that the State Council asserts Beijing’s right to push back on any foreign efforts to disrupt China’s supply chains, to put out information that could influence markets in an unhelpful way, right? So, there’s a broad counter-influence operation side of this as well. And so, you can argue that a lot of the supply chain, a lot of the specific articles are in this regulation also amount to an anti-sanctions or anti-foreign influence toolkit.

So, there is the ability, for example, to the regs, sort of the ability to authorize investigations and countermeasures against foreign actions that disrupt normal market operations or impose discriminatory restrictions or anything else that causes “substantial harm” to China’s supply chain. So, you can imagine a hundred triggers for that, many of which start with the U.S. did something, something. And certainly the Iran situation has only accelerated. I think Iran is a prototypical example of the kind of thing that calls for Beijing to be very ahead of the current.

While a lot of the U.S. actions, that’s the tech controls, etc., are probably the more original drivers of a lot of this thinking. But it’s very much a both situation. I imagine regs have been discussed for a lot longer than Iran’s been going on, certainly. But certainly Iran was also relevant here.

Andrew: Okay, well, you sort of anticipated my second question on this, which is also internally, we’ve been kind of flagging this for clients because you said there’s this kind of heavy national security element. There’s this very clear and strong anti-coercion, anti-foreign interference sort of element to this. So that’s one thing when it comes to “government actions” from the U.S. But it’s also the concern, I think, among some of our colleagues is that this can also be more clearly weaponized against individual companies, right? So, the classic example is Micron being in the hot seat for lobbying the U.S. government to put one of its Chinese competitors on a sanctions list. And then, lo and behold, when tensions heat up, Micron gets an investigation in China.

That seems like it’s the perfect kind of use case for something like this, right? For an American or other company who’s trying to influence Western policy against its Chinese competitors, could something like this be used in a weaponized way to go after a company like that? What are your thoughts?

Cory: Yes, I certainly think it could be. On the flip side, I don’t know if this is optimistic or pessimistic, but I think Beijing probably already has plenty of tools to go after companies without this regulation. I don’t think this regulation fundamentally opens new doors. But…

Andrew: Fair. Sorry. Well, before you go on, fair. But I mean, I talked about this a little bit on the pod, my last pod, two or three weeks ago, which in my trip to Beijing, it really felt like this was a separate issue. That officials, their attitude has always been, we have an export-oriented market, get over it. But they kind of didn’t say the quiet part out loud. But in March, especially around the China Development Forum, they were saying the quiet part out loud. They’re saying it more in written documents. They’re saying, “This is what we’re doing. Quit complaining. Our companies are more competitive than yours. That’s why we have so many exports. And we are going to continue to rely on exports.”

And so, part of it, I guess, yes, they have these tools, but making it explicit is still some kind of signal to me.

Cory: Oh, it’s certainly a signal. I completely agree there. I mean, there’s specific pieces on, for example, if Beijing announces, if it formally confirms that a particular government is maligning or harming China’s supply chain or industrial security, Beijing reserves the right to straight up force them not to comply. And that can result in not just fines, not just investigations, but entry and exit bans. They can cut off export and import capabilities. There’s a whole range of very specific and very damaging counter motions that Beijing can take. And it’s a very clear threat to companies — do not support efforts that will inhibit China’s supply or industrial trade security. So, absolutely, there’s a signal there for companies. Don’t comply. Don’t help these efforts.

Andrew: Well, and I’ve said this one a million times, but this just takes us one step closer to what, in my mind, is the inevitable circumstance where some Western company or Chinese company, maybe, gets put in the impossible position where they’re being told by multiple governments, most likely China and the U.S., to comply with two completely incompatible sets of regulations, one of which says, “Don’t do business in or with Chinese companies under XYZ circumstances.”

And the other of which says, “You absolutely must do business and not break off business with Chinese companies under XYZ circumstances.” Or something along those lines. Like, in your mind, is this a step closer to that eventuality?

Cory: Absolutely. And document 835, the second of the two that we’ve put on the table…

Andrew: Perfect segue.

Cory: … is…

Andrew: Go for it.

Cory: That’s exactly what it is. I mean, it’s explicit.

Andrew: Yeah. Walk us through it.

Cory: Yeah. The decree here of the, again, State Council, it’s the Regulations on Anti-Improper Extraterritorial Jurisdiction of Foreign Countries. That’s the full title, right? It’s explicit. Any word that there’s...

Andrew: Love it. Sounds better in Chinese.

Cory: It really does. It really does. That improper is actually a useful word there. There’s certain types of extraterrestrial jurisdiction. It’s basically, again, it’s about optionality. I’ll get to that in a second. But basically, the set of regulations under this decree of the State Council is saying that there are actions that other governments take that say they have jurisdiction over some Chinese interest. If Beijing disagrees, you cannot comply or you will be subject to Chinese sanctions. That is explicitly the purpose of this. To make sure that countries can’t comply with extraterritorial jurisdiction that affects China if China disagrees with it. That’s basically the point.

Andrew: Well, any other thoughts on that second doc, that April 13th document? I mean, you just went through the basics, but other thoughts on what else is in there or other implications we should be thinking of?

Cory: Yeah. I mean, oftentimes we think about these kinds of policies in terms of what’s the biggest impact it could have. And, of course, that’s the most important top line question. But underneath, what’s the logic of the policy, I think is the second most important question. And in this case, I think what’s really interesting to me is the degree to which China, I would argue more so than some of the previous documents around like the Anti-Foreign Sanctions Law, this document is very heavy, in my view, on ensuring optionality. Basically, it provides Beijing multiple off ramps and on ramps to deciding when and where a particular action is harmful to China, when it’s going to crack down on companies complying, and to what extent.

And so, for example, there’s a call for, I just want to make sure I get the detail exactly right here, I believe it’s a working committee. I want to make sure it’s indeed a committee — Oh, a national working mechanism. There we go. A national working mechanism to assess whether a foreign extraterritorial jurisdiction claim is or is not improper, to assess and they have to announce whether a particular effort is something they can command companies not to comply with. And then at that point, there’s actually a process by which companies, if they’re told by the Chinese authorities — you cannot comply with this foreign regulation — if they’re told they cannot comply, those companies are allowed to go.

There’s an explicit mechanism that says you can go to Beijing and explain why you absolutely have to comply and why Beijing should make an exception for you. The document itself, the regs themselves, provide Beijing the option to say, “Go ahead, you are approved to continue to comply with this thing that we don’t like,” or “No, you can’t.” There’s an actual review process there. And I think that’s another level of, it’s not just optionality of whether or not Beijing chooses to investigate.

There’s another level there that says, maybe, I’m trying to think of good case studies off the fly, I think there’s a thousand in the tech case, obviously, but you could send a signal such as we’re announcing that this is an improper exterritorial jurisdiction claim. Company says, “We have to go,” and they’re like, “Okay, we’ll let you for now.” And then starts direct diplomacy with that country or direct negotiations with that country.

This is really interesting in a couple of levels of the most important of which is what’s weird about, to me, maybe it’s not weird to the international lawyers who are used to this, but what’s interesting to me from a policy standpoint is, what this policy does is basically, at the end of the day, you’re using companies as your leverage. The way you hit back against the other country whose actions you don’t agree with is by saying you’ll punish their companies. Now it’s creating a carve-out that says, “But sometimes we won’t punish the company if we feel like not punishing the company to give ourselves leeway to negotiate, to go through other fora,” right? If it thinks it’s possible.

That said, again, so I think there’s an optionality there in terms of if that company in particular is too important to some Chinese operation or investment, or whatever it is, Beijing has the choice of raising a ruckus without screwing that particular company, but it can always fall back on using that company as the point of leverage saying, “We will harm this company if you don’t do what we want.” So, it’s an interesting kind of optionality there.

Andrew: Yeah, that is interesting. I will say like companies hate this kind of stuff.

Cory: Oh yeah. Oh, it’s bad for companies. Like there’s no…

Andrew: Well, I mean, it’s certainly bad, but it’s also just the uncertainty and like kind of not knowing where you’re going to land a lot of times. If something’s off limits, you can find ways to sort of either find a workaround or an alternative or whatever. It’s when you’re not sure whether or not the law is going to be applied or how it’s going to be applied that makes it difficult. I think, you know, a lot of our clients, companies who we work with, a lot of them are people who work on these issues, have been doing China stuff for a long time.

And a lot of times they kind of say exactly what you said earlier, which is like, it doesn’t really matter what the regulation says. They’re going to find a way to ding us if they want to. Although I will say it is interesting that they have this mechanism laid out. And my sense is actually that the regulators are trying to be more adherent to at least the letter of the law…

Cory: I agree.

Andrew: … and the letter of the regulation when it comes to this stuff to say to companies like, “Hey, if your home country does something we don’t like, we are going to use your leverage and we’re going to try to fight back against that regulation. But we’re going to try to do so in a way that’s within the parameters of something that is reasonably predictable and has a legal process.” And again, cold comfort to a lot of companies, but that seems at least like a step forward. I don’t know.

Cory: Absolutely. And I think, you know, I don’t want to overstate how much of a trade-off this is, but there are tensions in China’s own strategy. One is, as it’s trying to upgrade its economy and kind of transition to this new era of economic model, it needs to protect its ability to operate the way it wants to operate in terms of exports, in terms of its domestic subsidies and everything else not being borrowed from various markets, you know, it needs in terms of to achieve its objectives. Again, I’m not making a moral argument here, just a practical one.

And so, it needs the ability, or it views itself as needing its ability to push back on these foreign policies. At the same time, it made very explicit that it needs foreign engagement. It needs foreign companies support, not just as total amount of FDI, but the term strategic partners has come up multiple times. China needs strategic partners, foreign companies. And those are the types of companies who can come in, can invest, not only in terms of just pure kind of renminbi value, but in terms of technology, in terms of capital, in terms of operational and organizational knowledge.

Like, how do you actually make something efficient? How do you build out a biotech industry? That’s difficult. And that’s not just a matter of throwing money at it. And so, there’s this interesting, and again, I don’t want to overstate how much the weights are definitely unequal here, but the ability to push back on countries largely revolves around what I would, you know, in a technical sense, call optionality for Beijing, but from a practical standpoint is weaponized uncertainty for companies, while also trying to make sure that China is an attractive enough partner to attract strategic partners, such as it needs. So, there’s an interesting kind of tension there.

Andrew: Yes, actually, speaking of tensions, I want to circle back to the supply chain stuff. I want to move on to some other things on the supply chain kind of outside of China from your conversations around the globe. But before we do that, the one other question I had to ask you about that first document, the March 31st document from the State Council that was specifically on securing supply chains, was you mentioned there is some language in there around potentially restricting certain exports to maintain supply chain security within China.

And I had a question from somebody who was asking about like, why if they have such a export heavy model, would they be talking about restricting certain exports? So, that’s also a potential tension, but I’m interested in what your thoughts on that would be.

Cory: Currently, I see no signal that Beijing would be interested, for any real reason, to restrict a significant value, you know, in terms of total value of exports. We’re not talking about cutting off batteries to the world. I mean, that would be catastrophic for Beijing’s own interests. What we’re talking about really are generally speaking two things. There might be some edge cases I’ll think in a second. But the main two things — one is very simply as a punitive measure. So, one of the measures, there’s a series of measures that State Council claims the right to take against actors who interfere with and whatever the way they deem interference with industrial supply chains.

One is fines one is restrictions on the ability to move people or data or goods and services. So, that’s the trade component. So, that would be very specifically If you screw up, you’re not allowed to sell out of China. That’s a huge hit, right? So that’s a punitive measure. We haven’t seen that happen, but that’s a claimed authority. Now, the other is really in terms of, and this is much bigger than document 834. This is going back years. There is a standardized catalog of technologies that are prohibited or restricted for exports.

And specifically, what that does is, and so for example, what’s on there? The very best cathode technology. The stuff that is barely even commercial, but is the theoretical cutting edge. Two is rare-earth processing technologies, which were restricted from export in 2021. This goes back before the whole export control battle broke out. And a large part of what that is to make sure that certain technologies that are particular pillars of Chinese value creation don’t just get sold off to the highest bidder.

That’s what that is. That’s the export of technologies, typically, and some equipment, which are usually very specific tech. So, those are the main two ways in which we see actual restrictions. Other things would be much more niche. Or I guess the third piece is in case of emergency. And so, with the Iran war, there are certain impacts, let’s say. China has restricted the export of certain petrochemical products to make sure that domestic industry has enough.

And again, back to this whole point of China’s top priority, Beijing’s, the central government’s top priority, is making sure that the rest of China’s industry has whatever it needs. And if it needs petrochemicals, it will make damn sure that domestic industry gets those petrochemicals before the highest bidder outside. That’s not how it works with U.S. oil and gas. That goes to the highest bidder. That’s not what Beijing is allowing. Sulfuric acid, that is really the top processing input alongside hydrofluoric acid. or sulfuric acid and hydrofluoric acid, the two mains.

You do not get to process copper. You don’t get to process really molybdenum, manganese, any of your battery materials, nickel. You don’t process any of that stuff without sulfuric acid. So, what is Beijing doing? Saying that as of May 1st, we’re going to make sure we have all that sulfuric acid that we need because it’s being disrupted by flows through Iran, through the Strait of Hormuz. So that’s another example. In case of emergency, Beijing will temporarily lock things off just to secure domestic industry.

Andrew: Well, let’s lean into that topic a little bit more then. Talk to me about what else you’re seeing, if you want to talk more on the sulfuric acid piece, I’m sure listeners would love to know your thoughts there, but what else? I haven’t gotten your full rundown on what you think the supply chain impacts are on China from where we are currently in the Iran war. And I know that the ceasefire is up and down and on and off. And so, you know, who knows kind of how it’s going to resolve.

But just based on the information we have as of today, 6:00 PM, basically April 22nd, just give us your rundown on how China is thinking about where we are and what the impacts are.

Cory: Yeah, the impacts, I mean, it really depends where you’re looking. Broadly, I mean, China has been able to maintain a certain amount of Iranian supply. A lot of that has been relabeled shipments that were hanging out off the coast of Malaysia and Indonesia. We know this. It’s kind of not even an open secret. It’s just kind of reported now. Then you have some of the specifics — urea, critical to the ag industry. You have various other acids. You have sulfuric acid as well.

And so, one of the major pieces here is sulfuric acid’s role in fertilizer. There aren’t many policy areas that Beijing takes more seriously than economic security and energy security. Food security is one of them. It’s like food security in Taiwan, basically, in terms of things that always reign supreme. And sulfuric acid has an input to the fertilizer industry. That is absolutely critical. I think that’s why we’re seeing such a dramatic response in Beijing. There’s other things. Aluminum is being hit. There’s an appreciable, it’s high single digit, low double digits of total supply.

It’s not earth shattering necessarily. It’s certainly going to be expensive. Beijing has not been shutting down its aluminum exports. Why? Because that’s not food security. It’s not broad industrial security. It’s a price hit. It’s really unfortunate. And also, China has a lot of its own production as well. So, there are mitigants, there are lower stakes. But when it comes to certain things like the petrochemicals for industry, Oceania is going without a lot of Chinese petrochemicals, right? Australia, New Zealand being hit very, very hard. Other countries being hit very, very hard because China’s kind of maintaining those refined products for home to a certain extent.

And the acid piece is similarly. I think it’s a case where you see both where Beijing is probably congratulating itself on, one, managing and mitigating its dependence on overseas oil and gas in general. Like certainly it does still have dependencies, but you look at an industrial economy the size of China’s, and it’s staggering the sense which they’re not even more dependent on oil and gas. And specifically, they made sure they’re more dependent on coal and coal chemicals, right? Because that’s what they have. That’s a natural resource availability.

And so, they built around that for decades. And this is an example where it pays off And I just want to emphasize one thing because sometimes this kind of energy and industrial security argument, energy supply chain, industrial supply chain argument can come down to, well, for countries that have oil and gas, it’s okay. The same way that for a country like China that has coal, it’s fine. That’s not true. The issue with oil and gas markets, they sell to the highest bidder.

So, the U.S., for example, has plenty of shale gas. It has oil, but it’s selling to the global market. And so even though the U.S. does not have a supply shortage because it isn’t dependent on Gulf materials, it certainly imports some, but it’s not dependent in the way many countries are, Americans still feel the energy price inflation because the price goes up because everyone’s trying to get it, right? That’s not how coal works in China, right? Because it’s a domestic resource that a government that is very interventionist has basically state-managed the energy dependence.

So, that coupled with a lot of the other supply chain pieces of a lot of the upstream minerals, everything else that can be disrupted, this is the prototypical case of an exogenous shock that China is not responsible for, that affects China, and it is faring better than most countries and certainly better than any other major industrial economy. That said, certainly it has chinks in the armor, gaps in the walls, however you want to put it, and sulfuric acid is just one of them. Urea is another one, et cetera, et cetera.

Andrew: And so you’ve alluded to this already or your thoughts on this, but how do you think Chinese leaders are thinking about the situation? The word we used, I think, before was justified in kind of their approach in terms of resource security, stockpiling, all that stuff. And if so, might their calculus be changing as this thing drags on? We’ve already seen them become much more proactive in the negotiations hosted by Pakistan between Iran and the U.S. we’re hearing that China is very involved in getting the Iranians to the table.

And Xi Jinping, just a couple of days ago, kind of officially said, “All right, boys, it’s time to open the Strait of Hormuz.”

Cory: The straits should be open.

Andrew: Yeah.

Cory: I love the use of passive voice in a lot of Chinese… it’s great.

Andrew: Yeah, yeah, yeah. I don’t know. Talk to me about all of that. How’s Beijing feeling and how might its calculus be changing as we wear on?

Cory: Yeah, I mean, on the material side, I think it’s, on one side, you have to kind of note how comparatively resilient China is because of all the efforts taken by Beijing. And I would note there’s this distinction, sometimes we talk about stockpiling, the great thing about dominating tip to tail a lot of production lines is that you don’t have to stockpile if you’re producing everything domestically. If you pull the resource out of the ground domestically and process it domestically and use it domestically, you don’t have to stockpile that much.

You do have to stockpile, obviously, the things that you don’t have access to, like the acids. So, there’s that element of it. On the flip side, it still hurts. We cannot kind of use that point to underestimate or to understate the impacts on the economy. Certainly, this is still painful. And Beijing, I think like everyone has an active interest in freeing up supply of food and being able to make better use. I mean, currently you have low utilization of the refineries, you have a massive hit to export value, just because they’re having to keep things domestically for security purposes. This does hurt.

And Beijing, both for material and geopolitical reasons, has an interest in this ending. Now, there’s the whole geopolitical side as well. Can China come in and bolster its credibility as a peacemaker? All that stuff that is really less in my wheelhouse, and others have much more intelligent things to say than I do on that. But I think all those things point in the same direction. Beijing can weather the storm, but it would prefer not to have to.

Andrew: Yeah, I think that’s well said. Okay, well, let’s talk a little bit more about the supply chain response. We’ve talked a lot on this podcast about the Western response to Chinese moves on the rare earths piece. I’m sure folks in Washington and other capitals are looking at the latest supply chain document out in March in the anti-improper lawfare document from mid-April and thinking about how China might weaponize those and how Western countries and companies should be reacting.

Give us some highlights from your conversations over the past few weeks on where you think things are in terms of the Western response in terms of its own supply chain securitization vis-a-vis China.

Cory: Well, there’s a bunch of different things to touch on now. I think one actually that might just be the most interesting starting point, and tell me if this works for you, is looking at the progress that the U.S. and others have versus have not made in just general supply chain diversification. This is relevant in a couple of ways. One is it’s, broadly, it’s the response to China’s own export controls on the U.S., and that obviously affect the rest of the world, largely its collateral damage. It’s also become the centerpiece of Western industrial policy, really.

And it’s largely pulling from the Chinese playbook in terms of how you pull it off, which has some issues when you have a policy that works very well in the Chinese context and then apply it to a non-Chinese context. But it also has different issues when it’s a multilateral effort opposed to a unilateral effort. It also has issues when it’s a multilateral effort between a U.S. that has exhibited certain behaviors that do not support necessarily an amount of trust needed for certain investments. So, I’ll be less coy about that in a minute. I’m trying to be diplomatic, but I’ll be blunt here in a minute.

Andrew: Yeah, I can tell you’re choosing your words very carefully here.

Cory: Yeah. For those unaware, which I think is very few people, but just in case, Iran hit at a time when the U.S. is still frantically trying to shore up its own supply chains. A dozen different supply chains, critical minerals, everything from tungsten to rare earths, magnesium, all kinds of other stuff. Everything’s been hit by Chinese export controls and more. A lot of its efforts to do that revolve around, one, obviously the immediacy of trying to shore up supplies that have been decreased and made more expensive.

Supply has gone down and prices have gone up, I guess Chinese export controls. But the other is to try to lessen Beijing’s leverage. To the extent that you can diversify, China has less leverage. And so, you are less beholden to the impacts of your certain policy decisions or the consequences thereof. So, that’s been ongoing. The thing is the Trump administration has come around to the understanding that you cannot do this alone. This cannot be American investment in American companies using American resources for American security. It does not work that way.

The U.S. does not have the material on the ground. It doesn’t have the processing capabilities. It doesn’t have enough money even. And it doesn’t have the technical talent or technology in many cases to do this stuff alone. It just doesn’t. It could in a decade, maybe, maybe 15 years, but that’s too long to wait for the strategic objectives right now, which are fix the supply issue, decrease China’s leverage. That’s what you want. You can’t wait 15 years, 10 years, whatever it is. So, it’s come around to the idea of we have to work together.

And you see this demonstrated in three main initiatives. And these are not the first time that the U.S. has tried to rally the troops, so to speak, of international partners around supply chains. The Biden administration had the Critical Members Partnership, which was announced with a bang and never heard from again, partly because the impetus just wasn’t there. Now the impetus is clearly built effectively. And we see that we have three core programs or mechanisms. One is Pax Silica, which is an effort to work with a very specific set of allies and partners around basically semiconductor production chains from silicon all the way down to chips, right?

That’s what Pax Silica is supposed to be about. It’s a very niche operation run by a very specific office that is basically, I don’t want to say a one-man show, but it’s understood that this is the brainchild of a particular individual who is just going at it. Then you have these much broader initiatives. You have Project Vault, which effectively, it’s many things, but at the end of the day, it’s basically a US effort to build US-controlled stockpiles, strategic reserves that it can maintain critical supplies and release that need. Basically, trying to stockpile things that have already been disrupted, include gallium germanium, also include a bunch of other metals and other stuff like that.

And I’ll get to the difficulties of that. The third piece is FORGE, which is an acronym for or backronym in this case, but basically it’s a forum trying to get together dozens and dozens of countries to agree to work together on supply chain diversification. Secretary Rubio, Secretary of State, also National Security Advisor, had pulled together a whole bunch of countries. I think 50-some showed up, which is impressive, basically saying, “We,” i.e. non-Chinese countries, “need to band together to counter the threat that is China. China has cut off all of these resources. It has put the world in danger in terms of supply chains, industrial security, etc., And we have to solve the problem together.”

Now, that sounds great from the US perspective, I suppose, but for most other countries, what I imagine, I’m going to say this is my view, what I imagine is heard is the country that is co-equally responsible for the mess we’re in is now saying, “It’s all the other guys fault. Please work with me. You can trust me.” Now that it’s not just an optics and political game. It’s very practical. One of the questions is, did the U.S. understand the implications of its own actions when it took certain strategic decisions that inevitably led to Chinese retaliation? We didn’t know exactly what form the Chinese retaliation would take, but we were pretty confident it would do exactly what it said it would, which is hit back in a material way.

If you take certain actions undermining Chinese interests, they were hit back materially, probably through export controls and other things that you’ve talked about before. Som from a partnership standpoint, you have to ask, is the U.S. calculating that using us, the rest of the world, as collateral damage, is worth it for its strategic objectives to take those actions? Or did it not understand the strategic context and actual trade-offs that were relevant to its own decisions? Because either way, you probably want a very clear answer to how the U.S. is strategizing and taking actions before you tie yourself to it.

And this comes especially a salient point when it comes to stockpiles. Do you trust that any country, ally or otherwise, is going to release reserves when it suits your needs or only when it suits its own, especially when the context is basically, and I think I’ve said a version of this before, the context is basically the top priorities for stockpiling are the things that are already disrupted? Which means, by definition, there’s not excess supply in the system. Everyone’s using as much as they can get because supply is so short.

Andrew: So you’re adding further supply pressure.

Cory: Exactly. And specifically, you’re asking countries to either supply their own industry right now when they need it or send it to a foreign stockpile. that’s a heck of a trade-off, right? And that’s a decision I would have and I have a lot of confidence and trust in. And to have that trust, I think there’s a fair ways to go before there is that trust. So, this is not me trying to naysay or be a doomsayer or whatever it is. I’m saying that there are very practical strategic considerations behind whether or not the actors that the U.S. needs to work with will work with it. On the flip side, and I’ll wrap up here because I’m monologuing, but there actually has been quite a bit of progress on the commercial side in terms of particular companies investing in new projects.

That is good. It is worth singling out for recognition that specifically a lot of companies, I’m thinking of a few, and I’m trying not to endorse a company here, but there are several companies that have recognized the need for working with international partners.

Andrew: We already gave Dollywood a shout-out.

Cory: That’s true.

Andrew: So, feel free to go for it. We’ll see if we can get some sponsors from this podcast.

Cory: Oh, man. But no, this is truly my analytical hat on. I had the privilege to speak, to be on a panel with the CEO of USA Rare Earth, Barbara Humpton, last weekend in D.C. And what struck me about that conversation was seeing the full length of the logic in terms of, yes, building up U.S. supply chains, but I think there’s been a big shift in the industry’s understanding of the necessity of working with other countries. So, you see the acquisition of a UK metals company, you see working with a French government now, not just the U.S. government. This is a company that is getting support from the U.S. government, working with the French government, is going to be working with other governments. That’s something that the U.S. government itself is having trouble coordinating in my view, or at least has not.

Maybe it’s making progress behind closed doors, but we haven’t seen that much of it yet. But companies are navigating that. That’s what Lynas did, what’s part of what made Lynas so successful. And then you have the tungsten side. We have Sangdong coming online in South Korea. That’s a North American company working in South Korea. And so, I think there’s a role where the companies are making more progress in terms of really internationalizing the problem in a way that’s productive.

But again, there’s a key issue here, which is that what makes China’s supply chain security so strong is not just that it digs the stuff out of the ground. It’s also not just that it processes things. That’s the bottleneck of the West. It’s that it has the offtake too. It has guaranteed offtake from all the domestic suppliers. All the stuff that’s coming online by U.S. aligned or Western actors, who is it going to be sold to? So, much of it will go to DOD and the military and other militaries.

Great.

What about the rest, right? The cost implications are huge. These supplies will cost more than any Chinese supply. So, to the extent that China trickles out, whatever it allows to go through, that will be purchased first. So, are you going to be a company, a downstream company, maybe you make a battery or something in the U.S., are you going to sign yourself up for a long-term contract with massive amounts of offtake of something that costs two, three, four times what the Chinese supply cost? The government will do that. The Japanese magnet makers might do that with government support.

Not many other entities are doing that. And also, the downstream industry is just not robust enough in most of these cases to really support the level of investment in the upstream. So that is an ongoing issue that the U.S. really has to figure out and its partners as well. Until the economic case is clearer, you have a bit of a chicken and egg problem. Companies are waiting for more supply to become cheaper. The suppliers need more customers to have that revenue security, revenue guarantee, those long-term contracts.

It can’t all be government support. So, we’re seeing movement on the private side. We still have a bit of a chicken and egg problem there. And government support is theoretically a solution. They’re moving toward it. But there are still these very practical geopolitical differences and trust gaps that I think are holding progress back.

Andrew: Yeah, well, we’ll keep tabs on it. I’ll throw this out as a somewhat organic plug for listeners. Cory is tracking basically any commercial deal that is happening anywhere in the world on the critical minerals front and helping clients wrap their minds around where the supply and demand dynamics are changing, which new projects are viable, which are not. We’re helping a bunch of clients with this. So, if this is, in any way, of interest to you, reach out to us. That email again is hq@triviumchina.com or you can email me at ap@triviumchina.com. We’d love to talk to you about this stuff because it’s hugely important. It’s massively consequential both for China’s economy, for the U.S. economy, for the global economy, and for the companies that are involved. You’re doing some really cool work on that.

So, I just had to make a plug for it generally because of your good work. And also, you know, if we can make money doing it, of course, that doesn’t hurt.

Cory: Well, I’ll say, it’s an interesting context in the podcast, because as you can imagine, I mean, a lot of this stuff, there’s a lot of speculation in the market. And so, part of the conversations I’m having, which are obviously not something we’re broadcasting all the outcomes of right now. But we get questions like, for example, “Where exactly is Indian phosphide coming from? And how do we plug our specific gap?” And then you have these huge questions. What is the role of Southeast Asia?

That’s a huge question, right? So, from the very big picture to the very minutia, we are kind of across all those things. And so, it’s hard to fit all that into a podcast format. If you’re listening to this and like, “I have questions that I’d like to discuss, but I’m not sure it’s at the right level,” We’re probably there. It’s just a little hard to fit into the podcast format. So go ahead and get in touch and we’ll see if we can have a conversation.

Andrew: Yeah. Awesome, man. I love it. Well, speaking of the critical minerals piece of this and rare earths, that obviously is one key element of U.S.-China back and forth, negotiations, tensions, deal-making, etc. We got this Trump-Xi Jinping meeting coming up in about, what? Three and a half weeks. I know you had some thoughts on sort of the stakes of that meeting as they currently stand and just how people should be thinking about that. So why don’t you walk us through your current thinking on all of those dynamics?

Cory: Yeah, there’s a few pieces here. The first is this level of meeting is always important, right? There’s no questioning that. But I do think there’s a unique degree of importance to this particular meeting. There is so much commercially, diplomatically, multilaterally, I think that is just weighting. I think there’s a lot of waiting on the signal. What comes out of this? There’s a lot of questions around, for example, will the first meeting between Xi and Trump come with an agreement to postpone the October 9th controls even further, right?

That’s a good question, and that would be a great outcome. But I really think, more fundamentally, the first question is, I don’t want to be flippant and say it’ll be a success as long as they don’t get in a fistfight, but the real floor for me is, do they agree to meet again? That to me is the real major outcome. Like, hopefully we can do more than that. That is a very low bar, right? But if they agree to meet again, what I think that does is send the signal to both bureaucracies and more to the point to the rest of the world that maybe we’ve reached a floor and maybe we can start to move back to more constructive engagement. Now, why does this matter?

It matters because it changes the nature of the geopolitical risk that everyone’s facing. It changes the expectations of the government’s perception of risk, right? And so, if things go south or they’re not meeting again, what happens to supply chain risk? It goes way up again, and suddenly you’ll probably see a lot more funding for various projects. And on the flip side, if you have a bit more sanguine view coming out of the meeting, basically saying, “Hey, we’re going to meet again, we’re going to make things work, we’re going to figure it out,” the irony is that I wonder if the decreased sense of risk around Chinese supply chains will actually disincentivize a little bit more some of the willingness to pay more for non-Chinese supply.

So, there’s this other dynamic that the governments are very well aware of this. They’re also thinking through, how do we both give general commerce the sign that, hey, we’re good to go, do business, make deals, things can be good, but also not undercut the sense of risk that is driving this diversification effort? And there are, I don’t want to say polar opposite interests, but there are certainly tensions there. So, that’s an interesting piece. More broadly, I mean, that’s just within my little wheelhouse of supply chain stuff.

But more broadly, I’ve just been shocked by, I’ll speak very abstractly here, but how many different things are just waiting on this meeting, waiting to see how both leaders respond. It’s staggering. Now, the last piece I want to note that I think is very promising, I think it’s a good sign on the Chinese side, is I think Beijing, there’s about a dozen reasons I believe this, but I’ll give one reason why I believe this, I believe Beijing has a much clearer sense of U.S. policy where it is and is not intending to harm China. I think previously a lot of U.S. actions were taken as very deliberate, malicious actions where, in many cases, I think genuinely there was a the misunderstanding of the impacts.

I think sometimes, I mean, some of the tech control is very obviously aggressive toward China. BAS is not clear that that was really the White House’s intent. And so when we’re asked what could derail the Trump-Xi meeting, one of the first things that comes to mind is new tariffs, new things that affect Chinese trade heavily. And so, you see in this context, the emergence of the post- IEEPA tariff authority recovery efforts, basically new Section 301s, Section 232s, that basically the White House is trying to reproduce what it had claimed under the IEEPA tariff authority.

And so, there are two scenarios. One is Beijing sees all these new investigations, 232s, 301s and others, and says, “Oh great, the US is attacking your interests again. Let’s hit back.” That’s scenario A. Scenario B is like, they actually understand that this is not a US escalatory effort. This is an effort by the US or by the White House to basically maintain the playing field of what it was and just replicate an authority that it just lost. And I think that became very clear during my trip that that is the interpretation.

And so, Beijing had to send some signal back of its displeasure with the 301 and 232 investigations. But it did so in a way that basically doesn’t materially affect the U.S. I think that was very intentionally done. I think that is a signal from Beijing that they understand the U.S. side was not being escalatory in this particular case. So, China will not be escalatory in this particular case. We’re going to keep things level. That I think is promising in terms of interpretation.

Andrew: So that’s interesting. First, I want to follow up on that. But first, I wanted to press you, when you said a lot of things are waiting on this meeting, did you specifically mean on the U.S. government side, like actions are I know you can’t be too specific, but basically everyone in the government sort of waiting for this meeting to happen before they can proceed on other China focused policy out of the U.S. side? Is that generally what you’re saying?

Cory: Yeah, I think there’s a lot of engagement between commerce and government as well. Commerce is not the department, but the commercial world and industry. And I think it’s not clear what the boundaries are. For example, can you have American companies licensing Chinese technologies in the non-tech spaces? Those conversations are basically on hold, basically, until, you know, practically, among many other things, exchanges, visa issues, all that stuff is basically waiting, yeah.

Andrew: Okay, cool. Well, sorry, I had to deviate there for a second. Do a little excursion, as Trump would say.

Cory: Oh, God. No excursions, Andrew.

Andrew: But I wanted to pick up on the piece you were just talking about, the IEEPA thing, I mean, my sense has always been like, yeah, Beijing understands that if the USTR uses these 301s to get back to the IEEPA level, of course, that’s not an escalation. But if you’re Beijing, you still want to press that advantage. You might not react out of a huff or whatever or feel like, oh, we absolutely have to be retaliatory. But if I was Beijing or I was in Beijing, I would do the exact same thing and say, “Nope, those have gone away. If you raise them again, then it doesn’t matter. That’s still a new provocation and we’re going to hit back.” Why not press that advantage? Even if you’re thinking about it slightly differently, I don’t know, what do you think?

Cory: There is a world in which that could happen and I think that’s a more dangerous world.

Andrew: Yeah. I mean, I would at least try to press. I think they feel like they have an advantage with the IEEPA tariffs being shut down. Although the follow-up as well that I wanted to ask you is I also don’t really think that Beijing cares all that much about tariffs anymore. I kind of feel like...

Cory: Yeah, I think at this point, it’s more of the principle. It’s about the principle.

Andrew: No, no. But what I’m saying is, in a way, that could be even bigger reason to retaliate. Because actually, we don’t give a crap about your tariffs. We realized we can live with them. It’s not a big deal. And so, in fact, even though we’ve moved on and what we really care about is the supply chain security, we’re going to play hardball on this thing that doesn’t really matter anymore. Because now we can either extract concessions or focus political will on this issue that we don’t really care about, right?

Cory: Yeah.

Andrew: I mean, I don’t know.

Cory: There is that. I think the trade-off, and this is where we start to get more speculative, but I think the trade-off is if you think the response would be a cancellation of the Xi-Trump meeting, if you really want that meeting to happen, you don’t do that. No one who says they understand Beijing’s thinking about this does, like we don’t know exactly what Xi and his advisors are thinking about the meeting per se at this level detail. But I would imagine that number one risk of that kind of hardball approach is that Trump out of, probably out of pettiness, just backs out of the meeting.

And if you think that has more potential harms or takes opportunities off the table that you wanted to pursue, is it worth it to play hardball? What concessions could you get that are better than you could get out of negotiating directly with Trump, especially if you think that Trump, at some level, wants to cut a deal with Xi? Could you get more concessions out of that meeting than you could out of the hardball? I think that’s probably one of the questions at hand. Obviously, I’m not in Zhongnanhai, but I would imagine conversations, at some point, that was one of the pieces of that conversation, I imagine.

Andrew: Okay, well then, as long as we’re being speculative, one more speculative question.

Cory: Sure.

Andrew: I mean, I think Beijing wants the meeting to happen for sure. They want some stability, they want the rules of the road. But I could foresee a circumstance where they were willing to push and let the meeting fall apart. I guess the question is, being speculative, who do you think needs the meeting more right now?

Cory: Yeah, I think Trump needs it more in the short term. And this is where my question becomes, what is Beijing’s long term objective, like not long term objective in terms of economy, we know all that, but what does it want to get out of this meeting and the relationship with Trump that will benefit China’s long term interests? Is it, if we’d open, would welcome your speculation on this point, I think Beijing’s actions clearly indicate one, they want the meeting, right? Two, that implies they can get something good out of it. They wouldn’t care otherwise.

So, my question is what exact… I’m sure listeners are bursting with like, well, it’s obviously this. There’s a thousand possible answers. We’re not ignorant of those answers or those possible answers. I’m not sure which it is though. I’m very curious, what do you think?

Andrew: Well, I mean, I’ll channel Sean Stein, our good friend and president of the US China Business Council who regularly says, and I totally agree with him, they want stability. They want stability first, second and third. So, a lot of this is just about kind of having an ongoing dialogue, generally being on the same page that we’re trying to agree on something, working towards some longer term negotiation. I don’t know that there’s like a specific thing at this point, frankly, that they’re trying to extract. I think they’ve got the tariff levels down to something they can deal with.

I’m sure they would love a rollback of tech export controls, semiconductor export controls, but I think that’s like an understatement to say it’s a reach goal. I think it’s not something they’re actually thinking they’ll get, but like they’d love it if it happened to, Of course, we’ve talked, you know, maybe some adjustment on language on Taiwan. Again, I think it’s not something that they’re going to push that hard for or in any way expect, but they’ll take, of course, whatever they can get.

I think it’s as much about the meeting and stability and kind of a general set of principles as anything. And so, in that way, it’s almost back to the Biden-esque Xi Jinping meetings, which was the meeting is the deliverable in a way. But I could also argue because of that, there’s not that much they’re going to get from it. So, if they really get a thumb in their eye, they would be willing to walk away. I don’t know.

Cory: Stability to what end is always the question. I mean, if really like we want to...

Andrew: I think it’s buying time.

Cory: It’s buying time. Yeah.

Andrew: Right. We’ve gone over this many times in this pod. They think time’s on their side. They think they can close a semiconductor gap more quickly than the U.S. can close the rare earth gap.

Cory: I think it’s right.

Andrew: Yeah, I agree. Stop poking us. Let us buy some time. Let us see if we can get the tech piece before you get the supply chain and rare earth piece. And then we’ll be even more. Or we, this is what I think they’re thinking, then China will be even more in the advantage, but we’ll see. Of course, we’re being speculative, but I think we’re trying to channel how we think both sides are thinking about it. Listen, we’re already pretty far on, so let me give you one last chance of any final thoughts on any of this, if there’s anything you want to leave listeners with.

And then we’ll just unfortunately have to hold the industrial upgrading piece. I know you had some thoughts on that, but let’s keep that. Keep the listeners coming back. We’ll do another pod with you again soon and make sure to get those thoughts out there. But anything, any last kind of final thoughts for everybody?

Cory: Yeah, I think, I mean, the other piece of this is, it’s not just a U.S.-China story. I mean, the whole world is watching and waiting to see what happens. I mean, the world broadly, I mean, so many U.S. allies have been directly affected by the impacts of the closure of the Strait of Hormuz. And so, as China has, on one hand, withheld certain petrochemical supplies, that directly damages huge swaths of industry, even among American allies, that it presumably cares about. And the flip side, China’s also trying to help hasten the end of it.

So, there’s that dynamic. And then when it comes to Xi Trump, I mean, stability between U.S.-China is presumably good for the U.S. and China, but it’s really, really important for the rest of the world too. So, those dynamics too. I mean, I wonder how Beijing, and to what extent, I think generally speaking, I observe more consideration for the rest of the world from Beijing than I do from D.C. as a general matter of course. And I think in this case as well. And I have to wonder, not to add to speculation upon speculation, but how they’re viewing the outcome of this kind of period of U.S.-China relations, how does it make China look to the rest of the world?

Certainly, we’ve gone through all the kind of, honestly, some of the stale rhetoric of China looking like the responsible actor and everything. But in more practical terms, what type and what extent of a risk is China to you? You, whichever country. I think that is a question that has to be at the core of Beijing’s strategy beyond looking at the U.S. That’s a question that will reshape whether or not the U.S. is able to build global supply chains that cut out China, whether it’s able to build out the EV ecosystem that cuts out China someday. That basically is a function of the degree to which everyone else agrees with the U.S. assessment of the type and degree of risk that China is. And China has a huge role to play in that. So, I wonder the extent to which it’s thinking about that and how that plays out.

Andrew: Well, there’s a lot there. It’s a meaty one to end it on, but thoughts all well taken. And of course, as always, we’ll be unpacking that question among many of these other questions that we’ve already just spent an hour going through, some more speculative than others. But Cory, this was a great conversation, great podcast to get back in the rhythm. So, thanks so much for joining me today. I appreciate your time.

Cory: Absolute pleasure. Thanks so much.

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

• From adroitly facing down U.S. tariffs with its own proportional response to mending fences with spurned American partners, Beijing has navigated Trump’s erratic tenure with aplomb.

But as the Iran war enters its seventh week, Chinese leaders face a genuine geopolitical conundrum — and unfamiliar diplomatic waters.

Shy guy: For all its global influence, China is ever the cautious diplomat when it comes to crises far from its borders.

• After Russia invaded Ukraine, Beijing refused to be pressured into formally supporting either side, despite its close relationship with Moscow.

• Likewise, China was almost a non-entity when it came to brokering a ceasefire between Israel and Gaza.

Beijing’s logic is simple: It doesn’t benefit China to wade into complicated foreign entanglements when it doesn’t absolutely have to.

• There’s also no sense in China putting a target on its back by being seen as the major sponsor of one or more of the involved parties.

But this time could be different:

• While China maintains large energy reserves, every day that the Strait of Hormuz remains blocked eats into that all-important buffer — not to mention hitting Chinese access to a swathe of other critical industrial inputs.

• Meanwhile, energy price shocks are squeezing corporate profits and undermining consumer sentiment at home, as well as foreign demand for Chinese exports on which the country’s economy relies.

Then there’s the growing risks to China’s relations with the U.S.: The longer the conflict drags on, the higher the likelihood that the Trump administration will lash out at China, Iran’s perceived benefactor.

• The U.S. has threatened sanctions against Chinese entities involved with the purchase of Iranian oil, and the possibility of the U.S. Navy interdicting a Chinese ship is a diplomatic crisis waiting to happen.

Beijing’s ties with Tehran are already coming under intense scrutiny:

• Days ago, U.S. intelligence claimed that China was preparing a shipment of air defense systems to Iran, though China has denied this (CNN).

• The claims prompted Trump to write a letter to Xi Jinping warning him against supplying Iran with weapons.

• Leaked Iranian documents suggest that Iran purchased a Chinese spy satellite in 2024, which it subsequently used to target U.S. military bases in the Middle East (FT).

Stating the obvious: A breakdown in China-U.S. ties over Iran would effectively undo months of painstaking effort aimed at putting the relationship on a more even keel and return the two countries to a dangerous state of rivalry.

For now, however, there are signs that The Donald is interested in keeping things civil.

• In a Truth Social post, he said he would “permanently” open the Strait of Hormuz as a favor to China in exchange for Beijing’s supposed pledge not to send weapons to Iran.

• He further said that the U.S. and China were “working together smartly, and very well! Doesn’t that beat fighting???”

However, it’s anybody’s guess as to whether or not Trump will be in such a good mood if the conflict is still unresolved by the time he travels to China on May 14-15.

• The outcome of talks between Trump and Xi during that visit will offer a clearer picture of whether the Iran war is set to become an intractable drag on bilateral relations or just a blip on the radar.

Putting it all together: The Iran war is a global geopolitical crisis with a direct, immediate impact on Beijing’s core interests — across a range of different channels.

• If China sticks to its usual conservative playbook, it could forfeit its ability to influence the outcome and allow the risks to proliferate.

So far, Beijing’s efforts regarding Iran have focused on quiet backchanneling to try to resolve the conflict:

• China was reportedly central to persuading Iran to accept the two-week ceasefire with the U.S. on April 8 and worked closely with Pakistan throughout the negotiation process (though it credited Islamabad with the breakthrough).

• Chinese leaders have been furiously working the phones to regional capitals to discuss the crisis, and Beijing has dispatched a special envoy to the Middle East for on-the-ground engagement.

• Top diplomat Wang Yi also leaned directly on his Iranian counterpart Abbas Araghchi to “restore normal navigation in the Strait [of Hormuz].”

The big problem: Despite its low-key approach, Beijing has already stuck its neck out — raising expectations that it is key to resolving the crisis.

• Both Trump and Iranian officials acknowledged Beijing’s role in brokering the recent ceasefire.

That cuts both ways: If Chinese diplomats succeed in pulling Iran back to the table, Beijing will collect a credibility dividend as a global crisis manager.

• But if it tries and fails — or is seen as not trying hard enough — the blowback could be significant.

The big question: Given all that’s at stake, what will China do if its behind-the-scenes approach doesn’t work?

• If Beijing can’t persuade Tehran to compromise on key demands in future talks with the U.S., it might be forced to adopt more assertive methods.

• What that might look like is anyone’s guess, but it could be anything from more publicly distancing itself from Tehran to threatening to wield its economic and financial leverage over the Iranian economy to force Iranian officials to play ball.

The bigger picture: In the years ahead, China will face greater pressure to come off the sidelines and play a role in resolving global crises commensurate with its immense economic and political influence.

• The Iran conflict could serve as a trial run for a new, more muscular form of Chinese diplomacy, but only if Beijing rises to the occasion.

Joe Mazur, Head of Geopolitical Research, Trivium China

What you missed

Econ and finance

China’s economy grew strongly in Q1 2026 — but momentum is starting to wane.

• GDP grew 5.0% y/y in Q1, up from 4.5% in Q4 2025.

• Nominal GDP growth — which incorporates price effects — came in at 4.9% y/y.

• Industrial value-added (IVA) grew 5.7% y/y — down from 6.3% in January-February — and private sector IVA grew just 4.0%.

China’s export growth dropped sharply in March. Per data released by the customs bureau (GAC) on Tuesday:

• Exports grew just 2.5% y/y in March, a sharp slowdown from the 21.8% growth recorded across January-February.

• Imports surged 27.8%, building on 19.8% growth over the first two months of the year.

• The resulting trade surplus of U.S.D 51.1 billion was the lowest monthly reading (outside of Chinese New Year) in four years.

On Wednesday, the central bank (PBoC) and forex regulator (SAFE) raised the leverage ratio for how much banks can lend abroad against their capital base.

• For foreign-invested banks operating in mainland China, the ratio was raised from 0.5 to 1.5, implying a 200% increase in their offshore lending quota.

• The Export-Import Bank of China — the country’s main policy bank for export credit and overseas project finance — had its leverage ratio nudged up from 3.0 to 3.5.

• This is the latest in a series of steps authorities have taken to encourage outbound lending by domestic firms and banks.

Corporates

Regulators have reportedly consulted leading Chinese makers of solar module and cell manufacturing equipment on limiting exports of advanced technologies to the U.S..

• Tesla reportedly entered talks in March to purchase large quantities of solar module and cell manufacturing equipment from Chinese suppliers to enable the build out of large-scale solar manufacturing in the U.S..

• At the time, we flagged that Tesla’s efforts to decouple from China’s solar supply chain might prompt Beijing to impose export restrictions.

• According to industry insiders, no conclusions were reached at the meeting.

Business environment

On Monday, the State Council released the Regulations on Countering Improper Foreign Extraterritorial Jurisdiction.

• The regulations empower the Ministry of Justice to designate foreign measures as “improper” extraterritorial jurisdiction.

• Authorities can impose a wide range of countermeasures against the foreign country, across immigration, trade, investment, international cooperation, and foreign aid.

• A new Malicious Entity List targets foreign actors involved in formulating and enforcing such measures with penalties including visa bans, asset freezes, and trade restrictions.

Tech

On Tuesday, the ministries of industry (MIIT), transportation (MoT), and public security (PSB) held a joint meeting on autonomous vehicle road testing and pilot programs.

• Regulators said they will establish a three-tiered technology maturity and safety evaluation mechanism at the national, local, and enterprise levels.

• That means unified and tightened rules on which companies can put their driverless cars on the road, and which localities can host pilots.

On Wednesday, the National Data Administration (NDA) released a draft plan to build high-quality sectoral datasets, with a focus on empowering AI applications.

• The goal is to move beyond raw data to “AI-Ready” datasets that can directly train models and agents across thousands of industries.

• Crucially, the plan envisions a “data flywheel” effect — AI models will draw on the data supply to iterate, which will in turn empower new AI applications and data uses.

• Under the plan, the state will explore new data trading and pricing mechanisms based on AI token usage.

Politics

On April 12, the Party’s Taiwan Work Office released 10 measures to increase connectivity between Taiwan and the mainland.

• These came at the conclusion of the five-day visit to the mainland of Cheng Li-wun, chairwoman of Taiwan’s opposition Kuomintang (KMT) Party.

• The measures include more closely integrating Fujian province’s infrastructure with the nearby Taiwanese islands of Kinmen and Matsu, increasing the number of flights between Taiwan and the mainland, and allowing select Taiwanese TV programs to be aired on the mainland.

Foreign affairs

On April 10, top diplomat Wang Yi met with North Korean Supreme Leader Kim Jong-un during a two-day visit to Pyongyang, the first visit by a Chinese foreign minister in six years.

• Wang said the two sides should work together to “safeguard their respective sovereignty, security and development interests.”

• Wang met with his North Korean counterpart Choe Son Hui a day prior, and reportedly hailed Pyongyang’s “socialist construction…amid intensifying conspiracies of isolation and oppression of the U.S..”

On Wednesday, Minister of State Security Chen Yixin published a lengthy editorial in Qiushi, the Party’s top theory journal.

• Chen indicated that the U.S.-Israel-Iran conflict has freaked Beijing out: “Major powers are locked in fierce competition over strategic minerals, strategic straits, and strategic energy resources, with escalating risks of energy crises, chokepoint threats, and financial shocks.”

• According to Chen, China needs to go on the front foot: “[We must] shift national security work from reactive response toward early warning, rapid response, and proactive shaping.”

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.

• But as of last month, it faces the opposite problem — a shift that couldn’t have come at a worse time.

The Iran war has delivered an energy price shock that has rippled through China’s economy at rapid speed.

• The U.S.-Israel strikes on Iran began on February 28 — by March, PMI survey data was already pointing to the fastest rise in input costs in four years.

And this week, the stats bureau confirmed it: China’s deflationary cycle has come to a sudden end — just not in the way Beijing had hoped.

Throughout March:

• Producer prices (PPI) grew 0.5% y/y — the first year-on-year increase in over three years

• On a month-on-month basis, PPI for the oil and gas extraction subsector surged 15.8%

• China’s purchasing price index — which measures manufacturers’ input costs — rose 0.8% y/y, the first increase since 2023

The energy shock is feeding through to consumers, too.

• Transportation fuel costs rose 10.0% month-on-month throughout March.

• Major Chinese airlines hiked domestic fuel surcharges sixfold.

But here’s the catch: This is the wrong kind of inflation.

• Cost-push inflation — driven by a supply shock rather than strengthening demand — does not solve China’s deflation problem in the way demand-pull inflation would.

• It compresses margins rather than expanding them, and squeezes household disposable income without improving consumer confidence or the propensity to spend.

To Beijing’s credit, policymakers have pulled out all the stops to cushion the blow.

• Throughout Jan-Feb, China pre-emptively boosted crude oil imports nearly 16% y/y, adding to strategic reserves that provide 3-4 months of import cover.

• Beijing has also restricted fuel exports to preserve domestic availability.

• Meanwhile, the macro planner (NDRC) has intervened multiple times in its standard fuel price adjustment cycle, capping retail gasoline and diesel price increases at roughly half the level that would normally apply — a rare measure not seen since 2013.

And yet, the squeeze is still coming through.

• Reporters visiting home appliance stores across Shanghai found staff at consumer electronics company TCL warning that TV prices are set to increase 8%, while staff at home appliance manufacturer Midea said refrigerator prices could rise by “several thousand yuan.”

• Staff at other brands echoed similar expectations.

The risk now is that cost-push inflation hits consumption precisely when Beijing has less room to respond.

• With consumer goods trade-in subsidies already trimmed this year and interest rate cuts on hold until at least H2, the government’s ability to offset the squeeze on household purchasing power is more limited than it was a year ago.

The irony is that Beijing entered 2026 hoping to engineer a gradual reflation through demand-led mechanisms — trade-in subsidies, services consumption, and recovering business confidence.

• What it has received instead is a cost shock disproportionately concentrated in input prices.

The upshot: The deflationary era in China may be over.

• But what’s replacing it won’t feel like good news to most Chinese households — or to the businesses that serve them.

Joe Peissel, Senior Macroeconomic Analyst, Trivium China

What You Missed

Econ and finance

Authorities are broadening the ways households can spend their housing provident fund (HPF) balances.

• The HPF is China’s compulsory, employer/employee-funded social insurance program designed to help citizens save for home purchases, offering below-market-rate mortgage loans.

• Hangzhou now allows HPF withdrawals to cover deed tax and property management fees.

• Meanwhile, Chengdu and Xuzhou have moved beyond housing-related spending, allowing HPF funds to cover major medical expenses.

Business environment

On Thursday, the State Council released the master plan for the China (Inner Mongolia) Pilot Free Trade Zone.

• Inner Mongolia handles roughly 95% of China-Mongolia overland transport and over 65% of China-Russia overland freight.

• The new FTZ will be China’s 23rd, spanning 120 sq km across three zones — Hohhot, Manzhouli, and Erlianhot.

• The plan includes measures to boost trade in commodities, including expanding imports of agricultural and food products, promoting outbound investment in energy and resources, and developing LPG and fluorochemical industries in Erlianhot.

On Wednesday, the state asset regulator (SASAC) established a new department — the Bureau of Overseas Foreign Investment Administration.

• The bureau’s responsibilities include guiding central SOEs’ international operations, optimizing the allocation and structure of overseas assets, and strengthening risk prevention and mitigation in overseas investment.

• Industry executives told Caixin the move signals the rising importance of overseas operations: “The consolidation suggests overseas operations are shifting from a supporting role to an integral part of core business.”

Tech

On Monday, the Ministry of Commerce (MofCom) and five other agencies issued guidance on promoting e-commerce development, with a significant focus on cross-border expansion.

• Per the document, China will establish service platforms to help e-commerce firms navigate foreign regulations.

• The document also emphasizes that firms should build “localized operational capabilities” and engage in “fair and orderly competition.”

• The guidance’s emphasis on compliance reflects officials’ recognition that aggressive expansion tactics by Chinese platforms have created political friction.

On April 3, the industry regulator’s (MIIT) electronics division held consultations with ZTE and Xiaomi as part of drafting the 15th Five-Year Plan for electronics manufacturing.

• Both companies emphasized that the 15th FYP period is a “critical window” for industry transformation, with AI reshaping the sector and driving growth in AI terminals, computing infrastructure, and intelligent connected vehicles.

• This is a heads-up that a formal electronics manufacturing FYP is coming, but is still in the drafting stages.

Politics

On April 3, state media announced that Politburo member Ma Xingrui is “suspected of serious violations of discipline and law and currently under disciplinary review and supervisory investigation.”

• Ma is the third Politburo member to be put under investigation since the October 2022 20th Party Congress, along with Generals Zhang Youxia and He Weidong.

• While it’s not clear what got Ma in trouble, he has deep ties with China’s aerospace sector, which has been caught up in the sweeping anti-corruption campaign wracking the defense-industrial complex.

Foreign affairs

On Wednesday, Iran and the U.S. agreed to cease hostilities for two weeks — and China was apparently key to getting Iran to the table.

• Per the New York Times: “Iran accepted Pakistan’s two-week cease-fire proposal following frantic diplomatic efforts by Pakistan and last-minute intervention by China, a key ally, asking Iran to show flexibility and defuse tensions…according to three Iranian officials.”

• Iran’s ambassador to China, Abdolreza Rahmani Fazli, also reportedly said China still has a big role to play in helping keep the peace.

U.S.-China

On Tuesday, when discussing U.S. President Donald Trump’s upcoming state visit to China, U.S. Trade Representative Jamieson Greer said: “When we think about what to expect for ​the president’s meeting…we’re looking to maintain that stability.

• Greer signaled that the proposed “Board of Trade” will be a big topic at the summit, describing it as: “A mechanism where we can work out with the Chinese what are the non-sensitive goods that we should be trading with each other.”

• However, he threw cold water on a potential “Board of Investment,” saying that trade is the current priority in bilateral economic relations.

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.

• It’s irreplaceable in chipmaking – and global supply just took a massive hit.

This week, we want to walk you through a supply chain story that has nothing to do with tariffs or export controls – but could prove just as disruptive to China’s chip push.

It starts in Qatar: On March 18, Iranian strikes on Qatar’s Ras Laffan industrial complex – the world’s largest LNG export hub – took all production offline.

• Helium is extracted as a byproduct of natural gas processing – so when Qatar’s LNG plants go dark, helium production does too.

The result? Roughly a third of the world’s helium output was wiped out in one go.

What does any of this have to do with chips? Quite a lot, as it turns out.

Helium is non-substitutable in semiconductor fabrication.

• Both electronics-grade 5N (99.999% pure) and ultra-high-purity 6N (99.9999% pure) helium are critical for wafer cooling, chemical vapor deposition (CVD), atomic layer deposition (ALD), and photolithography.

The semiconductor industry accounts for roughly 20-25% of global helium demand. But it competes for supply with some formidable rivals.

• Some 25-30% of global helium flows into the healthcare sector, where most is used to cool the superconducting magnets in MRI machines. Here again, either 5N or ultra-high-purity 6N helium is needed for both manufacturing and maintaining MRIs.

• Other cryogenic applications – from cooling down quantum computing systems to enabling missile and submarine detection to serving as a propellant in rockets and missiles – are also hungry consumers of high-purity helium.

This matters because chip fabs are far from guaranteed to be placed above healthcare and military needs when helium supply gets tight.

So, where does this all leave China? In quite a pickle, as it turns out.

When it comes to helium, China is heavily import-dependent.

• As recently as 2023, the Chinese Academy of Sciences reported that China imported more than 95% of its helium.

• Matters may have improved somewhat as a new facility in Ningxia came online, but most estimates indicate that China still imports well over 85% of its helium.

Qatar – through Ras Laffan – accounts for well over half of these imports.

• Russia’s share rose noticeably in Q4 2025, but it still supplied just 40% of China’s 2025 imports.

That’s not all: Unlike fertilizer and crude, China does not maintain state helium reserves – though both industry voices and expert advisors have been calling for this for a number of years now.

That leaves China directly exposed to Qatar’s supply gap.

• Domestic spot prices for ultra-pure 6N helium have surged. Industry sources say they’re up 110% since the end of February, adding that most suppliers have suspended spot price quotes altogether to prioritize long-term contracts.

• Prices for lower-grade liquid helium (5N) have reportedly risen by 65% since the beginning of 2026.

And mainland Chinese chip fabs are at a serious disadvantage.

• Unlike leading Korean and Taiwanese players, mainland Chinese fabs are not known to maintain deep inventories, and few have invested meaningfully in helium recovery systems.

• Plus, they’re under severe pressure from export controls on a wide range of advanced lithography tools, talent bottlenecks in the rapidly growing sector, and mounting margin pressure among mature-node producers.

The upshot is that Chinese fabs are likely not well prepared for a supply crunch of this kind.

• Leading chip producers elsewhere in Asia may have up to six months of supply resilience due to a combination of on-site storage, long-term contracts, and helium recovery systems.

• Mainland Chinese fabs – especially smaller players making the older workhorse chips that power sensors, control EV motors, and help your devices charge – could run out in a matter of weeks.

Can anyone fill the gap? Not really.

The vast majority of global helium is produced in just five countries: The US, Qatar, Russia, Algeria, and Canada.

• Helium can only be commercially captured at gas fields with naturally high helium concentrations – it can’t be synthesized from other industrial processes.

• With the possible exception of Russia, no major exporter has significant capacity to increase helium output in the short term.

So, what’s next?

Chinese chipmakers will need to reckon with soaring costs and an absolute global shortage of helium alongside all other buyers.

• Higher spot prices will almost certainly feed into contract prices as the disruption continues.

• Assuming a prolonged shortage emerges, helium suppliers may face pressure to direct limited supplies to MRI maintenance, defense customers, frontier research, and national champion chipmakers over smaller fabs.

And the disruption won’t disappear once the Strait reopens and Ras Laffan resumes operation.

• Strikes on the massive facility have reportedly damaged gas processing infrastructure that produces roughly 14% of Qatar’s helium. These could take 3-5 years to repair.

• Shipping prices and insurance premiums on Gulf-routed shipments have spiked sharply due to the conflict – and those costs will not disappear when the Strait reopens.

If there’s one silver lining, it’s that the crisis could finally force a reckoning in the helium sector.

• This is the fifth major helium supply crisis in two decades – each time, industries and governments have failed to produce structural solutions.

• Indeed, the US government completed the sale of its helium reserves in 2024, and even stockpile-obsessed China hasn’t managed to build one.

Building more resilience into the global helium supply will require years of exploration, investment, and political will.

• The question now is whether this will be the crisis that finally forces a reckoning.

In the meantime, if helium hasn’t come up in your boardroom yet this month, it probably should.

Cory Combs, Head of Supply Chain and Critical Minerals Research, and Even Pay, Head of Agricultural Research, Trivium China

What you missed

Econ and finance

The Gulf crisis has sent manufacturing costs spiking – but based on manufacturing PMI data, China’s firms appear to be shrugging it off.

• Despite surging costs and geopolitical volatility, all major PMI sub-indices – including production, new orders, exports, and employment – either remained in expansionary territory or improved from the previous month.

• The business confidence subindex also pointed to moderately strong business sentiment, higher than levels seen in January.

At its annual earnings call, Bank of Communications (BoCom) said new mortgage applications – a timely indicator for housing activity – were roughly 15% higher in March than the 2025 average.

• BoCom is one of China’s largest mortgage lenders, meaning its comments likely reflect broader trends across the banking sector.

• The bank added that its outstanding mortgage balance may stop contracting this year and gradually start growing again if current momentum persists.

Business environment

On Monday, the market regulator (SAMR) rolled out a plan to enforce the Anti-Unfair Competition Law – the legal backbone of its anti-involution campaign.

• Since July 2025, Beijing has been trying to curb cutthroat “involution-style” competition across sectors like EVs, solar, batteries, and food delivery.

• The platform economy tops SAMR’s target list – ahead of EVs, solar, and batteries.

• Regulators also pledged new regulations to crack down on unfair competition online – likely aimed at curbing price wars and predatory tactics by platforms more broadly.

Tech

On Monday, China launched the World Data Organization (WDO) in Beijing – organizers say there are already some 200 members from more than 40 countries.

• The WDO’s goal is to help break down barriers by tackling globally fragmented data policies, developing standards and best practices, and helping corporates reduce data compliance costs.

• It also aims to build transnational data ecosystems in key industries, including healthcare, education, and energy.

• However, the WDO will not try to set binding data transfer rules as it is strictly for entity-to-entity coordination.

Politics

On Monday, Taiwan Affairs Office Director Song Tao announced that KMT Chairwoman Cheng Li-Wun will visit the mainland between April 7 and 12.

• Cheng took the KMT helm last October on a platform of easing tensions and reviving cross-strait engagement.

• It will be the first meeting between Xi Jinping and a sitting KMT leader since 2016, and the first time Xi has personally “welcomed and invited” a KMT chair to the mainland.

On March 27, Zhang Chengzhong, 55, was appointed Party secretary of the Ministry of Emergency Management (MEM), replacing Wang Xiangxi, who was removed for corruption.

• The MEM is responsible for workplace safety and coordinates disaster prevention and response.

• Zhang should be formally appointed as minister at the April legislative session, making him the youngest serving minister.

• Zhang is a technocrat who spent the first two decades of his career working in subsidiaries of China National Petroleum Corporation (CNPC) – one of the world’s largest oil and gas producers – in Liaoning province.

Agriculture and rural affairs

On Friday, the macro planner (NDRC) and the ministries of commerce (MofCom) and finance (MoF) announced the launch of pork purchasing for central reserves, citing the need to ensure “stable pork market operation.”

• Let’s be clear: This isn’t a wartime stockpiling effort, and Beijing isn’t bracing for a food security crisis.

• China’s pig farming companies have been battling a supply glut and been locked in an involutionary price war for a while now.

• Average pig prices dropped to RMB 10.68 per kilogram in the fourth week of March, down 29.8% y/y to a nearly eight-year low.

Foreign affairs

Bloomberg reported that Chinese tankers delivered shipments of diesel and distillates to the Philippines and Vietnam over the weekend, despite Beijing’s fuel export curbs imposed earlier this month.

• China banned commercial exports of refined fuels in early March amid soaring prices for petroleum products resulting from the war in the Persian Gulf.

• At the time, we flagged that Beijing might provide emergency relief to neighbors and allies on a case-by-case basis after domestic energy security was in hand.

• Two tankers delivered over 260,000 barrels of diesel to the Philippines on March 28-29, and another vessel delivered roughly 100,000.

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.

That’s been one of the main themes from my conversations in Beijing this week — many of which focused on messaging from the new 15th Five-Year Plan and remarks by Chinese officials at the China Development Forum (CDF).

• The CDF, for the uninitiated, is an annual gathering where Chinese officials tout the wonders of China’s economy and the huge opportunities it presents to foreign companies — or at least that’s what it used to be.

While I wasn’t at CDF myself, the folks I’ve spoken with who attended almost universally noted that the tone from officials was notably matter-of-fact, largely focused on trade, and pretty much boiled down to:

• “Yes, we’ve got an export-oriented growth model. Deal with it.”

The official verbiage was, of course, less direct — but only slightly. Premier Li Qiang, for example, in his keynote speech at the CDF, at least padded the message with this:

• “We take our trading partners’ concerns seriously and we are ready to work with all parties to promote the sound and balanced development of trade.”

But only before proceeding to state that:

• “China’s imports and exports represent fair trade conducted within a rules-based framework.”

• “China’s competitive advantages have not been achieved through subsidies and protection, but through…the hard work and dedication of the Chinese people and Chinese enterprises.”

As one European diplomat put it to me, the message was: “Quit whining that our companies are more competitive than yours.”

What I find remarkable about this messaging isn’t what it says about China’s fundamental approach to economic growth.

• We’ve been saying for months that China’s plan is to double down on industrial innovation and upgrading, which almost by definition means continued reliance on export markets to absorb excess production.

What’s striking is the pointed shift to a much more unapologetic attitude.

• China’s leaders clearly understand that much of the rest of the world is deeply concerned about the influx of Chinese goods hitting their markets.

• But rather than seeking to assuage those concerns — and avoid future fits of trade tension and retaliation — they seem to be daring other countries to do something about it.

The bet seems to be that most countries, or trading blocs, won’t get their acts together enough to materially push back against China’s export juggernaut.

• Even the U.S. tariffs on Chinese goods — unprecedented in recent history — have only succeed in diverting low-value manufactures (think toys, textiles, and fast fashion) away from the U.S. and toward new markets.

• They’ve had less impact on higher-value exports to the U.S. — either because those goods were never sold there at scale (i.e. NEVs) or were exempt from the tariff regime anyway (i.e. smartphones and medical equipment).

It seems to me, then, that China is likely to continue pushing its export machine to its absolute theoretical limit — and I think we still have a way to go until we reach that limit.

• That means that China’s exporters can continue capturing wallet in a range of new markets, both by riding overall global demand growth and — crucially — by eating into the market share of exporters from developed economies.

The upshot will be that despite the loud — and growing — complaints from other countries, China’s export model will prove more sustainable than is commonly assumed.

• And until other countries take action, rather than simply complaining, Chinese officials will happily stay the course.

As always, if you want help thinking through what this all means for you, get in touch and we can set something up.

Andrew Polk, Partner and Co-founder, Trivium China

What you missed

Econ and finance

On March 20, the Ministry of Commerce together with eight other ministries unveiled a policy push to boost inbound tourism, focusing on:

• Presenting a more dynamic and appealing image of China through social media

• Improving foreign-language services across restaurants, hotels, tourist sites, healthcare, and public services

• Expanding unilateral visa-free access and optimizing transit visa-free policies

Corporates

According to recent earnings reports, China’s leading new energy vehicle (NEV) startups are finally becoming profitable.

• Xiaomi’s spectacularly successful NEV unit generated RMB 900 million in profit in 2025, just two years after its founding — an industry record.

• Leapmotor, China’s bestselling NEV upstart, saw 2025 annual sales quadruple from 2023 levels and posted its first-ever annual profit of RMB 540 million.

• Xpeng and Nio, though still loss-making, both recorded their first quarterly profits in Q4 2025, driven by a surge in sales volumes.

On Wednesday, state-owned COSCO Shipping announced it is resuming new bookings to the UAE, Saudi Arabia, Bahrain, Qatar, Kuwait, and Iraq — sparking speculation it would become the first major carrier to resume shipments through the Strait of Hormuz.

• Within hours, COSCO clarified that it will not be transiting the Strait.

• Instead, it will route containers to two UAE east coast ports outside the Persian Gulf and then move goods overland via bonded land transport corridors for onward shipment.

• European shipping giants CMA CGM and Maersk announced similar multimodal alternatives on March 11 and March 18, respectively — putting COSCO weeks behind some of its largest Western competitors.

Commodities

On Monday, the macro planner (NDRC) announced temporary price controls as part of its updated national fuel price ceilings, limiting gasoline and diesel price increases to roughly half of expected levels.

• Folks still face an over-10% price hike at the pump — but that’s a far cry from the roughly 25% increase that the NDRC’s pricing formula would usually dictate.

• This is the first time the NDRC has used this power — including in 2022, when oil prices soared following Russia’s invasion of Ukraine.

Business environment

On March 22, Han Wenxiu, the senior official overseeing day-to-day operations at the Central Commission for Financial and Economic Affairs (CCFEA) — the Party’s top economic policymaking body — told the China Development Forum (CDF):

• “After years of effort, China’s indigenous innovation capacity has passed a critical inflection point, making it difficult for external forces to derail our development”

• That’s a big change in framing — as recently as 2023, Xi Jinping warned that U.S.-led technology restrictions posed “unprecedented severe challenges” to China’s development.

• Han’s remarks follow a broader uptick in official messaging highlighting progress in overcoming foreign technology chokepoints. For example, on March 5, Minister of Science and Technology Yin Hejun stated that China had made “new breakthroughs” in core chip technologies — though provided no details.

Foreign affairs

On Wednesday, China’s Ministry of Commerce (MofCom) released its final determination in its trade investigation against Mexico, finding that: “The measures under investigation…constitute trade and investment barriers.”

• China launched the investigation in September after Mexico announced plans to hike tariffs on imports from non-free-trade-agreement (FTA) partners.

• While the tariffs — which took effect on January 1 — don’t single out any individual country, China, by far Mexico’s largest non-FTA supplier, bears the brunt.

• The tariffs landed ahead of Mexico-U.S. discussions on reviewing the United States-Mexico-Canada Agreement (U.S.MCA).

U.S.-China

On Thursday, Commerce Minister Wang Wentao met with U.S. Trade Representative Jamieson Greer on the sidelines of the WTO’s 14th Ministerial Conference in Yaoundé, Cameroon.

• The discussion looked largely steady-as-she-goes following the last round of China-U.S. trade negotiations in Paris on March 15-16.

• However, Wang raised “serious concerns” over Washington’s recent Section 301 investigations into multiple trade partners — including China –regarding overcapacity and forced labor concerns.

• Beijing also fired back with two trade probes of its own — one targeting U.S. measures that disrupt global supply chains, another targeting restrictions on green trade.

On Thursday, U.S. President Donald Trump announced on Truth Social that he had rescheduled his long-awaited China trip to May 14-15.

• Trump’s visit was originally scheduled for March 31-April 2, but he postponed it to focus on Iran.

• Trump said that he also planned to host Xi Jinping and his wife, Peng Liyuan, for a “reciprocal visit” later this year and that he: “Look[s] very much forward to spending time with President Xi in what will be, I am sure, a Monumental Event.”

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 latest dynamics driving the economy, and the potential…erm…hiccups it may face in the coming months, Trivium China Podcast host Andrew Polk is joined this week by two seasoned economists:

• Beijing-based China Economist at the Standard Bank Group, Jeremy Stevens

• And Trivium’s own lead macro-econ analyst, Joe Peissel

The three run through the latest monthly macro data, discuss where key vulnerabilities are lurking, and look ahead to how the Iran situation may upend things, if and as it drags on.

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, Tribune co-founder, Andrew Polk, and I am joined today by our Head of Macro Research, Joe Peissel. Joe, how are you doing, man? Good to see you.

Joe Peissel: Hey. Good, Andrew. Glad to be here as always.

Andrew: Yeah, great to have you on. And we have a very special guest with us today, a pal of mine from my Beijing days, where I am currently, and a very seasoned economist on China. He is a China economist for the Standard Bank Group, which is South Africa’s biggest bank, partially owned by ICBC, been based in China now for about 16 years or so. It’s Jeremy Stevens. Jeremy, how are you doing, man?

Jeremy Stevens: Hi, thanks for having me today. I’m really excited to be joining you guys. I’ve been watching your podcast for a long time, and I have been pretty annoyed that I haven’t been invited until now. So, I’m pleased to finally get the nod.

Andrew: Well, it’s good to have you, Jeremy. We are going to talk with these guys about the general state of China’s economy now that we’re three months into the year, and we finally have a little bit of data to understand what’s going on. So, take our monthly check on the state and health of the Chinese economy. I thought Jeremy would be a great person to discuss that with. Of course, Joe walks us through his views about once a month. And so, that will be the main part of the conversation. And then at the end, we’ll also do a little bit on kind of implications of, of course, the biggest geopolitical story of the past several weeks, which is the war in Iran.

So, what kind of implications that has for China’s economy as well but before we get started with content of course we have to start with the customary vibe check. Jeremy, you’re one of the few external guests who we have on early enough in the pod to do the vibe check, so I’ll start with you. How’s your vibe today, man?

Jeremy: Apart from this thrilled invite, which I’m grateful for I would say, so yesterday, I’m obviously going to South Africa tomorrow to see some clients for about 10 days. And so, this morning, my wife asked my son, who’s nine years old, “Will you miss your dad?” And he thought about it. And he said, “I’ll miss kicking the ball with him.” And then my wife then said, “Is that all you’ll miss?” And he said, “Yes, that’s all.” And then I said, “Well, then just kick the ball against the wall.” And then my son said, “Yeah, actually, that’s the same.” So, I feel domestic relegation and then I feel, as I’ve said, umbrage at this; it’s your millionth podcast, and I’m only finally getting invited. So, it’s a bad start. I’m on the back foot here, but I’m open to see how this thing goes.

Andrew: Well, that’s a perfect vibe check — very classic Jeremy Stevens for our listeners who know him, and so well executed. Joe, how about yourself, how’s your vibe?

Joe: Yeah. Also, Jeremy, it speaks volumes about your football skills as well. My vibes are good, Andrew. I don’t have any kids, so I’m shielded from the humiliation of children, thankfully.

Andrew: For now.

Joe: I’m in sunny Brighton in the UK. The weather’s getting warmer. So, my vibes are pretty good, man. Enjoying the warm weather.

Andrew: Great to hear. My vibe is super upbeat. I’m in Beijing. It’s been a super short trip. I’m about to head off. But I’m seeing a couple of my business partners in Balmy, Bali, Indonesia next week. So, excited about that. A nice strategic retreat in Bali, can’t beat it. So, it looks like we’re kind of all over the place on the vibe, but I think we’re bringing some good energy here. So, last thing we have to do before we get into the full meat of the discussion is the quick housekeeping.

Just a quick reminder up top that we are not just a podcast here. Trivium in China is a strategic advisory firm that helps business and investors navigate the China policy landscape. That, of course, includes domestic policy in China, which we’re going to talk about today in the form of macro policy. 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 receiving more Trivium content, check out our website.

Again, triviumchina.com, where we’ve got a bunch of different options, both free and paid in terms of subscription products for China policy and intelligence, whether it’s markets, tech policy, or general China watching. You’ll definitely find the China policy and intelligence option you need on our website. And finally, please do tell your friends and colleagues about Trivium, both about the company itself and about the podcast, so we can continue to grow both our listenership and our business. We really appreciate the word-of-mouth recommendations.

All right. So, with that, let’s get into it. Joe, I’m going to start with you. You just wrote a note beginning of the week that laid out the story on where China’s economy is after the first couple of months of the year. We got, for listeners who don’t know, January data never really comes out because of the Chinese New Year. Makes it volatile from a seasonal perspective. So, mid-March, we get January, February data combined.

So, Joe, you took a look at that, and what’s your headline takeaway in terms of what the data tells us about where the economy started off in 2026?

Joe: Sure. Thanks, Andrew. I mean, big picture takeaway based on the first two months of data is really China started this year much as it ended last, but just a little bit better, which by that I mean growth has picked up pretty much across the board. I think every single metric from industrial activity to investment to consumption metrics, everything’s improved a little bit relative to what we’re seeing towards the end of 2025. But we’re still seeing the same structural challenges. They still all exist — The supply-demand gap, sluggish consumption, huge reliance on exports, declining property sector. So, very much similar to what we’ve been seeing, but slight improvement in terms of economic momentum.

Andrew: So, picking up in the beginning of the year, Jeremy, you’ve been talking with clients over the past few days, I know. What’s your headline takeaway when you talk to clients right now about what you’re seeing in the data?

Jeremy: Yeah, I totally agree with Joe. It’s pretty much more of the same. I think it justifies from what I sort of read from the Two Sessions as well is that Beijing seems to have made the… They’ve adjudicated that even though the economy is facing downward pressure and is sort of operating at a relatively low level, the challenges aren’t rising. And like Joe said, I think that the latest data very much confirms that.

It’s granted weak by historical standards, but I think for them, this would be arguably within what they’re calling that relative stability or that operating range that they’re comfortable with. I think when you look at consumer sentiment, business sentiment, they’re stable. It’s kind of like we’re accepting a new reality and moving on. And I think that’s why macro policies adopted this year have been relatively conservative.

And I think that recognizes that both monetary and fiscal policy space is more limited than before. And I think the fundamental point, Andrew, is that probably for the first time, I mean, the most since I’ve been here, is that Beijing’s threshold for subdued economic activity and weak data has probably never been higher. And they remain very, very focused on shifting resources, both labor and capital, from mature sectors towards these emerging sectors.

And they’re betting that this will deliver producer power, this will deliver global leadership, this will indirectly restructure our incomes and wages, and profits are distributed, and that’s how they’re going to restructure the economy towards consumption. So, nothing that’s happened in the first two months changes that. And I think it really does justify where they are in terms of their relative ease at which the economy is slowing down.

Andrew: Yeah, I want you to pick up on the point you made on business and consumer sentiment because that’s something authorities have been sort of worried about or focused on. And certainly, people outside of China, you know, the weak consumption story. But you said they’re sort of settling into this new environment. Previously, when you and I were talking before the podcast, a couple days ago, you kind of made the observation that you feel like people have just adjusted their lifestyle and they’re kind of fine with the new normal. Can you speak a little bit more about kind of how you think about what’s happening on that side in terms of consumption and sentiment overall?

Jeremy: Yeah, sure. So, I think for the last 10 years, and obviously Joe and yourself and your team has been reporting it for a while, I mean, basically consistently, is that the economy is on a structural downtrend, which is largely manifesting in the sort of traditional drivers of economic growth have matured. And in the process of trying to find new avenues of growth, the transition towards that’s not particularly easy. And so, there’s like an issue with the climate. 10 years ago, when I used to speak to Chinese clients about the Chinese economy, the vibe was always, well, China’s different, and you don’t really understand how China’s economic model is different.

And gradually, what’s happened is a lot of the issues that we’ve been speaking about for a long time have manifested in weaker and weaker economic growth. And so, the climate is one where upward social mobility is slowing down, the pace of change has slowed down, the idea that you can never have a bad year and every year gets better, albeit at different speeds, that’s no longer the case. And I think people have learned to realize that. And then at the same time, you have the climate that’s declining, and then you have the weather patterns and the hurricanes from the housing crisis, COVID, Iran, the trade war. That’s all impacted on sentiment at the same time.

And I feel like the fundamental adjustment, the recognition that rapid economic growth and every year is going to get better for everyone, that’s now settled. And now we’re seeing behavior change accordingly. And I think that that process is sort of three years in. And I think that right now we’re at a stable point where nobody’s expecting things to improve very quickly. They’re expecting this to be a gradual grind.

Andrew: And they seem to be increasingly okay with it, I guess. Once you adjust your lifestyle downwards to, I’m not buying the new phone or whatever every six months, and instead, I’m going to only buy one every couple of years, you kind of realize, actually, this isn’t so bad. This is an adjustment I can make. Joe, I want to bring you in. What are you seeing in the data on the consumption side in terms of where we are? Is your view in line with what Jeremy said? How are you thinking about the consumer piece of this?

Joe: Yeah, totally, totally right. So, as Jeremy said, I mean, the signals in the Two Sessions show policymakers have an appetite or a willingness for lower growth. And there’s no real ambition in the short term to juice consumption. There’s no exciting policy dynamics going on at play. There’s nothing at the Two Sessions. I mean, it’s quite telling that the consumer goods trading program, which is like one of the main consumption boosting measures, was actually scaled back in terms of funding. So, Beijing has a willingness, particularly at the short term, to accept sluggish consumption growth. And if we look at the policy dynamics, there’s actually very little upside for consumption in the short to medium term. I think over the longer run, I’m slightly more bullish.

I think there’s a very slow policy movement to lay the administrative or bureaucratic infrastructure to expand the welfare state. So, slowly, slowly, we’re seeing things like increases in minimum wages, expansion of pension, expansion of healthcare coverage. But these sort of measures take years to implement and to extend full coverage. So, in the short term, consumption is going to remain sluggish. If we look specifically at January and February data, there was a slight pickup.

So, retail sales of consumer goods grew, I mean, close to 3%, which is hardly anything to shout about, but massive improvement from what we’ve seen towards the end of 2025 when there’s a sharp slowdown in consumption. But nevertheless, 3% is hardly anything to shout about. On the consumption picture, I think the one area where I do feel more bullish is expenditure on services. So, retail sales of services have grown much faster. That’s somewhere between 5% and 6% every single month.

And we see this in terms of consumers’ willingness to spend on consumer durables has dropped massively, but consumers’ willingness to go things like traveling, spend on education or healthcare has actually grown pretty well. And we saw that in the Chinese New Year spending data, which was also quite robust. So, overall consumption picture, not particularly positive. It’s going to remain slow and sluggish for the foreseeable future because the nature of the policies Beijing is rolling out take time to have an effect. But there are pockets of strength, particularly in the services side of the consumption picture.

Andrew: Yeah. So, I mean, and consistent with what you said at the top, which is the overall picture is basically the same as last year, more of the same, but slightly better. I was having a meeting today with someone from one of the embassies in town who was talking about just how wildly things have changed over the past five years since the pandemic, just how everyone’s saying, “Oh, great, 3% growth in retail sales of goods. That’s a really good picture to start the year.”

Whereas, you know, in 2019, that’s dismal, like, you know, low, single-digit growth. So, it speaks to kind of the new world we’re in quite a bit. But let’s pivot a bit now to, we kind of covered the consumption piece, the parts of the economy that are particularly strong. You talked about how, Joe, how the data for January, February has shown this ongoing supply-demand mismatch. And the supply side of the economy is still doing really, really well. We’ve got industrial production really humming, 6.3% year over year growth, and industrial value added. Talk to us about what you’re seeing on the industry side in any specific areas of positivity within that.

Joe: Yeah. So, what’s quite interesting on China’s industrial side, but particularly manufacturing, which I’m going to talk about, and that manufacturing specifically grew by 6.6% in the first two months of the year. That’s pre-pandemic levels of growth. So, when we think of the structural slowdown that China’s facing, that’s only happened on one side of the economy. Consumption is structurally slow in consumption growth. But manufacturers continue to increase their output at the same rates as before the pandemic. And this is exacerbating this huge supply-demand gap we’re seeing, which leads to all these issues like overcapacity, deflationary pressures, and over-reliance on exports.

But nevertheless, I mean, manufacturing is a really strong point in the data. So, as I said, 6.6%. That’s the same sort of growth we’d have seen five, six, seven, eight years ago. And as always, it’s concentrated in these high-value-added goods, things like industrial equipment, rail, shipbuilding, electrical machinery. And what we’re seeing is this seems to be spilling over into the investment data. So, as I’m sure our listeners will know, China’s investment data was terrible last year. This kind of unprecedented decline in fixed asset investment. That seems to have reversed in the first two months of this year.

And part of that reason is because of the surge in manufacturing. So, as manufacturing in these specific areas has increased, which I just mentioned, rail and electric machinery, industrial equipment, and so forth, we’ve actually seen an increase in manufacturing fixed asset investment in these exact same sectors. So, that suggests to me, looking at the data, that this surge in manufacturing is actually having a positive spillover into China’s broader investment economy. So, in that sense, it’s a really good thing, real positive. That said, there’s this strong correlation between investment data and manufacturing data. It suggests that this is a cyclical pickup in investment.

And that also means it’s highly vulnerable if there’s any sort of shock, like, I don’t know, a war in the Middle East, for example. I mean, this cyclical pickup could quickly peter out and we could see a decline in the manufacturing investment again.

Andrew: Yeah, that’s a great point. We’ll circle back to the Iran piece and how that may impact the short-term cyclical picture in China. But Jeremy, let me throw back to you. What are you telling your clients on the industry investment side? I mean, obviously, investment was terrible last year, and your clients, many of whom are funds in South Africa, are very attuned to commodities from industry. What’s your message on that side?

Jeremy: Yeah, I’m slightly less optimistic. I mean, everything Joe said is totally right. When you look at where the growth has been, even in the first two months of this year, the fastest-growing sectors have been those sectors where the proportion of their revenue coming from external markets is the highest. So, there’s a clear correlation there. And I worry it’s now $32 trillion in manufacturing investment, up from $21 trillion in 2021. Now, purely just maintaining the speed at which that has been expanding has become very, very difficult. And even the sort of one-third of manufacturing that you could consider sort of advanced manufacturing after years of double-digit growth, they started to slow last year to a crawl. I am watching the interbank markets, the DR77, that’s climbed. And some are arguing, at least some in the sort of domestic economist space, they’re saying that banks are starting to tap the interbank markets because enterprises are finally starting to borrow. At this juncture, I don’t fully buy it yet. I think that it’s got a lot to do with front-loaded policy stimulus and seasonal factors, and the fact that depleted bank excess reserves, they’re currently at about 1.2%.

So, I think that it’s more a seasonal thing that’s caused that. I note that the profit recovery that we saw in the industrial sector last year in Q3 was really just base effects, and those dissipated as the year unfolded. You also look at loss-making enterprises that accelerated through the second half of the year. Inventory growth accelerated across the board.

When you look at loan demand coming from the PBOC surveys, they’ve stabilized, but they’re well below where they were a couple of years ago. And so, I think it’s still going to be this new productive forces part that’s growing at an okay speed, but slower than before. So grid, high tech manufacturing, EV, that stuff. And then I think that the traditional manufacturing base is likely to sort of flatline and continue to struggle. That’s at least where I’m at, and I’ll wait and see how that plays out as the year unfolds, I think.

Andrew: So, what you just said reminds me of the balance sheet recession type argument that a lot of people made trying to say that China is effectively facing a balance sheet recession. And it sounds like maybe you buy into that idea a little bit, although you’re saying that some of those dynamics would have alleviated. Do you think China’s in a balance sheet recession, or do you think that some elements of that are holding back investment growth in industry and profitability like we were just talking about?

Jeremy: Well, I think that what we’re seeing is a feature, not a bug of China’s system. I think the policymakers, like I mentioned at the start, they really are trying to mobilize resources to those parts of the economy that they think can generate productivity gains, right? And what they’re trying to do is make sure that those productivity gains, rather than cascade, or those surpluses that they created, rather than cascade to shareholders and into profits, they want them to cascade down to households through an adjustment in value to cost, better quality, better featured, cheaper products.

Or they want those gains to be reinvested into equipment upgrades and automation and R&D. And so, this supply-demand mismatch is a natural byproducts. And I think that it’s very, very clear that even though the rhetoric speaks to boosting consumption, I think that how they understand boosting domestic demand has to do with, yes, it means proportionately more resources will go towards helping social services and trying to unlock the large share of savings that households tend to accrue in China. But at the same time, it means less roads, bridges and ports, but significantly more investment in renewable energy, for example.

And then it also means within sectors, more investment still. So less in ICE vehicles, but more in NEVs. And I think this is the model that they’re embracing. And like I say, I think that when you think about what they’re trying to do, it’s almost like we see consumption as a part of the GDP composition, but they see it as a byproduct of success elsewhere. So if they can incentivize and rejig the allocation of resources pre-production and incentivize those areas where They think they can generate high-skilled jobs that university graduates can eventually be employed and absorbed by. And then those people who are getting paid a lot can then go and travel and cut their hair, and go to restaurants. This is a 10, 20-year program to restructure their economy.

And I think that’s what they’re trying to achieve. Whether or not they get there or not, it’s going to be tough. But I think all of that lends itself to pushing harder on the supply. And when you look at previous years in supply-side structural reform, which you guys will all know about, 2015 was much more about cutting out capacity. Whereas this time, and I know you guys have written about it, a number of the sort of thought leaders here in China are saying, “We’re going to be much more gradual this time around,” because I think that they believe that crowding in resources and that cascading effect in those sectors is what will deliver the breakthroughs in the technological leadership.

And so they can’t pull back. And so you’re just going to see more and more push from that side. And that’s why the supply overhang and the deflationary pressures are so problematic is because I don’t see anything that’s saying, “We’re walking back the supply side orientation,” even when they talk about boosting domestic demand.

Andrew: Yeah, all great points. And I actually, I want to come back to that in a minute, because the China Development Forum was this week, and kind of your point about their commitment to the model, the message very much out of the China Development Forum, as far as I understand it, I wasn’t there, but from people who were there and were sort of, was that the message of the government was, this is the model, get used to it. We’re not going to change. We’re focused on innovation and tech upgrading or industrial upgrading and technological innovation.

And that’s going to result in exports, and that it is what it is. So, I just thought that was an interesting change in rhetoric that underscores that they are saying, not only… they’re just saying more forcefully, “This is the model and we’re committed to it, get used to it.” We’ll come back to that, but I do want to pick up on something you said on the manufacturing side-

Jeremy: Before you move on, sorry, Andrew, can I just jump in there?

Andrew: Yeah, please.

Jeremy: Because one of the things that we’ve seen recently is there’s quite a strong conversation domestically around the fact that even though household consumption per capita is reasonably low, they’re starting to argue quite forcefully that the reason China’s consumption as a share of GDP is low is largely because of healthcare, for example, is much more expensive in the United States. And if you carve that out, that’s about a third of the difference. Along with homeowners in the United States, they have that paying themselves rent, which is excluded from China’s household consumption data. There’s also a conversation that they’re saying, if you compare, yes, per capita spending compared to the United States is maybe 20% or compared to Germany.

But when you look at individual product ownership of shoes, of protein, of all of that stuff, actually China’s catch-up potential is much more limited than the data would suggest. And so, the reason they’re pushing that conversation, and I agree with Joe and Dini’s analysis that they do think that there’s latent demand in the services sector, but one, you’ve already said previously many, many times that Xi Jinping has said he’s not going to allow the Latin Americanization of China.

And so, they can’t use debt to fund social welfare, and it has to come through the tax system. But at the same time, they don’t think that there’s that much catch-up potential as it stands right now. And so, they are looking at how the economy restructures in a different way to how a number of Western or offshore analysts are seeing the problems facing China.

Andrew: Yeah, I think that’s a great point. And it’s something I’ve actually been talking with folks a lot about this week, which is just understanding how Chinese leaders are diagnosing their own economic challenges or economic opportunities and trying to understand exactly what they’re trying to achieve. To your point, they are thinking about consumption in a very different way. And so we’ve been banging on like the whole rebalancing toward to consumption conversation. It’s just kind of a non-starter when you talk to people on the Chinese side about it for not only the reason that you talked about, but for many others.

The problem, though, of course, is the supply-demand, even though they’re not focused as much on raising domestic demand, raising consumption, the supply-demand mismatch persists. And what that results in, Joe, is a ton of exports on them, you know, flooding the global market. I want you to talk to me about the export data from January, February, and just what you’re seeing on the export side. I’ll front-run you a little bit by saying the numbers were huge in terms of export performance. But I will say, I was talking to somebody earlier this week, he has some insight into the shipping industry. He was saying that his perspective on one of the reasons that exports might have done so well at the beginning of the year is because of the very late Chinese New Year.

A lot of companies try to get as much inventory out the door ahead of the Chinese New Year as possible. So, the Chinese New Year moving around always mess with the year-on-year numbers. Having a particularly late Chinese New Year meant you had a particularly long period to front run as much production as you can as an export. So anyway, I just wanted to throw that little anecdote in there to maybe color what you’re about to say. Tell us about the export numbers and what we’re seeing there, Joe.

Joe: Sure. I just want to circle back really quickly to the conversation you and Jeremy just had about the consumption stuff. And I mean, totally agree with what you guys are saying. I think understanding how Beijing views consumption is really important and is very different from a typical Western economic analysis.

And I think what’s really interesting is, and we see this in the policy talk coming out of Beijing, Beijing almost wants to stimulate consumption through supply-side stimulus, which is very non-conventional. And I think they kind of see this in two ways. The first is, if you can increase supply of good-quality goods and services, you unlock what’s called latent demand. So, policymakers in China are convinced that households have this huge amount of latent demand, which is essentially households want to spend, but there isn’t the supply of goods and services to spend on.

And so, we see things like policymakers encouraging investment in the silver economy. So, building care homes, increasing the provision and quality of elder care. The idea being loads of people want to spend on elder care. It’s just the supply doesn’t exist. And so, the approach is, well, if we increase investment, if we have this supply side stimulus, by doing that, we’re going to increase consumption. The other way of supply side stimulus can increase consumption is through industrial upgrading because this creates well-paid jobs. And so over time, you see an increase in salary and then households have stronger purchasing power.

So again, it’s unconventional compared to what we’re used to. It’s just a very different approach to consumption. And understanding that approach helps us see why, particularly in the short term, there’s very little upside for consumption. Just by the very nature of Beijing wants to go about stimulating it. And of course, one of the consequences, as you say, is you’re going to have a huge, if you try and achieve consumption through supply side stimulus, guess what? You’re going to have too much supply, which leads to these exports. Yeah, so exports surged.

I mean, it’s again, it’s really a continuation of what we saw in 2025. Huge reliance on external sector to offload excess production. The Jan-Feb data was particularly, I think it’s about 22% growth in exports But as you rightly point out, it’s really hard to discern any sort of trend behavior across January and February because there’s seasonal impacts. The timing of the Chinese New Year really matters as well as the length. So, this year is a day longer than last year. 21.8% in the first two months of the year doesn’t mean we’re going to see 21.8% in the rest of the year. But I think the dynamics are still important. It signals to us still this really huge reliance on the external sector to offload this production because the domestic sector isn’t consuming it.

Maybe the one interesting thing to talk about is the diversification in export markets. So, exports to Africa during the first two months of the year grew by 50%. To the U.S., they dropped by 11%. Total change in where exports are going. And of course, Some of this is about reshipping to U.S. markets to try and avoid tariffs. But there’s also a genuine structural shift in who China is selling to. And this diversification, as a general rule, is a good thing. And what we’re seeing in China’s policy, especially in Africa and parts of Latin America, is to try and lock in export supply by accompanying exports with investment. So, for example, take Africa.

China’s building all the infrastructure in Africa. And by doing so, it’s increasing exports of everything from raw materials to intermediate goods to capital goods, as well as consumer durables. So, it’s quite a sustainable way of re-diversifying who they export to. Maybe the last thing I’ll say on this, the one potential downside from this diversification or exposure to developing economies is, as a general rule, developing economies fluctuate much more in terms of the business cycle and economic growth.

And so, if we see a continuation of this diversification, then at some point we may find that China’s exports are even more vulnerable to global changes in the economy. Because developing economies, their economies shoot up and shoot down a lot more than you’d expect from advanced developed economies in the West.

Andrew: Yeah, I’ve said it before, I’ll say it again, you know, I think I’ve been writing or saying every month for 10 years, they can’t keep pulling out the export, you know, trick, and yet they keep doing it even in the face of a global trade war, in the face of a trade war with the U.S. And so, they clearly have more capacity to diversify than many people thought. The question continues to be, how long is that runway? Jeremy, what is your thinking on sort of the export diversification generally? But also, you know, Joe just talked about some of the stuff going on with trade with Africa. I mean, you do a lot of China-Africa analysis. What are you seeing in that space particularly… a key question I keep getting is, what is the global south?

So, we’ll talk about Africa specifically. What is their capacity to continue absorbing this massive amount of Chinese exports? Joe just said China is trying to maintain that capacity through investment. Does that work? What is your thought on all that?

Jeremy: So, I think that’s an important starting point for this is that previously exports used to be foreign-owned companies that were sort of employing, you know, embracing China’s first world infrastructure to build labor-intensive goods. And then those products were being designed almost entirely for the developed market. And they really crossed over into the domestic market. But this new era that we’re seeing, it seems to me it’s being driven by private companies, by domestic brands. It seems like product’s being designed for the domestic market, and then the secondary priority is exports. And increasingly, that’s going to the developing countries because China’s price point is so competitive.

We’ve seen this in the trade surplus. We mentioned it in dinner the other day, but China’s trade surplus with emerging markets has gone from 150 billion to 500 billion since 2022. It shows us, and like Joe said, I mean, China’s exports to Africa up 50%, but also I think half of China’s fastest growing export markets since basically the pandemic have been in Africa. They’re gaining crazy market share. It’s like 40% of Nigeria’s imports, 40% of Kenya’s imports are coming from China. Just over a quarter of everything Africa imports is now coming from China. They’re gaining market share because, in part, because of the productivity gains that we’ve discussed already. They’re also designing these products for 1.4 billion price-sensitive Chinese people.

They’re benefiting from a weaker currency. So, over the past five years, you would say that on a trade-weighted basis, China’s currency has been relatively weak. There’s been aggressive pricing. There’s been falling PPI. They’ve had domestic subsidies. And so, all of that has meant that they are managing to carve out massive positions in the global south, in emerging market countries. And I did a presentation last week to the European Union because obviously, you know, the idea is that, are they hollowing out Africa’s manufacturing base? Probably not, because outside of South Africa and Nigeria, we don’t really have a manufacturing base. But what it is doing is it’s hollowing out European sales to Africa.

And so, I looked at the data. And when you look at heavy industrial goods, so machinery and equipment and so on, China’s share has gone from 15% in 2015 to 30% last year. And the EU’s share has gone from 18% to 12%. And like Joe’s rightly said, the move is calculated. So, what wasn’t on my bingo card this year was China’s construction contracts were going to accelerate. Because, you know, with the end of checkbook diplomacy, de-risking the financial sector, what they did in Belt and Road, there’s actually been a paring back of lending into Africa. And obviously, Africa has also run into its own sovereign debt fragilities.

And so, there was a narrowing of China’s focus that was sort of predating the pandemic. But last year, construction contracts hit, I think, $62 billion, which is up 40% from year on year. And why that matters is because obviously that means construction, machinery, exports, which are Sany, Zoomlion are all killing it in Africa. And it also advertises China as a development first partner and juxtapose itself against the chaotic West. Remember, you’ve spoken about this in the past, but China’s trying to pivot away from a sort of universal value international relation order to a sort of economic growth jobs income kind of agenda.

I would say that what’s interesting, though, because on this trip to South Africa now, one of the things I’m doing is talking to our chief executives about their strategy. And so, I’ve tracked the top 200 Chinese companies’ revenues in Africa over the last five years and their growth rates. And all the big players, the biggest guys are all in construction, infrastructure, and so on. But they’re growing the most slowly, despite what I’ve just said, they’re growing slower, apart from financial services, they’re basically growing the slowest, even though it’s relatively fast. And when you compare it to autos, ICE autos, pharmaceuticals, e-commerce, household appliances, those things are growing even faster.

And so, it’s not only about this construction, sort of exporting capsule goods. It’s actually they’re finding their ways into our markets and gaining an amazing market share. So, it’s real.

Andrew: So, follow-up question, two-parter. One is, what is the ongoing absorption capacity of Africa for these goods? Are the economies growing quickly enough to continue supporting ongoing growth in Chinese exports from a macro level? Or can China eat further into European and U.S. market share and move European market share from 12% down to 15%? And then thirdly, is there any pushback among African countries from the state leadership of Chinese goods?

Jeremy: Yeah, so I’ll be brief. Africa is growing at a decent clip, nothing special, around 4%. So, okay, in the context of Africa. Your question around whether this is sustainable and speed at which China’s exports are growing, I would say probably not. But I’ve fallen into the trap you’ve fallen into before as well, where I’ve said this has to slow, this has to slow, and it continues to expand. The game is definitely market share, and that’s going to continue. So, the degree to which they can continue to gain market share, I think, is still quite large. The biggest issue is obviously this geopolitical story.

We saw pushback before the pandemic from the African side. We saw Xi Jinping came out in 2019 promising to triple imports from Africa precisely because of the trade deficits were becoming problematic. Since then, imports have stayed flat, and it’s only going to continue to be the case when you think that shifting away from oil, for example, the economic model shifting away from the kinds of drivers that used to push them towards the kinds of commodities that Africa could export, with the exception of critical minerals.

So, structurally, the China-Africa story has that limitation, I would argue. But at the same time, they are continuing to find their way into African markets and gaining this incredible market share. So, the trade deficit went from 66 in 2024 to 102 billion last year. It is going to be on the radar for all the African leaders because it’s the most visible and obvious imbalance. And it does undermine Beijing’s bona fides as a sort of development partner in Africa.

And clearly, they want to have these relationships that at least give the veneer of being win-win. But bear in mind that it’s very difficult for a president of South Africa or Nigeria to fight with Donald Trump and Xi Jinping at the same time. And so this sort of more tense environment geopolitically that Trump’s generated since that April Independence Day tariffs has really given China more time to continue this model. But at some point, the pushback is going to come. And we saw Mexico, Turkey, South Africa putting up some barriers before the pandemic.

And I think that that will come back as the year unfolds. And obviously, the sensitivity of China’s economic activity is gradually moving towards the global south, which is new. So, how they navigate, it’s going to matter.

Andrew: Yeah, well, and I guess the story that you’re talking about in Africa has also been replicated in South America, a market share game, along with investment that supports Chinese exports to the continent. Joe, Jeremy mentioned something interesting in terms of the European displacement in Africa. I know you’ve done a little bit of work on China versus European exports globally, and did Japan a little bit in that regard. Any thoughts on what you see happening there?

Joe: Yeah, I mean, it’s not just Africa. Yeah, we did some research about this for a client. So, China’s displacing European exports in every market, including China’s domestic market. So, EU exports to China are dropping because China’s producing a lot of the goods domestically, and vice versa. Consumption of EU-manufactured goods is declining because they’re importing Chinese goods. So, yeah, it’s not just an Africa phenomenon, it’s global, so around the world. Specifically on the exports to Africa and the sustainability point, I mean, as Jeremy says, There’s a structural ceiling at some point, right?

Particularly because of the asymmetry because China exports so much more to African buyers. One thing in China’s favor, and this isn’t just an Africa story, this is a general global export story is … the proportion of exports which are intermediate goods, these are goods involved in the manufacturing process, they’re not final products, nor are they raw materials, that’s shot up. I can’t remember the exact figures, but it’s something like 40% to 50% of what China now exports is an intermediate good. It’s involved in the manufacturing of something else.

And a lot of the time, China’s the only economy in the world that has the scale to produce these intermediate goods at such a vast scale and a competitive price point, which essentially locks them into supply chains. So, even if we do see some of these trade frictions re-emerging later in the year, we talked, again, Jeremy mentioned things like Mexico and Turkey trying to push back, and a lot of the case, or in some instances, these countries don’t really have a choice. They have to, they’re locked into Chinese supply chains. And I think that’s kind of one upside for China’s export story, which suggests that maybe growth to an extent can continue for the foreseeable future.

Andrew: Great point. I want to touch on one other big weakness in the economy before we talk about potential shocks from Iran, which is property. It seems like we write it every month. And by we, I mean me and Joe, that the big drag in the economy is the property sector. What’s the latest on that front?

Joe: I mean, yeah, so it’s still the biggest drag on economic growth. I don’t have a whole lot of interesting stuff to say about this. I think maybe there’s two points. So, the first is one of the major issues with the property sectors, this kind of supply-demand gap, it mirrors broader structural economic challenges China faces, but the property sector still has a huge surplus of stock of unsold properties. Until they can start shifting those, the sector is going to continue to decline. The second thing is these dynamics are really going to be guided by the price. So, as long as house prices keep falling, households are going to have these deflationary expectations and they’re not going to jump into the market.

Why would they buy a house now if they think in six months’ time it’s going to be even cheaper? So, the dynamics we’re really hoping to see is at some point, prices bottom out because the market hits a low. At that point, consumers adjust their deflationary expectations and then they buy back into the market. At that point, the property sector can then start to shift all this surplus stock. Once that happens, then property developers have the confidence to start investment and construction, and the property sector can start to grow a little bit. Obviously, we’re never going to get back to the heydays of double-digit growth. But at some point, in years to come, the property sector can be a slow, sustainable part of China’s growth story. That’s not going to happen in 2026. I can tell you that.

The only positive story we saw in the data is that a lot of the key real estate metrics, so prices, sales, investment, the decline has slowed for two or three consecutive months. It’s way too early to conclude that the sector’s actually bottoming out. We’ve seen this before. We’ve seen a slowdown in the decline and then it’s accelerated again. So, from my perspective, it’s unclear whether or not this is a genuine sustainable slowdown in the decline. But it’s something we’re keeping an eye on. And if we get a few more months of data of this consecutive slowdown, then maybe we can readjust our assessment of the sector. But for now, it’s really the same old.

Andrew: Yeah, this slog just seems like it’s going to continue for the foreseeable. I was talking about this with another person throughout this week in the media. Just saying they obviously are not in a hurry to do much about this. In the 15th-5-year plan, they had moved basically the housing policy section from the growth section of the plan to the social section of the plan. So, housing seemed more as a social good rather than a growth drive. But also my comment to the person I was talking to about this recently was the majority of the pain has already been experienced. So, why panic now?

You know you can make the adjustment, 90% or 80% or whatever if the adjustments are even made. Jeremy, how are you thinking about property and how it fits into everything you’re seeing?

Jeremy: Yeah, it’s funny. What Joe said resonates with me. I also don’t have particularly much news simply because I think that the Party is reasonably happy with the manner in which they’re metabolizing this correction. I think if you had asked any analyst five years ago, what’s the biggest risk to the Chinese economy? Everyone and their dog would have said, you know, real estate collapse. And now they’re sort of four or five years in, and I feel like they’re reasonably comfortable with the manner in which that it’s being eaten up by the broader economy.

And I think that they’re not really showing any signs of changing their property playbook. I would just say that I do think that tier one markets are likely to see improvement this year and stabilization. And why I watch it so closely, because one of the issues that China’s had is that when you look at sort of sentiment indicators from the household sector, you see the biggest hits from the pandemic was to low-income households, but they were the fastest to recover and every year their outlooks improved. And as you move up the income cohorts, that hasn’t actually been the case. The wealthier the households, actually they’ve seen deterioration in sentiment.

And so, what you’re seeing in the spending data is that poorer people are spending, but the wealthier people are holding back. And I think that if the stabilization can occur in tier one markets, as well as potentially a sort of rallying, gradual rallying in the stock market, where it’s predominantly wealthier families that have exposure to that, you could see a slight improvement in their sentiment, which would make quite a big difference in the consumption story because I think the top 20% income owners have about 50% of household consumption and about 65% of household wealth. And so, you just need a small change in their movements to actually see it in the data. And so, I do think there’s a reasonable chance, but I agree.

I think 80% of new starts after 2015 were in tier three and four cities. I mean, those places are dead forever. And so, the idea that construction can come back online like it had in the past is just not realistic. And I agree with what Joe’s saying in terms of his overarching analysis of where they are and how they’re handling it.

Andrew: Yeah, not a pretty picture. So, I think we’re all agreed that we’re pretty pessimistic on properly for the foreseeable. We’re getting closer to sort of time here. So, I want to make sure we spend a little bit of time on kind of vulnerabilities that we see from news of the day, which is the ongoing situation in Iran. Jeremy, again, I know you’ve kind of been thinking about this. Let me start with you. What do you see as the big vulnerabilities that China either has currently or that might sort of become more and more or larger and larger potential issues as and if the confrontation drags on?

Jeremy: I thought it was basically over. I thought President Trump had started his negotiations and it’s basically done.

Andrew: Yeah. I mean, well, just on the off chance that the Iranians decide…

Jeremy: So, a couple of points on Iran. I think it certainly reinforces Beijing’s instincts to focus on making China strong and more resilient and self-sufficient, right? So, it doesn’t do anything from that point of view in terms of undermining where they’re going. I had a conversation with a client in Hong Kong not that long ago. I said, “If America wants to compete with China they have to be willing to send their kids to do 12 hours of maths a day for 12 years, and if they’re not willing to do it, they’re going to lose.” So, there’s a vibe here of clearly we’re competing and we’re competing to win.

And so, I think that you know this just reinforces their instincts to look inwards and make sure that they’re competitive and that they’re doing the right things. It also makes it, again, referring to what we spoke about earlier, it makes it pretty easy, position yourself in the global south as a partner that’s stable, that’s constructive rather than chaotic. And I think that that serves China long term. I mean, of course, I think that China would rather a benign external environment and not a contested one with the United States or with the European Union. But as it stands right now, then the next best is for them to look good and the rest of the Western world to look a little bit more chaotic.

I think that the degree to which Trump is undermining the Western institutions is profound and meaningful, and it makes a big difference in the global south. So that’s not nothing. From an economic point of view, I think you guys have done a lot of good research on the vulnerabilities as it relates to oil and the most immediate shock. So, I won’t rehash that. I would just say that obviously beyond oil disruptions for other agricultural inputs, industrial chemicals, and those things, aluminum, those are all real. But I would just say that given what we’ve spoken about already, if you imagine a situation where suddenly oil’s at $130 or something, it’s going to cause an additional cost squeeze at a time where firms don’t yet have pricing power.

And that obviously means more margin compression. Then obviously, given the importance of exports, if import demand from Europe and Asia and Latin America and Africa is all impacted, that’s not going to help China at all. And then exporters will have, sort of they’ll have falling volumes, or they’ll have to further cut prices, which is obviously going to dent capacity utilization rates, add to the deflationary pressure. So, there’s a lot going on there that makes a lot of the vulnerabilities that China is trying to, as Joe said, they’re gradually trying to grind their way out of those situation. This would make it a hell of a lot more difficult.

And then at some point then, the Chinese leadership have to choose between market clearing bankruptcies, which you know they’re not going to do, or sustaining excess capacity and zombie capacity through forbearance. And that obviously eats into the sort of viability of the financial system, which is something that’s already reasonably vulnerable, which is why the central bank, for example, doesn’t want to cut interest rates because the banking sector can’t really accommodate it. So, there’s that. And then you add, given the climates and the hurricanes that we spoke about earlier, you add, this doesn’t help consider sentiment, right? So, then suddenly you have households that were maybe starting to feel like, okay, maybe we should go travel or whatever. Maybe they say, “No, let’s save.”

And that makes things even worse. So, there’s a lot to digest in terms of the impact. But of course, from a direct point of view, in terms of vulnerability, they’re reasonably self-sufficient and reasonably comfortable.

Andrew: Yeah. Joe, pick up on Jeremy’s comments there. You sort of intimated earlier, talking about the potential fragility of the industrial cycle and investment cycle that the next real shock of your challenge. Where do you think the vulnerabilities are?

Joe: Yeah. I mean, it’s a stress test at the worst possible moment for China’s economy. I mean, and Jeremy’s talked about the two big macroeconomic implications.

Andrew: Let me just say, I think we just got our episode title. Nice work.

Jeremy: Yeah, I also think Joe did really well there. Well done, Joe.

Joe: There’s obviously the energy hit. Jeremy’s talked about that. And then maybe the less obvious, but still pretty obvious channel is to China’s export base. So, China ships a lot of goods to the Gulf, to Southeast Asia, lots of consumer durable to Southeast Asia, to Europe. And households, their purchasing power is going to decline because of the energy crisis. So, I think to make all this worse, fiscal tools, which would generally be the best policy tool to try and manage this issue, are limited because China has constrained fiscal space. And we see that not only through things like really sluggish tax revenue growth, but also policymakers are prioritizing trying to reduce hidden levels of debt, not generate even more. So, it’s like a perfect storm of bad things. Sorry, that’s not quite so articulate. I don’t think that’ll-

Jeremy: No, I prefer that one.

Joe: It’s a perfect storm of bad economic outcomes coming from every angle. So, it’s the worst possible moment for China, I think.

Andrew: Well, and an interesting one is, so obviously everything you just said, both of you, just kind of the stakes and the compounding potential impacts grow and grow and grow as the conflict drags on. So, it does matter how quickly it’s resolved, although as many people pointed out, the global economic ramifications of the conflict will be long lasting, even just if everything stops tomorrow and everybody ceasefire tomorrow and everybody puts down their weapons. But one thing that I was just talking to Cory Combs, who is also in Beijing this week and is our Head of Supply Chain Research, he was mentioning a lot of people are asking us about helium coming out of the middle East, which is also shipped through the Strait of Hormuz.

About, I guess, a third of global helium, I believe, comes from, I believe, Qatar, and definitely is shipped through that channel and it’s one of the things that’s used in the production semiconductors. And he was saying one thing that people don’t think a lot about, I’m just going to steal his thunder, is inventory bugs. And what he means by that is when have an inventory of something, if there’s a buffer, it takes a certain amount of time for you to see this disruption So, for example, if you need a part, but you’ve got two months’ worth of it, and that part is suddenly unavailable, you don’t see this shortage for two months later.

And that moves all the way down the supply chain. So, if you have something that’s very high upstream and you’ve got inventory buffers at one level, it takes a couple of months or a couple of weeks, however much inventory you have for this shortage to show up, and then however much before you to have it. The next part of the supply chain takes a couple months, and then the next part of the supply chain takes a couple months. So, his point was helium is very far upstream when it comes to semiconductor production, and so we may not see if there’s a shortage of helium tomorrow, which, I mean, the prices have gone up.

I don’t believe there’s a global shortage yet, but to the extent there is a shortage of some of these key materials, we’re not probably going to see it for six months, And then it’s just going to kind of slam everything all at the same time. So, I think that’s another sort of element of this that China feeds into the idea that you both said, where China’s like pretty well placed now. But the trickle down effect of some of these disruptions may come in unexpected times, may come in unexpected places. Again, no one would, I think, automatically think, oh, semiconductor production is going to be disrupted because of helium in Qatar. So, I don’t know if either of you has any thoughts on the back of that.

Jeremy: I mean, I was really worried because Jasper’s birthday is in January. And so, I just wanted to make sure there were going to be enough helium balloons for his birthday party. Sounds like he should be okay, I think.

Andrew: Well, actually, we were laughing because, you know, helium is kind of one of these things, it has a bunch of these like low value uses like that. But then it just so happens that it is also a very high upstream piece and a very critical part of the technology supply chain. But I’m glad to know that Jasper’s birthday is going to be okay.

Jeremy: It should be fine. I want to ask you, Andrew, before you go, about two meetings, right? Because a lot of what we’re talking about is the shock, the bad news, etc. And I think that this pain threshold story from the authorities matters quite a great deal because how they interpret and what they’re willing to do and prioritize as data maybe deteriorates through this shock, if it plays out, I’m arguing that I think that they’re going to be conservative. And like Joe said, part of that’s because of fiscal and monetary policy space is more limited. And what they’re prioritizing is different to in the past. But I did notice that the stock market in the two meetings, as a result of this Iran war, were down.

Can you remember any time that there’s been two meetings where the stock market has fallen off the top of your head?

Andrew: No, not off the top of my head. But to be honest, I don’t think I’ve been following the correlation all that closely. I mean, is that unusual in your mind?

Jeremy: Yeah, I always thought that they did something to prop up the market around the time of big meetings. And I can’t recall a time where that hasn’t happened, but I haven’t actually gone and checked.

Andrew: But what do you read from that?

Jeremy: I just think that they are accepting that they’re not sort of the be-all and end-all controlling all outcomes like they thought they were in the past. And actually because people’s tolerance for accepting bad news or weaker data is now higher, as long as the wheels aren’t absolutely falling off. I think that they’re deciding to be more conservative and more constrained.

Andrew: And not sort of freak out at every little thing, I guess, which I think is right. I mean, again, part of my consistent sort of theme, one consistent theme of my meetings this week has been kind of saying, you know, maybe the authorities are wrong. But I watched the reaction function, and I’ve been in Beijing when they are worried about growth. And what do they do? They stimulate. And so, you know, they know how to do that. And so maybe they’re wrong for not being worried. But I think that’s a really good way to put it is their pain threshold is much higher. And I think that it’s permanently higher. And that has fundamentally changed how they manage the economy going forward.

Jeremy: Andrew, last point. You said years ago, and it stuck with me, where you said that Chinese policymakers are really effective when they’re on the front foot and they’re less effective when they’re on the back foot and reacting. And I think that if they pivoted towards being more... And it seems like when you look at the plenum last year, if you look at the two meetings, if you look at the 15-Five year plan, it seems like there’s a coherency and coordination and a focus around what they need to prioritize. And everything else is not a distraction, but they’re not actually that eager to kind of pivot away from what they’re actually trying to achieve.

And so, that kind of lends itself to, you know, I think that you should expect continuity, and you should expect them to continue to focus on the things that they’ve been prioritizing for the past two or three years, basically irrespective of the cyclical economic data. And I think that that puts them in a better stead than previously when they were reacting to everything with the national team to support the stock or whatever it was, which just doesn’t really help them in the long term.

Andrew: That’s a great point. It’s interesting because the way I’ve been sort of characterizing the 15th five-year plan and the government work report for this year is that it is kind of all over the map when it comes to economic growth, like there’s not a clear plan, like, is it 4%, is it 5%, is it more? It just doesn’t seem like they’re sending a clear signal. And so, I’ve kind of talked about it in that context like policy is usually better when they’re very clear on what they want to do. Buti hadn’t tied it to that point on innovation which is they’re absolutely clear that innovation is the number one thing. And it’s sort of like, when you think about it that way, they’re very clearly saying, “Listen, if we get the innovation piece, the growth will take care of itself.”

And maybe they’re wrong about that. But I think that is how they’re thinking about it. And I think you nailed it there by saying they have very, very clearly said there is one clear top priority. That’s — we’ve got to continue innovating, close the innovation gap with the West generally and the States. And we’re not going to worry about growth. We’re not going to worry about the property market, at least not to the same extent. And so, when policy is geared like that, it does tend to produce the outcomes that they want. So, I think it suggests that they’re going to be pretty successful on the innovation front. Joe, any last thought from you before we wrap up?

Joe: Yeah, really quick. I mean, to just kind of jump into what you guys are saying, it does seem like Beijing’s willingness to accept lower growth gives them the space to focus on either national priorities or these structural issues. Yeah. So, it makes sense. I kind of totally agree with what you guys are saying. It makes a lot of sense to me.

Andrew: Well, listen, guys, this has been great. Really appreciate the time. Joe, thanks for joining us as always. And Jeremy, appreciate your time. You’ve been very generous with your time. Great to have you on and hope to have you on again sometime soon.

Jeremy: Thanks for having me. It was nice to be part of it for a change.

Joe: Yeah, it’s been fun.

Andrew: All right. Thanks, guys. Look forward to doing it again soon. Thanks for listening, everybody. Bye, everybody.

In case you missed it: The economy slowed significantly in Q4 last year.

• Quarterly GDP grew by 4.5% y/y — the slowest rate since the pandemic.

• Retail sales grew a measly 1.7%.

• Fixed asset investment (FAI) posted seven straight months of decline.

Ouch.

The first two months of 2026 tell a different story.

• Activity picked up across the board — with stronger industrial output, a rebound in investment, and tentative signs of stabilization in consumption.

At first glance, this looks like a solid recovery.

• But scratch beneath the surface, and things get more complicated.

Let’s start with what’s driving the upside.

First up, China’s supply-side is surging.

• Manufacturing output grew 6.6% y/y across the first two months of this year, marking the fastest pace of expansion since mid-2025 — driven by gains in general equipment, rail, and electrical machinery.

That strength is feeding into investment: Manufacturing FAI grew 3.1% y/y, snapping a six-month losing streak — with the sectors where production surged posting the biggest gains.

• FAI in rail and shipbuilding jumped 31% y/y, while investment in industrial equipment manufacturing rose 7%, and investment in electrical machinery increased 6%.

Meanwhile, price dynamics are becoming less of a headwind to China’s manufacturing sector.

• Producer prices fell 0.9% y/y in February, marking the slowest decline in 19 months, while month-on-month, producer prices rose 0.7%.

• As producer price deflation bottoms out, profit margins for manufacturers should gradually improve — giving firms more room to ramp up production even further.

The second upside is China’s external sector, which remains a major source of strength.

• Exports surged 21.8% y/y in value terms in the first two months of 2026 — the fastest pace in more than four years.

• Shipments to the US fell 11% y/y, while exports to ASEAN and the EU grew by close to 30%.

• Exports to Africa soared 50%, continuing a remarkable expansion in China’s trade with developing markets.

There are also signs that domestic demand is stabilizing — but only just.

• Retail sales of consumer goods grew 2.8% y/y across January and February, up from just 0.9% in December.

But let’s not get carried away: That growth rate is weak by historical standards, and well below overall growth of the economy.

• Meanwhile, geopolitical uncertainty from the Iran war — along with a spike in energy prices — may incentivise consumers to reduce spending and increase discretionary savings in the coming months.

• If the manufacturing of consumer goods durables continues to outstrip demand, China’s economy will be forced to offload surplus production to foreign markets or suffer renewed deflationary pressures.

Despite these risks, Zhongnanhai seems pretty chilled.

• At this month’s Two Sessions, officials outlined a policy toolkit largely unchanged from 2025, suggesting Beijing is comfortable with its current growth mix.

• Authorities are extending the consumer goods trade-in program and rolling out targeted interest subsidies to support household borrowing — incremental measures that will help stabilize spending but won’t drive a rapid rebound in demand.

This suggests continuity in China’s macroeconomic strategy — and a relatively steady growth trajectory this year.

Over time, policymakers hope that improved household income growth and a gradual expansion of public services will strengthen domestic demand.

• But for the foreseeable future, China’s economy is likely to remain characterized by the same imbalance visible in the latest data — robust supply-side activity alongside cautious household spending.

Joe Peissel, Senior Macroeconomic Analyst, Trivium China

What you missed

Commodities

China’s aluminum inventories topped 1.34 million metric tons on Monday – the highest level since the 2020 pandemic.

A few factors are contributing to soaring supplies.

• China’s upstream alumina refining sector is bloated, and set to grow further in 2026, fueling overproduction at smelters.

• The Spring Festival holiday dampened demand from domestic manufacturers, many of which idle around the holiday period, allowing inventories to build up.

• Aluminum prices have spiked worldwide, driven by shutdowns and shipping disruptions in the Gulf, which further dampened demand across value chains.

Business environment

On Tuesday, the macro planner (NDRC) announced a new batch of 13 “landmark major” foreign direct investment projects totaling USD 13.4 billion.

• Since 2018, the NDRC has led a program to facilitate signature foreign investment projects over USD 1 billion, periodically announcing new batches as part of Beijing’s broader push to attract FDI.

• While the latest batch is still manufacturing-heavy, state media stressed Beijing’s expanding focus on services — highlighting that logistics projects have made the list for the first time.

Tech

On Tuesday, Baidu held a launch event in Beijing unveiling its strategy to launch a suite of products built around OpenClaw, the open-source AI agent framework that has taken the developer world by storm.

• OpenClaw is a local-first framework that turns AI models from chatbots into action-oriented agents.

• The company is rolling out a whole family of OpenClaw-powered agents, including DuMate, a desktop AI agent for office automation, and Home Lobster, billed as the world’s first home-environment agent, integrating online and offline task execution across devices.

• Alibaba, Tencent, ByteDance, Xiaomi, Zhipu, Minimax, and many others are rolling out OpenClaw powered tools.

Agriculture and rural affairs

Beijing just released a long-awaited policy that will shape rural land use for decades.

• The Party Central Committee and State Council’s March 18 guidelines instruct localities to extend the term of soon-to-expire rural land contracts by another 30 years, with pilots beginning in 2026.

• The policy will affect the roughly 160 million rural Chinese households whose contracts expire over the next five years, giving them confidence that their most valuable asset will remain in their hands for the long term.

Foreign affairs

On Monday, top diplomat Wang Yi, Public Security Minister Wang Xiaohong, and Defense Minister Dong Jun met with their Vietnamese counterparts in Hanoi for the first 3+3 Strategic Dialogue on diplomacy, defense, and public security.

• The 3+3 dialogue emerged from Xi Jinping’s trip to Vietnam last April, his second state visit to the country in two years amid a major Chinese diplomatic blitz toward Hanoi.

• The Chinese delegation said that, as “friendly socialist neighbors,” China and Vietnam should have each other’s back including by cooperating in international trade frameworks, properly addressing maritime issues, and guarding against “color revolutions.”

U.S.-China

On Monday, U.S. President Donald Trump told reporters that he planned to delay his long-awaited trip to China by “a month or so.”

• Trump said he needs to focus on Iran: “I’d love to [visit China] but because of the war, I want to be here.”

• Treasury Secretary Scott Bessent, fresh off talks with Chinese Vice Premier He Lifeng, said the postponement was down to “logistics,” not hardball diplomacy.

On Thursday, The Paper reported that an anti-drug taskforce in Hubei province had arrested seven people and subjected 12 more to “criminal compulsory measures” in a crackdown on the production and export of fentanyl precursor chemicals.

• Hubei established the taskforce in December 2025, shortly after Xi Jinping and Donald Trump agreed to deepen fentanyl-related cooperation during their summit in Busan in October.

• This is the first publicly reported action in China involving arrests related to fentanyl precursors since the summit.

• An unnamed U.S. official told Reuters: “We want ​to ⁠see seizures and convictions, not just ⁠arrests.”

The U.S. Intelligence Community (IC) has changed its tune on Taiwan.

• In its 2026 Annual Threat Assessment, released Wednesday, the IC states that Chinese leaders: “Do not currently plan to execute an invasion of Taiwan in 2027, nor do they have a fixed timeline for achieving unification…[and] prefer to achieve unification without the use of force.”

• The 2025 report was much more skeptical: “The PRC calls for a peaceful unification with Taiwan…even as it threatens to use force to compel unification if necessary.”

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.

Now in its third week, the war increasingly looks likely to be a protracted engagement, and as the conflict grinds on, the implications — both political and economic — for the many countries not involved in the fighting will become clearer.

• China, of course, has a wide-range of interests — both short- and long-term — that will be impacted by the situation.

To unpack the thinking around all of this in Beijing, Trivium China Podcast host Andrew Polk is joined on this week’s episode by two of Trivium’s lead analysts on all things geopolitics, trade, and commodities — Joe Mazur and Even Pay.

The trio gets into:

• China’s most immediate concerns — largely revolving around resource security

• How Beijing’s patient buildup of commodity reserves over the past decade has now been vindicated

• Whether Xi Jinping and company see any strategic upside from the confrontation

• What, if anything, Beijing can do to influence the outcome

• And what it all means — in China’s view — for the longer-term evolution of the geopolitical system

It’s another banger folks — you won’t want to miss it.

Transcript

Andrew Polk: Hi, everybody. Welcome to the latest Trivium of 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 our Head of Geopolitical Research, Joe Mazur, and our head of, well, I always introduce her as a Jack of all trades, but head of Ag Research, Head of Trade Research, head of sort of minerals and all other manner of things that other people don’t cover research, Even Pay. Even, welcome to the podcast. How are you doing?

Even Pay: I’m doing well. Always fun to try to explain what I do at work.

Andrew: Yeah, we got nailed out of your title. But yeah, a jack of all trades is good. Well, welcome. Good to have you on. And Joe, how are you doing, man?

Joe Mazur: Yeah, doing good. Looking like spring finally in Beijing, which always makes me happy.

Andrew: Yeah, that makes a big difference for the psyche. Well, we are going to talk today about China’s view on the whole Iran situation. I’m sure listeners will be aware that there is a war in the Middle East between the U.S., Israel, and Iran. And so, we’re going to talk about China’s perspective on all of that. We’re not going to get into our views on the war or how it’s going or any of that stuff. Well, we’ll touch on it only insofar as we need to, to explain kind of how China might be reacting to various stuff. But we’re really going to focus on the China piece of it, of course, because this is Trivium China.

But before we jump into the conversation of the day, we got to start with the customary vibe check. Even, I’ll start with you. How’s your vibe today?

Even: Great. Yeah. Well, the vibe on my end of things is that it’s been very full on. I think it’s been nonstop since coming back from the Chinese New Year holiday from, you know, straight into the Two Sessions, and then around that, dealing with the conflict and the implications across a whole bunch of different sectors. So, I feel like I haven’t logged off. I haven’t looked up from my screen for like three straight weeks now, and I don’t really see any end in sight. Not sure about you guys.

Joe: Yeah, I’m going to say that my vibe or the vibe, I think, in the Beijing policy community is jaded just because, you know, we just finished up with the Two Sessions and then we kind of turn to the war in Iran and go, “Oh, God, what now?” Especially in the context of Trump now having postponed his trip to China. So, just, I would say, maybe resigned acceptance that it’s going to continue to be crazy all the time. So, that’s the vibe I’m getting from people.

Andrew: Yeah, that’s kind of not sad, but it’s a, I don’t know, bit of a depressing way to live your professional life. But I mean, I kind of feel like since the first trade war and then the pandemic, so since 2018, basically, it’s just been one major geopolitical shock after another. And I keep thinking, well, maybe this year we’ll have sort of a “normal,” whatever that means, or more of a chill year. And it just hasn’t happened now for eight or nine years running. So, I guess this is just the new normal. So, we should get used to it.

Although, as everyone often points out, it does help a bit with job security. I think I’ve said it before in the pod, mild chaos is what one of our clients told me we need. You don’t want too much chaos because people then start to become conservative. Companies become conservative, and they don’t want outside consulting and counsel. But mild chaos is good. So, anyway, we are going to analyze what I think is slightly more than mild chaos today. I will say, I got to do my vibe check, I’m in Barcelona this week on my way to Beijing. And Barcelona is amazing. It’s great to be traveling on the road again. So, my vibe is very upbeat. So, I’m going to bring that personal energy at least to the pod, even if our professional energy is a little bit more suspect.

Joe: We’ll take it.

Andrew: All right, good. Well, hopefully that brings a little bit of levity to what we’re doing here, since we’re talking about some very serious stuff. But before we do talk about that, we also, of course, have to do the quick housekeeping. First, 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 range of issues, as well as policy towards China out of Western capitals like D.C., London, Brussels, and others.

So, if you need any help on 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. Otherwise, check out our website, again, triviumchina.com to check out more of our content. You can find a range of options in terms of China policy analysis, China policy intelligence on our website. These are subscription-based products that you can check out, either purchase, or there are free options as well. So, you’ll definitely find the China policy option that you need on our website.

And then, finally, please do tell your friends and colleagues about the podcast. Those word of mouth recommendations really help us to grow both the listenership and the business. All right guys, let’s get into it. I think let’s start with just sort of China’s immediate reaction once everything kicked off with the U.S. and Israel sort of first kind of preemptively attacking Iran. Obviously, for many of us, it sort of came out of nowhere. I’m sure for the Chinese it came out of nowhere. So, Joe, I’m going to start with you if you’re sitting in in Zhongnanhai, which for those who don’t know, is the leadership compound where all the Chinese leaders stay.

In the first sort of day or two of the escalation or the initial military action, what would you say would be the single most immediate concern that Chinese leaders had at the outset? Would it be oil security, regional stability, U.S. military distraction, or something else?

Joe: Yeah. So, I mean, I think when it comes to China’s response, we break down kind of the public facing response versus what people were privately probably worried about among China’s leadership. So, publicly, China’s whole foreign policy is predicated on sovereignty and that no country has the right to intervene in the affairs of any other country, let alone try to affect regime change sort of on a whim or really just ever. So, some of the initial statements that China put out were to that effect, saying we condemn this gross violation of Iran’s sovereignty. Realistically, though, yeah, I think overwhelmingly the number one concern in practical terms is energy security, is the disruption to global energy systems that was going to happen and now has happened as a result of the conflict.

And I think we can get more into the specifics of that later. But China’s always been very preoccupied with its energy security for reasons like this and scenarios that they’ve gamed out, which are similar to this. And then probably secondary practical concern is regional stability.

China’s footprint in the Middle East, like its footprint in a lot of places, is kind of based on a strictly business approach where it seeks economic partnership sort of above any kind of other factor in its relations. So, the extent to which American and Israeli intervention makes business difficult, it brings business uncertainty, provokes Iran to retaliate against other Gulf states, that’s also a broader concern. So, yeah, I would say that despite the kind of high-minded concern for Iran’s sovereignty in the official statement, the two primary concerns are very practical ones — energy security and regional stability.

Andrew: Yeah, I think that’s right. Even let’s get your take on kind of the same question. And, insofar as energy security ranks on the list, I’d also like you to weigh in on kind of how that’s fared so far as China seems like it’s done well through the early stages of this crisis, at least in terms of energy security. So, talk to us about, if you could, their concerns, how they’ve managed those concerns, both on kind of a short-term basis, and then what they might be increasingly worried about in the medium-term, if that makes sense.

Even: Yeah, absolutely. So first off, I tend to agree with Joe’s assessment that really early on in the aftermath of understanding that there had been strikes and retaliation in the Gulf, what top leaders were almost certainly talking about in Zhongnanhai was that economic security piece. And I use economic security as a wider frame because it’s not just energy security, although, of course, so petrochemicals is a huge part of this equation, but it’s also access to the other raw materials that come out of the Gulf.

And that includes, I mean, really crucially for China, it includes certain fertilizers. And it also includes a whole bunch of other raw materials that feed into metals and plastic supply chains, not just in China, but around the world. So, immediately, there would be questions about, okay, what is this going to mean if it lasts a day, a week, a month, a year for Beijing’s ability to manage the economy in a way that delivers sort of a sustainable, stable domestic environment? Which we know is something that top leaders are very, very concerned about. There’s almost an obsession with the kind of gray rhino supply crises and how they can be managed among party leadership.

And we’ve seen that repeatedly. It comes from somewhere. It comes out of sort of historical supply shocks with the vast majority of China’s leadership class having personal experience of famine. And we see that reflected in food security policy, you know, a huge focus on self-sufficiency. We see that focus in energy policy with a very substantial self-sufficiency direction in energy policy as well, including relying on coal for as long as necessary because that’s something China can self-supply, including the efforts towards electrification because that is both technology that China supplies, at renewable energy technology and also a way of generating power without needing to rely on an external input.

And we also see that obsession reflected in the very large strategic reserves that China maintains. Over and over again, we hear from Western economists about the drag or inefficiency or even kind of unfair price management that might happen as a result of these massive strategic stockpiles that China likes to maintain and hang on to, whether that’s in rice and wheat or whether it’s in pork or whether it’s in fertilizers or nickel or crude. But repeatedly, over certainly the past decade, I can name four or five different examples of circumstances in which top leadership felt extremely vindicated for the strategy of holding on to really, really sizable reserves.

And this is another one of those where the fact that China is sitting on very substantial oil reserves, very substantial minerals and metals reserves and very substantial fertilizer reserves, as well as food reserves, you know, grain reserves, are going to insulate the domestic economy to some degree, less as time goes on, but to some degree against the worst of a crisis that is having pretty significant effects on global prices. China’s price management tools and its ability to access state reserves are already insulating it from some of the worst of those effects.

Joe: Yeah, I’ll really just piggyback off of what Even said. I think the word vindication is absolutely correct. I mean, if you’ll indulge me, I’m reminded of that episode of The Simpsons where there’s an elephant rampaging around and it’s headed straight towards a peanut factory. And the foreman says to the workers, “I told you this day would come. You said it was insane to practice elephant drills every day for 20 years.” And I really kind of feel like that’s sort of where China feels that it’s at. And so, when I hear people talk about, “Oh, this is going to turbocharge China’s energy diversification push, and it’s going to turbocharge its green energy push, it’s almost like, I don’t even know, because those were already kind of going full steam ahead for reasons that-

Even: Yeah, there’s no more turbo here.

Joe: Exactly. So, I mean, certainly it’s a vindication. It’s a massive argument against ever changing that strategy. But really, they were already completely all in on these risk management and built-in energy cushions that are now, again, making China better able than most, not fully immune, but better able than many other major economies to weather these shocks.

Andrew: Yeah, I totally agree with you both. I think that’s a great observation, Joe. And I was going to say that it kind of, just to tie this to a broader theme that I often think about, is, you know, the West currently, and over the past decades, often the West, broadly speaking, Western economists, Western observers, tend to criticize China for the inefficiencies in its economy, right? China has always opted for sort of greater inefficiency with the trade-off of lower volatility, right? That’s the same in its banking system. Basically, the entire way the economy allocates resources is not towards maximum efficiency.

It’s towards sort of maximum stability. And we, people from the West often look and say, “Well, that’s inefficient and that’s China’s not growing as much as it could or this or that.” But it seems to me the world is moving more and more towards China’s point of view on that, especially when you think about how the U.S. and other Western countries are reacting on the critical minerals front now that we know that Beijing has this very strong chokehold and weaponized chokehold on that stuff. And now, of course, we’re trying to create our own critical minerals supply chain, which is totally inefficient and wasteful, but we need to for economic security reasons. And so, I think vindication is the right word that both of you used. Go ahead, Even.

Even: I mean, that raises a great point, which is that there is reason why there’s been so much energy and resources and policy development focused on this strategic reserves management and price management and sort of pursuit of a certain kind of stability. And for lack of a better way of putting it, it’s, in many ways, because Beijing really struggles to respond to or to deal with extreme uncertainty and extreme volatility. And so, the flip side of this conversation where, you know, we’re saying that in the first 48 hours, there would have been a lot of focus on, okay, how is economic security going to go? The flip side of that equation is economic security might be well seen to, but that doesn’t mean that top leaders are breathing a sigh of relief. Right?

If anything, the extreme uncertainty coming out of an active conflict that is still escalating, you know, it’s not what the system would prefer to be dealing with. Even if China is better positioned at the moment in a number of respects to navigate it than many, many other places, I think on balance, nobody’s celebrating, nobody’s taking a victory lap in Beijing.

Andrew: Yeah, well, Joe, I want to bring you in on that point. And maybe this is good pushback a little bit, controversy here. I think that’s right, Even. But at the same time, we all know that like Beijing’s number one priority is stability, stability, stability, you know, top three priorities. But they have no control over the geopolitical hand that they are dealt, really, in terms of external events that don’t involve them. Obviously, they play a role in managing their own geopolitical presence. But something like this, they really have very little, I think, immediate influence on.

And the question is, so yes, short term, they’d prefer for this not to be happening. They prefer stability. But Joe, is there a longer-term strategic thinking in China? And this kind of gets back to this sort of public line versus private assessment that you spoke about earlier. Is there a thinking about what the longer term benefits or lack thereof might be for China from this action from the U.S.? Because my thinking, it’s a leading question, I’ll just go ahead and say it. I agree with your general point, Even, but is there a part of Beijing that says actually some level of chaos is good because it makes the U.S. increasingly look like an unreliable actor and that moves more and more towards putting Beijing on the map as a stable, reliable partner for many of the rest of the world?

So, sort of a short-term problem, but a strategic win. I don’t know. Joe, react to everything I just said.

Joe: Yeah, yeah. I think there’s going to be a pros and cons column here from Beijing’s perspective, right? So, cons, we’ve kind of been over a little bit already, the immediate impact of the energy shock, right? And a lot of these, what these end up being pros or cons depend on how long the conflict drags on and how, to what extent the Iranian regime emerges intact or does not, right? I mean, I think that let’s say that Trump with the midterms coming up decides, okay, this was a mistake, and he does a taco. He ends up talking to the regime. And yes, there was a big disruption, and yes, there was loss of life.

But he ends up basically kind of bailing on it because, as we all know, Americans are incredibly sensitive to the price of gas as an economic indicator. And given the unpopularity of the war in Iran among the American public and including his base to whom he promised no more wars. So, let’s say all of that combines and Trump says, “Okay, we’re going to declare victory and status quo ante,” basically. I mean, I think that that, from Beijing’s perspective, is kind of the best possible outcome, because then the U.S. will have appeared ineffectual on the world stage. It was very publicly not backed up by its allies after the Trump administration having berated them for months and months, and then kind of calling them in for help makes them look faintly ridiculous, or maybe more than faintly ridiculous.

And, you know, it’s just another kind of indication that the U.S. is a feckless power in the eyes of the world. I mean, I think that Beijing wouldn’t necessarily be unhappy with that outcome. But on the other hand, let’s say that Trump doubles down, the war intensifies, there’s more disruption in the Gulf. Iran itself potentially loses its central command and then kind of breaks into a series of Islamic Revolutionary Guard Corps command structures kind of around the country. The term that they use is the mosaic defense, which I think by its very nature is meant to be a destabilizing war of attrition.

That’s obviously a very bad outcome, right? And possibly there’s going to be more energy disruption that goes along with that. So, I think to what extent this ends up making China look good by comparison and to what extent that’s worth it to China depends on the future trajectory of this conflict. It’s not fully clear yet.

Andrew: That’s a great point, Joe. And I think it’s in a way a simple one, meaning we’re not going to know what the outcomes are until we know more of what the outcomes are. But it’s so important because I feel like the snap or the reaction, the snap reaction is to make an immediate judgment. We saw this in the wake of the Venezuela action by the U.S. People saying, “Oh, China has lost an ally in Latin America.” That was the immediate reaction in the China world, right? And my reaction was, well, we don’t know. We don’t know who’s going to end up ultimately in power in the long term.

It’s Delcy Rodriguez for now. And the Venezuelan regime is mostly still in place, which China still has ties to. So, maybe it’s just like they lost their guy, but they still have plenty of other guys. But then in Venezuela, but then what does the U.S. action in Venezuela say about the larger sort of U.S. strategy towards the Western Hemisphere? And if it’s part of sort of a much more aggressive ongoing stance by the U.S. in the Western Hemisphere, then yes, that could impact China’s presence in the Western Hemisphere. But everyone wants to make a snap judgment on winners, losers.

We’re doing the same for this Iran situation. But actually, we don’t know. It could go a bunch of different ways. So, I don’t know. Do you have further thoughts on that?

Joe: And if I can add one more point, I mean, you know, I got asked about regime change, and I think this is an unlikely outcome. But let’s say, for example, the U.S. ends up effectively conducting regime change and the next government in Tehran is pro-U.S. or at least neutral, then China, in theory, has a party it can do business with without the risk of U.S. sanctions. Again, I don’t think that’s a likely outcome. And it’s tempting to say, “Oh, well, they lost their allies in Tehran and now that’s definitely a bad thing.” But like, is it? And not to be too like, oh, Joe, it’s too soon to tell. But I think that because China is more a business-oriented partner than it is an ideological partner, any outcome that restores stability is probably going to be the preferred outcome.

Andrew: Yeah. Yeah. I think that’s a great point. Even, I want to throw this over to you now, kind of comment, A, on everything we’ve just talked about, if you have a different perspective on it. But also wanted to ask you, you brought up before the pod kind of what other countries in the Asia region in particular may be thinking about sort of this action. Obviously, China’s looking at it and trying to game out where it stands, strategically, if it stands to gain or lose. We’ve already said sort of time will tell. But what are other countries in the region? I will point out, you know, I’m in Europe and at my meetings this week, people have very notably said the Europeans are standing up to Trump on this one.

It took them a while, but they’re finally standing up. They are not backing him in this war. They’re not sending military support. And so that must be kind of raising eyebrows among both U.S. allies and non-allies in the Asia region. Talk to us about all of it.

Even: Yeah, absolutely. I actually want to jump off from what Joe was just discussing, which is that it’s very difficult to understand what China’s exposure is and what might be in the pros or cons column until we understand how the conflict is resolving. But at the same time, there is this chance that if we return to a stable Iran and under any kind of leadership, that that will always be good news for China, who will find a way to be a development partner, as China consistently has with all kinds of regimes all over the world. Just to sort of double down on that thesis, repeatedly, we’ve seen sort of circumstances where the U.S. has paid lip service toward a certain kind of development aid, but ultimately developing countries have kind of felt like what the U.S. has had to offer in terms of actually building infrastructure, actually helping get commerce and trade going, actually helping the financial system achieve sort of a base level of stability hasn’t kind of been sufficient to move the needle from like least developed to developing or emerging economies, right?

And over and over again, we’ve seen sort of a different story where developing countries have been interested in constructive partnerships with China, even in cases where China’s ideological or political positioning has been quite far from the national government of the third country because China shows up with a massive market, a whole bunch of infrastructure investments, the technical know-how and the companies to sort of bring financing and bring technical know-how to build out that infrastructure. And looking at what’s happening in Iran, and not just in Iran, but around the Gulf, if there’s been a whole bunch of destabilization and a whole bunch of critical infrastructure that’s been impacted, a whole bunch of industrial facilities that have been impacted, if and when there’s an opening for China to go in and acquire assets and invest in the reconstruction effort, I think that’s something we’re likely to see Beijing first in line to do that.

And you’re kind of thinking about the sort of long-term outcomes or directions, depending on how things go, there is a world in which even a totally regime-changed Iran that has been rebuilt in the U.S. image, or what-have-you, would still end up in an economic partnership with China. So, I think that’s absolutely right. And I guess pivoting a bit to how the conflict is being viewed across Asia, to the extent that it’s reasonable for anyone to speak about, the strikes in Iran and the war that’s resulted has a real like painful impact across all of Asia. There’s fuel rationing across Southeast Asia.

There was fuel rationing immediately day one in Myanmar. Now across both Thailand and Cambodia and also Vietnam is, depending on where you are in the country, you might have to line up to fill up your motorbike. You certainly would have to line up to fill up… you know, industrial facilities are kind of clamoring for making sure that they can keep their fuel supplies stable. That’s also true in places like Australia, where there were significant export dependencies on China for certain types of jet fuel, for example, on both the Middle East and a number of economies in Asia for fertilizers. And so, you have all of these national economies across Asia that are suddenly dealing with real supply disruptions with very significant price spikes and not a great deal of consultation or answers from the U.S. about what’s happening here.

What’s the timeline for getting this resolved? Forget like the lack of notice that it was even going to happen in the first place, right?

Andrew: Well, to be fair, it’s hard to answer the timeline question when you don’t know the answer to the timeline question.

Joe: Yeah, yeah, yeah, absolutely. Absolutely. But I mean, there certainly isn’t an answer for the timeline question, but there could at least be some kind of like firm commitment to a specific off-ramp or something like that. And in public, we hear Trump sort of talking about like, oh, we’ve won it, but only about another week or maybe a month or now it’s five weeks till the Xi meeting can happen. So, we know the timeline’s all over the place. We know that whatever is actually being discussed is probably no longer credible behind closed doors. And into that, you have China, which has these stockpiles of all kinds of strategic materials, right? And also has this massive industrial base where it can produce a lot of things. And in the short term, China has clamped down a bit on certain kinds of exports.

It’s restricting exports of a whole bunch of fuels. It’s restricting exports of a whole bunch of fertilizers in the interest of making sure supply and price can stay stable at home. But if this conflict continues for a while and once Beijing feels like it has a handle on the domestic supply and price situation, what I think is likely to eventuate is that that will actually as a strategic tool. China has an interest in its neighbors not having massive economic collapse as a result of fuel shortage or a complete sort of lack of supply. China also has an interest in global food prices not going to the moon because China imports a great deal of stable crops from everywhere in the world, right?

So, once conditions get back to sort of a relative level of stability, there will be an opportunity for countries to approach China basically and say, like, “Hey, can we get some fertilizers?” And we’ve already seen India do that. We’ve already seen the Philippines do that. That’s been made public, that government officials have approached Beijing to discuss keeping fertilizer supplies moving. I would expect that something similar will be happening across fuels in fairly short order. That might not be public, but I bet the conversation is already starting. So, then the question becomes, does this become yet another example that Beijing can point to and say, “Here’s Washington, you’re out there acting alone to decapitate a sovereign nation’s government without discussing with you, and it’s upturned your economic conditions this year. Meanwhile, here we are, we’re going to offer you fuel and fertilizers at state-controlled prices, we’re not even going to gouge that bad,” right?

They’ll gouge a little bit. They’ve got to do something because the SOEs are going to be bleeding to keep the prices low domestically, right? So, they’ll get a little back. They’ll get a little back. But there’s a strategic opportunity here for Beijing to look after its own interests, you know, in neighborly stability and food security and to burnish its reputation as a peacemaker and as a collaborator and as a force for good and a force for sort of multilateral managed markets, etc. So, it really plays into that narrative that we’ve seen across Chinese diplomacy and has the potential to become a really salient and concrete example of Beijing showing up in a crisis that Washington created, right?

Andrew: Yeah. I mean, I feel like that could be on a bumper sticker in Beijing. Beijing shows up to fix the crises that Washington created. That’s well put, I think. Joe, let me bring you in. any thoughts on kind of the wider regional perspective based on what Even said?? And then also want to bring in a very timely point about the fact that, you know, the Xi Jinping-Donald Trump meeting, which was supposed to take place at the end of this month, early next month, so end of March, early April in Beijing has now been postponed. Double barrel question. Talk to us about both of those issues.

Joe: Yeah, I mean, I generally agree with Even that Beijing will take any chance it can get to portray itself as kind of not just an anchor of stability for its own reasons, but kind of, you know, the term we always use is adult in the room, but just sort of the constructive partner. But one thing I will say, though, is that China’s response to the war in Iran has also kind of cemented a trend that we’ve seen a lot in recent years in terms of China’s response to international crises, which is that China kind of releases a statement, calls on all parties to exercise restraint, maybe dispatches an envoy to talk to various kind of interested parties, but then really doesn’t do much beyond that. I see some takes on X and elsewhere, which is already a mistake to be looking at takes there. But, you know, “Oh, well, China has failed to defend its allies in Venezuela and Iran.” I think that’s a complete kind of misreading of how China views these partnerships.

As I’ve said before, they’re primarily transactional, and they’re primarily strictly business. And so, on the one hand, there’s no meddling, right? China’s not going to say, “We don’t like your form of government, and therefore we demand that you change it to get development aid from us.” But equally, they’re not going to certainly not going to respond with military force to support these countries. And really, they’re not even going to do that much, I think, diplomatically to throw their weight around. So, I think that’s probably fairly well understood by most of China’s partners by now. But anyone who’s expecting China to do anything more than write a strongly worded letter to try to calm tensions, maybe you don’t need more than that from China. Maybe you know that going in if you’re a Chinese trade partner. But certainly, you’re not going to expect China to kind of go to bat for you in really concrete sort of ways.

Andrew: Yeah, actually, before you move on to the U.S.-China, I just want to follow up on one thing there because this is also something I wanted to throw in later, which I’m glad you brought it up. So, someone asked me yesterday, why isn’t or will China use its influence in Tehran to try to sort of tamp things down? And my thinking was like, I think that’s the wrong question because I actually don’t think Tehran’s driving the train here. I mean, in my kind of strategic view of the situation, like the Iranian leaders have to just kind of fight it out. As I understand it, like the smartest minds say, this is just a sort of a survival situation.

If Iranian leaders can sort of ride out the storm, then basically wait for the U.S. to get exhausted, then maybe the two can start a dialogue. But Tehran, like if they start to dial things, they have no interest in dialing things down because that’s like basically full capitulation. There’s really no strategic calculus that would say they would do that. And to the extent that China has influence, it could potentially maybe convince Iran to do some de-escalation, but that just isn’t on the table, right? So, I guess how much influence does China even have in this situation is my question.

I think people think Beijing can ride it, much like with Russia, Ukraine. I think Beijing has influence over Russia or influence on Russia, but I don’t think Vladimir Putin is going to stop the war at the request of Xi Jinping. So, I guess, what’s your thinking on that?

Joe: Yeah. So, I’ll caveat this by saying I am not an Iran expert nor a Middle East expert in general. So, kind of take everything I say with a grain of salt as far as that goes. But I think, yeah, first of all, it seems to me that for the Iranian regime, the worst has kind of already happened. I think that maybe if there had been space for China to do some back-channeling between the U.S. and Iran prior to the war breaking out, that would have been one thing. But I mean, the U.S. and Iran were already negotiating. So, that probably wasn’t even the issue. I’m not really even sure what the role would have been for China there.

And now that sort of the war is ongoing, yeah, I don’t really think that China is, A, going to be interested in intervening and kind of putting itself in the crosshairs if something goes wrong. And B, I’m really not sure, given that hostilities have already broken out, how much leverage it realistically has.

Andrew: Yeah. The framing we often see, and this is actually in my notes, so it’s on me for having it in there, but it’s often put out as the limits of strategic partnership with China, right? Like, oh, China’s not going to show up when push comes to shove. But I think you made the right point, which is I don’t think these countries expect China to. That’s not the type of relationship they have. It’s not a NATO-style relationship. It’s more of a business alignment sort of relationship.

Joe: I mean, that’s also why China refers to them as strategic partnerships and very much not alliances, because alliance implies a certain sense of military solidarity that China has not agreed to and will not agree to.

Andrew: Yeah, totally. All right. Talk to us about implications for U.S. China and the moving of the Xi Jinping-Donald Trump meeting.

Joe: Yeah. So, I think that it could go either way. And again, not to say again, it’s too soon to tell, but here’s the two ways that I’m thinking about it. On the one hand, we know that in the run-up to this meeting, which was originally scheduled for the very end of this month and beginning of April, that expectations were pretty low, partially because the U.S. side was not receptive to planning overtures. They really hadn’t done a lot of planning by all reports and including insider sources. And so, I think China was very disappointed with that because they had hoped this could be sort of a grand meeting that could really help to extend the life of the trade truce that was agreed to by the two leaders in October in South Korea. That was the goal, I think.

People ask, what was the primary outcome, the baseline outcome that China was looking for? And it would be codifying those understandings from the Busan meeting and putting U.S.-China trade relations and relations in general on a more even keel. And so, you won’t see the kinds of ups and downs, peaks and valleys that we saw all through 2025. And so, I think that hopes there were kind of diminishing from the Chinese side. So, maybe now, maybe the planning, the lack of planning was partially due to the administration being preoccupied with plans to go to war with Iran. I don’t know. That’s speculative.

So, an optimist might say that now, when it finally happens, assuming that there’s a little bit more clarity on the timeline for Iran, then maybe that will allow the Trump team to focus more on putting together a more kind of robust set of outcomes for the China visit. Maybe. The pessimist would say that the longer this trip is pushed off, first of all, the whiplash in planning, I think, undermines whatever trust that China still has in the U.S. in terms of that dialogue. But equally, it creates more space for something to go wrong, for a blowup to happen. We’ve got to remember that the last big blowup in U.S.-China relations happened because commerce imposed a 50% rule at the Bureau level, at a relatively lower level, which seems to kind of flew under the radar of senior U.S. officials until China responded very angrily to that.

So, that’s not to recapitulate the whole course of the trade war last year. But it’s very possible that sort of as U.S. government organs are kind of left to their own devices to devise trade policy, that there can be a misstep like this, especially given the Trump administration is trying to reimpose the tariffs that were struck down by the U.S. Supreme Court, right?

So, for those who maybe weren’t following that story, the U.S. Supreme Court ruled that Trump had overstepped his power by imposing the Liberation Day tariffs, so-called. And so now we’ve got the U.S. trade representative and other bodies trying to find other legal channels to reimpose those tariffs. And while their stated goal is continuity, getting tariff levels back to where they were before the Supreme Court made that ruling, you know, the question is, is China going to see it that way? If USTR is launching a bunch of new probes into China with this explicit goal of reimposing tariffs, will China view that as a violation of the spirit of the Busan Agreement, right?

Maybe China’s incentivized to not react too strongly, especially if the overall effective tariff rate is down or the same as it was before. But I mean, frankly, I think that if they were so inclined, that would be, I think, in their mind, a reason to retaliate against the U.S., whether or not that’s strategically smart from China’s point of view is maybe another question. But my point is, it’s kind of a long-winded way of saying the longer that we go without this dialogue, the more we’re creating space for something bad to happen.

Andrew: Yeah. I’ll just briefly say, and this is probably an unhelpful thing, but I’m just going to throw it out there, that if Xi Jinping is anything like me, I had, a couple of weeks ago, it was a Friday afternoon, I had a meeting on the books that was supposed to be a negotiation with a potential client. We were going to talk about price, all this stuff. But at the last minute, the client emailed and said, let’s kick this to Monday or Wednesday the next week. And I was relieved because it was a Friday afternoon and I didn’t want to go into a big negotiation. So, maybe Xi Jinping is just happy that the Zoom meeting was pushed back a month if he’s anything like me.

Joe: Yeah.

Andrew: He’s probably less conflict-averse than I am. So, I don’t know, Even, what are your thoughts to the back of that unhelpful observation.

Even: Yeah, you know, I tend to agree. I think that I can only imagine that for these senior leadership folks are always operating right on the edge of burnout and getting just a little bit of a break is always going to come as a relief. But I want to throw some more kind of outside scenarios onto the table off the back of Joe’s discussion of whether China could have a role somehow in persuading Iran to sort of chill and come back to the table. I’m actually pretty interested in how that could unfold, particularly watching how the U.S. and how Trump in particular have been reacting as the conflict intensifies, like seemingly beyond his plan or control.

So, we know some things about Trump, right? He’s a vocal guy. We know he likes the G2 concept. He likes power. We know he’s been asking for help. He’s been asking for China to send ships, help ensure trade can move smoothly through the Strait of Hormuz. That’s not exactly happening, but he’s certainly open to the idea that China would intercede in some way, which is pretty neat, right? We also know that the U.S. and Iran were negotiating right up until just hours before these strikes. And as a result in part of that, Iran has said that it won’t come back to the table without third-party guarantees, right? And in Iran’s, I believe, foreign minister referenced specifically China and/or Russia as countries with seats on the UN Security Council as a potential sort of third-party guarantor that only with the participation of a third party would Tehran think that it could get someplace, right? That there would be actual security guarantees.

There’s no longer trust that the U.S. will negotiate in good faith and will not just use it to stand up another strike. And we also know that China has some leverage, right? China buys most of Iran’s oil. They’re not likely to sort of cut that off. It’s totally outside China’s playbook and it’s really not in their interest either. But that kind of an economic relationship creates a certain sort of pull. And so, there are some reasons to believe that China could, with Trump’s blessing and potentially also with support from Tehran, insert itself into a negotiation process that did actually turn down the temperature in the conflict.

And if you ask me, that could be kind of interesting in the context of what’s happening between the U.S. and China. It would lay some groundwork for maybe what a G2 relationship would look like and why there would be some benefit to collaboration, sort of a strategic conversation there. But I also agree with Joe that as much as the delay of the Trump-Xi meeting and Trump’s China state visit, as much as it buys time maybe for some more progress around how the two countries might frame out some agreements, that it also buys time for a lot more risk of a blowup. And whether that’s new Section 301 investigations or weapon sales to Taiwan or whether it’s just additional weakness and uncertainty that’s emanating out of the conflict in Iran, I think everybody’s pretty jittery.

And the U.S. has spent tons of military resources. It’s moved key components of its missile defense system out of South Korea. It’s moving military equipment out of Asia to relocate over into the Gulf. And all of that means, in theory, if this conflict comes to an end, there will be a moment when Washington likely tries to move that stuff back, which is also, again, going to bring up a defense conversation with China that I think has a potential to raise some risks as it happens as well.

Andrew: Yeah, obviously, it’s hard to know the ultimate outcome benefits or costs for Beijing before we know the ultimate outcome of the action, right? What ends up happening in Iran itself. So, I mean, that’s plainly evident. And like I said, we’ve said it many times, but it’s worth repeating simply because so many people are just trying to put their stamp on, well, these are the implications. But what you just said, Even, I think certainly, as Joe pointed out, there’s a pros and cons list in Beijing. And under the pros list for certain is the fact that the U.S. is focused elsewhere other than China. And it is, I don’t know if distracted is the right word, but at least putting its attention elsewhere. And not only its attention, but its actual military hardware, moving it out of the Indo-Pacific and into the Middle East.

And that’s, I think, from Beijing’s perspective, kind of an unqualified positive in their thinking. I do want to wrap up, though, by stepping back a little bit further and just asking both of you, I’ll start with Joe, how all of this kind of plays into China’s broader geopolitical thinking of how sort of the geopolitical system is evolving. I think they’ve thought for many years that the system is sort of moving more in their favor. It’s moving more towards real politic, might meets right, kind of a transactional, or might makes right, kind of a transactional perspective where countries act in solely their hardcore national security interests as opposed to some larger ideological kind of framework or allied network.

And we talked on the pod a lot about how Xi Jinping talks about this whole notion of changes unseen in a century, which I talked with Jude Blanchette on the pod about before. But my kind of back-of-the-envelope way of explaining it is that it’s kind of the rise of the East and the demise of the West. There’s a lot more involved in that. But I guess two things. One is, Joe, do I have all that right? And is what’s happening in Iran feeding into that perspective in your view? And then a specific one, I noted that Wang Yi, the top Chinese diplomat, talked about, “the accelerated evolution” of changes unseen in a century when he was talking about the Iran situation. And I was just wondering, like that really struck a chord with me. This does seem like an accelerated evolution. So, maybe, again, a leading question, but is that a phrase you’ve seen before, the accelerated evolution? So, kind of a very specific question and a bigger one.

Joe: Yeah, I’m trying to remember. I feel like I may have seen it elsewhere at some point in time. But I mean, certainly, even if I hadn’t seen it before, even if it’s not something that the Chinese sort of diplomatic machine has said before, it’s certainly something they must believe.

Because it is. I mean, really, I think Trump, in a lot of ways, is, not to put too fine a point on it, speed running the end of American hegemony, right? He’s sort of not quite at the stage of dismantling NATO, but pretty close in terms of threats to Greenland. He’s revived the so-called Don Roe doctrine. And it’s interesting because now the Trump administration is effectively echoing this sort of the, not the inverse, but like, whereas China’s saying, “Oh, the world is becoming more anarchic and that’s a bad thing.”

I think a lot of the signals we’ve got coming out of Washington now is like, “Oh, well, the world is anarchic and we’re going to be sort of the dominant player in this anarchic world.” So, in some ways, the official U.S. line, or at least the official Trump administration line, is becoming slightly more aligned with the Chinese view of an anarchic world, right? And so, I think there’s two points. On the one hand, I think, again, to use the word vindicated, it does sort of vindicate China’s view of the world and the precautions that a country needs to take to ensure that it’s not on the menu, so to speak.

But equally, you can bleep this out if you want, but I think there must have been kind of an oh shit moment in China where you see the intensity and the number of US interventions that have happened in the past few months, right? So, first, Venezuela, then Iran, now threats to Cuba, and who knows, maybe after what’s going on in Iran, maybe Trump will have gotten his fill and there won’t be any more. So, I mean, it’s one thing to be able to say, ha-ha, we’re rhetorically correct in the U.S. is… You know, it was always just about hegemony and naked power politics.

That’s fine as far as it goes rhetorically. But if you’re any ideological or geopolitical rival of the U.S., part of you must be like, “Uh-oh, this isn’t good,” especially when a lot of the policies seem kind of reckless and ill-conceived. So, you can talk about, oh, well, it wouldn’t be in the U.S. national interest to begin a conflict with China, but arguably, a lot of this is not in the U.S. national interest if you think more than a step or two ahead. And so, I think that while China might be grateful for the rhetorical victory and to look like the good guy, they’re certainly probably also concerned that like, well, all right, does this mean that the U.S. is going to be more bold about intervening in areas that are much closer to our interests, right?

What about Southeast Asia? What about Taiwan? What about Korea, right? And so obviously right now there’s a focus on the Middle East. And if the U.S. gets bogged down there, I think that’s a strategic positive for China. But who knows who’s going to be next?

Andrew: Great points. Even. What are your thoughts on the broader implications from China’s point of view?

Even: Yeah. So first, I mean, completely agree with Joe, like from Beijing’s perspective, being right about this is cold comfort because you now have to live in the world where there is extreme instability and sort of rising geopolitical chaos and challenge. And nobody likes that, right? Nobody’s having a good time, or at least very, very few people are having a good time operating in this context. It’s a big shift from the international rules-based order of just a few short years ago. But when I think about how I will, as a China analyst, will look back on this moment, I think what I expect, one of the things I expect that’s fairly concrete and discreet that will come out of this conflict is in the wake of a crisis, Beijing always brings out as many lessons and takeaways as possible.

And I think that one of the takeaways from this is going to be that developing China’s “strategic hinterland” is absolutely the right course of action here. And that strategic hinterland is a line from the decisions that came out of the 3rd Plenum back in summer 2024. And it jumped out to us because it felt like a revival of Mao’s third front, right? The effort to shift a whole bunch of industries into, you know, out of China’s coastal regions and further westward and into the mountains and into areas where capitalist invaders would have a harder time getting at them, right?

And when we first saw that back in 2024, it was kind of like, okay, well, yeah, it makes sense that China wants to develop its central and western regions more. That’s been a long-term priority. But like this rings as a very security-oriented to us. And in the intervening time period, now looking at a crisis like this, a part of what we’re doing, sadly, is the old analyst trick of looking at a map. And what you can see is that all of those industries that are reliant on seaborne imports coming through the Persian Gulf to eastern China are going to hit some bumps, and are already hitting some bumps in these weeks and months, because their primary source of supply has been disrupted.

But those industries that are situated in central and western regions, along the extensive pipeline networks that are energy pipelines coming out of Central Asia and out of Russia, and sitting along rail lines that are linking to these areas, or in not so distant future that could be served by pipelines and rail networks coming through Pakistan, there are these signs of why it might make strategic sense in an increasingly geocomplex world for China to be able to have these overland routes to see to its energy and raw materials security.

So, I think when we look back at this moment, we’ll talk about it as sort of a watershed, an effort that was already ongoing to move industries further west for all kinds of reasons. More land, cheaper labor, common prosperity, and better sort of development prospects for less developed regions of China. We’ll also get this, we’ll say, why go? And that’s what supercharged them is because these industries were able to locate along energy pipelines and not need to rely on seaboard and cargoes and crude.

Andrew: Yeah, that’s an interesting observation. And that would be, yeah, not a big shift, but certainly an accelerant in terms of a certain strain of thinking in terms of Beijing’s economic security goals.

Even: Yeah, exactly.

Andrew: I think you guys both made really great points that I just wanted to sort of reemphasize one last time, which is, you know, just for some reason had never occurred to me that this is sort of a careful what you wish for kind of thing for Beijing, which is Beijing thinks the world is moving in its, I don’t know, in its favor, which is slightly more chaos. Like I said, more real politics might makes right world. But that is in an inherently more volatile world, an inherently more volatile geopolitical environment. And arguably, China has been, maybe not even arguably, China has been one of the biggest beneficiaries of the past several decades of U.S.-led global system with relative stability, emphasis on rule of law and kind of an agreed trading system.

Now people will say China gamed the system. But I don’t know. I just never really thought about it. China might end up in a world where it kind of gets exactly what it wants, but then realizes, oh, but we just lost all the stability that we also loved. Is there an irony there? I mean, there’s obviously, in my view, an irony there. Does either of you have thoughts on that? I mean, you guys both made the point that I just wanted to kind of foot stomp that and see if there are any more thoughts on that particular observation before we wrap up.

Joe: I think of kind of one specific episode, which has to do with the American withdrawal from Afghanistan in, what? Was it, 2023? Am I remembering that right?

Andrew: Somewhere in there. Yeah.

Joe: Yeah. Time is really just kind of blurring together for me. Anyway, whenever that happened, China had for years and years kind of railed against American interventionism and lack of respect for sovereignty and kind of crowed about the American retreat from Afghanistan. But then had to deal with the Taliban on its doorstep. And there’s no specific love for the Taliban either as kind of a fundamentalist regime and one that maybe doesn’t have the chops to tamp down on security threats on China’s border. And so, there was kind of an uncomfortable several months up to maybe a year or more of silence where China didn’t really know how to...

It got kind of what it wanted in the sense that it got to be right about the Americans having gone into Afghanistan and having messed it up. But then what came next was also not great from China’s perspective. So, I do think there is an element of that where just China being reaffirmed in its view of the world doesn’t mean that that’s a world it necessarily aspires to live in. I mean, obviously, the strictly business approach that China does take with its partners, it does keep it free from entanglement. But I do think it also reflects the fact that China’s not, you know, it would say it does not seek to be a hegemon, but also it doesn’t really have the chops to be a hegemon in the same way that the U.S. has been.

We can argue whether or not that’s morally right or wrong or good for the world or whatever, but there is a certain, yeah, I mean, this is a very kind of rambling, a long winded way to say I think you’re right. I think that China can criticize U.S. hegemony, but what comes next is at the very least uncertain and possibly even less in China’s interests.

Andrew: Yeah.

Even: Yeah, I think China might actually be leaning into that challenge in certain kinds of ways. And it’s easy to not pick up on this stuff because the way that discussion of sort of multilateral initiatives is framed sort of broadly, particularly in the U.S. media is that the U.N. system is horribly corrupt and ineffectual and no one cares about it do anything or what have you. But China has invested very significant resources in developing its relationships and its ability to operate within the UN framework. It’s becoming one of the largest funders of the UN framework. Meanwhile, Beijing is also investing in its own initiatives.

I mean, Joe, you can speak to this maybe better than I can, but the Global Governance Initiative, the Global Security Initiative, the Global Development Initiative, this slew of kind of frameworks for conversation that appear to kind of point toward what could be stood up as a replacement international rules-based order. So, it seems like there’s at least some kind of an interest in these frameworks and institutions and rules continuing to exist in some format.

The question is just like, without the U.S. sort of economic heft and military backing, who’s going to show up and who’s going to follow these rules, or who’s going to get involved in these initiatives? And I don’t know the answer to that.

Joe: Yeah, I think that’s exactly correct, Even, is that there’s these initiatives, they put out kind of a way of viewing the world. But I think there’s two problems, you know, if you want to think of them as an alternative to post-war economic and security architecture. The first is that they’re kind of predicated on the idea that everybody should do what they want and leave everybody else alone. Which say what you want about NATO and the post-war system, it was a lot more, I mean, robust in the sense that this is what we believe in. This is what we support. Everybody do what they want is not really a global governance strategy.

And I’m being maybe a little bit glib, but I think that’s sort of the foundation of Chinese foreign policy is that sovereignty to the max. And if you, again, yeah, just like you were saying, if you don’t have the institutional backing, either in economic or defense terms, there’s really only so far that those are a system as opposed to a series of kind of aspirational statements.

Andrew: Great observations. I think we could probably do a whole nother podcast on this. So, we won’t do that now. But maybe in the future, I will say, well, first I will say, Joe, I looked it up — the withdrawal from Afghanistan was 2021. So, for those...

Joe: I looked it up as well. Yeah, sorry.

Andrew: Well, no, yeah, I’m just putting that out there so that the listeners who were typing that email to you can stop because we’ve already acknowledged, trying to save your inbox.

Joe: Thank you.

Andrew: No, I’m kidding. We really appreciate our listeners engaging with us on all this content and pointing out when we make silly mistakes. But I just wanted to get that on the record. But I also wanted to say, I love these conversations. These debates around these big picture issues, again, for listeners a little bit behind the curtain, in Trivium, we don’t always get to debate these big picture issues, but Trivium always has these internal kind of dialogues and discussions and back and forth on how we think China views various things, how we think the world is evolving.

And that’s one thing for me, at least, that makes this job so much fun is to have those debates and discussions. And we try to bring a flavor of that to the podcast each week so that the listeners get the benefit as well. So, just want to say, Joe and Even, thanks so much for the interesting conversation today. As always, I really appreciate both of your time.

Joe: Yeah, it’s our pleasure. Thanks, Andrew.

Even: Yeah, it’s a pleasure to be here. Please have us back sometime when there’s not a war on.

Andrew: Well, that might be a while, but yeah, I’ll do my best. Really appreciate it. Yeah, and we’ll see you guys again soon. Thanks, everybody, for listening. Bye, everybody.

• We’ve been poring over China’s newly released Five-Year Plan (FYP) and Government Work Report (GWR), and parsing what they mean for clients.

Unsurprisingly, much of the conversation has focused on the usual macro questions – China’s GDP target, its consumption strategy, and the outlook for the property sector.

Then, of course, there’s tech: Between the FYP, GWR, and planning and budget documents from the macro planner (NDRC) and Ministry of Finance, Beijing has given us a lot to go on regarding China’s technology strategy for the next five years.

• Since we can’t capture all of it in this note (though we’re always happy to brief clients directly), we’ll give you a quick dose of the most talked-about areas of the tech agenda – AI, self-reliance, and semiconductors.

First up, AI – which is dead center of Beijing’s digital economy agenda.

• The plan calls for deepening the integration of AI across all sectors of the economy and society – from scientific research and industrial development to public services and social governance.

Accessible, high-quality data is a key piece of the puzzle: The plan calls for accelerating the construction of AI corpora and building high-quality datasets specifically for energy, transportation, manufacturing, education, healthcare, and finance.

The FYP also flags the development of a framework for the “reasonable use” of AI training data.

• That’s a big deal, because the Chinese state sits on an enormous reservoir of data that the private sector cannot easily access.

• Funneling that data toward AI training could give domestic model developers a meaningful edge over foreign competitors that lack equivalent access.

The FYP doubles down on the idea that AI-powered devices – such as smartphones, robots, wearables, and other next-gen consumer electronics – are vehicles for “intelligent consumption.”

• To encourage adoption, AI-powered devices will be included in this year’s consumer goods subsidy programs.

• Policymakers see a double win for consumption, not only by increasing purchases of the devices themselves but also by spurring purchases of AI-powered services through them.

Perhaps more interestingly, the FYP also signals that officials will focus on encouraging innovation “in multimodal intelligence, agentic AI, embodied intelligence, and swarm intelligence.”

• The fact that agentic AI was only popularized in the past few months, yet still made its way into the FYP, highlights China’s characteristic – and sometimes startling – policy-response speed.

For those wondering if China has an AGI agenda, the plan gave us an answer – sort of: It says China will “explore development paths for general artificial intelligence” – the first explicit reference to AGI in a major Chinese national policy document.

• But the cautious “exploring” hedging suggests Beijing is not yet convinced that current scaling approaches are the only route to more general AI capabilities.

• It may also reflect reluctance to anchor national strategy to a still-contested concept.

Beyond AI, the 15th FYP also doubles down on a familiar priority: Technological self-reliance.

• The plan dedicates a full section to self-reliance, calling on the state to take “extraordinary measures” to reduce reliance on foreign technologies – and demanding “decisive breakthroughs” in integrated circuits, industrial machine tools, high-end instruments, foundational software, advanced materials, and biomanufacturing.

Annoyingly, the FYP itself does not elaborate on what those “extraordinary measures” might look like.

• But an article published alongside the plan in Study Times – the official journal of the Central Party School – offers some clues.

According to the article:

• “When we say ‘take extraordinary measures’… it involves a comprehensive innovation in thinking patterns, organizational methods, and policy tools.”

• “The US’s ‘CHIPS and Science Act’ and ‘Project Genesis,’ as well as the EU’s ‘European Chips Act,’ all utilize unconventional means such as legislation, massive subsidies, and localization requirements to compete for future industrial dominance.”

Reading between the lines, the message seems clear: Chinese policymakers should feel empowered to move faster and use a broader policy toolkit than they have in the past.

To be clear, no Two Sessions document explicitly calls for a sweeping domestic substitution drive or massive new subsidy programs in these sectors.

• But the surrounding discourse suggests Beijing is increasingly willing to consider more aggressive policy tools.

On semiconductors in particular: Beijing made it clear that advancing in semiconductors isn’t just a short-term self-reliance play.

• The Government Work Report designated semiconductors a “pillar industry,” alongside aerospace, biotech, and the low-altitude economy.

• In Chinese policy lexicon, “pillar industries” are those with “large growth potential, high technology concentration, and broad market penetration.”

In other words, semiconductors are a load-bearing layer of the modern industrial system – underpinning everything from AI and robotics to electric vehicles and advanced manufacturing.

• The focus is on “catching up” to relieve foreign chip “chokeholds,” but also, in tandem, “leapfrogging” to gain capabilities in new semiconductors for which no commercial supply chain yet exists – to power the broader industrial economy.

This dual designation will open the floodgates to more state support – including subsidies, cheap credit, procurement opportunities, and favorable regulations.

• But frustratingly for Beijing, there is only so much the state can do to accelerate chip development cycles.

• Ultimately, policymakers will have to wait for domestic manufacturers like CXMT and SMIC to make progress.

Taken together, the message from this year’s planning documents is pretty clear: China’s leaders see the next five years as a decisive window for technological competition.

• AI will be embedded across the economy.

• Policymakers will roll out a new policy playbook to pursue tech self-reliance.

• And advancing in semiconductors, in particular, will remain a generational national project.

The direction of travel isn’t changing – but the urgency and scope of the policy response is ramping up.

• That means almost certainly more tech ambition, more policy experimentation – and more friction with the Western world.

Kendra Schaefer, Head of Tech Research, Trivium China

What you missed

Econ and finance

China’s exports are going gangbusters. Per data released by the customs bureau (GAC) on March 10:

• Exports during the first two months of the year surged 21.8% y/y – the fastest growth rate in over four years.

• Imports grew 19.8% – the first double-digit increase since April 2024.

On March 6, Xi Jinping discussed medical and health reform with members of China’s top political advisory body (CPPCC).

• Why it matters: Xi meets a group of CPPCC members each year on day three of the Two Sessions for a discussion centered around major policy priorities for the year.

• In 2023, he used the meeting to emphasize support for private enterprises.

• This year, health policy advisors and medical researchers presented on how to support innovative drug research, strengthen China’s weak grassroots primary care system, and expand the use of AI in healthcare.

Business environment

Policymakers are getting state-owned enterprises (SOEs) to focus on the industries that matter.

• On March 5, Zhang Yuzhuo, head of the regulator overseeing non-financial SOEs (SASAC), announced that: “Within a few years, we will concentrate central SOE assets and operations in around 20 strategic industry categories, with over 88% of their revenue generated from these sectors.”

• Central SOEs currently operate across 92 out of 97 industry categories defined by China’s statistical authorities.

• The announcement presages a significant pullback in the breadth of this activity.

Politics

Central Party School trainings for up-and-coming officials are increasingly focused on economic security.

• A local health official who recently attended such a training described it to SCMP: “The attendees learned about the external economic security challenges facing China and how the country could best respond through careful planning and preparing countermeasures.”

• A teacher at such courses said there has been a noticeable change in recent years: “‘The top leadership believe that all the future leaders, regardless of their background and their job function, must have a good sense of China’s greatest strength and Achilles’ heels,’ said the scholar.”

Agriculture and rural affairs

The 15th Five-Year Plan (FYP) raised China’s top-line grain production capacity target to 725 million metric tons by 2030, up from 650 million metric tons in in the last FYP.

• Food security has long been a top priority for China’s leaders – but the last FYP was the first time that Beijing set a binding grain production target.

• The 650 million metric ton target wasn’t ambitious – output had already exceeded that level for several years.

• The new target is more of a reach: 2025 staple crop output broke records, but still fell short of 715 million tons, leaving an over 10 million metric ton gap to close by 2030.

US-China

On Wednesday, the Office of the US Trade Representative announced it was launching a Section 301 investigation into excess capacity among 16 US trade partners, including China.

• We knew this was coming: US Trade Representative Jamieson Greer signaled that his team would look for channels to reimpose tariffs following the US Supreme Court’s ruling that US President Donald Trump’s Liberation Day tariffs were illegal.

• Greer said his office would be accepting public comment through April 15 with a public hearing scheduled for around May 5.

• He also said that an additional probe investigating forced labor practices in more than 60 countries is coming down the pike.

Prospects for US President Donald Trump’s visit to China are dimming by the day.

• On Monday, the SCMP scooped that Trump’s visit will be confined to Beijing with no plans to visit a second location in China.

• Sources say this is mostly down to Trump’s “very tight” schedule, but could also be a function of a widely reported lack of American advance planning.

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.

The group covers a broad range of issues including:

• Key macroeconomic, development, and economic security goals

• The plan for industrial upgrading – and key priorities in upstream, midstream, and downstream industries

• The nexus of technological and industrial ambition

• How climate goals and industrial policy interact

• China’s latest efforts to solve its compute problem

• How innovation factors into goals for the healthcare and agriculture sectors

Just like the FYP itself, this conversation is wide-ranging and hits on a bunch of key policy themes that matter – both now and in the years ahead.

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 we’ve got another special pod for the listeners today. We are still on sort of Two Sessions outcomes, looking at the broad takeaways, both from the Government Work Report that was released last week, as well as the 15th Five-Year Plan. As I mentioned last week, we did sort of a quick rundown of high-level takeaways from the group at Trivium, and we’re going to go a level deeper on some of the analysis this week.

So, we got a bunch of Trivium folks on. We’re going to break the pod up into two parts, kind of like last time, mainly due to time zone issues. To start off, I am joined once again by a couple of Trivium pod regulars, and that is our Head of Markets Research, Dinny McMahon, and our Head of Supply Chain and Critical Minerals Research, Cory Combs. Dinny, how’re you doing, man?

Dinny McMahon: Good, mate. All the better for seeing you.

Andrew: Yeah. Always love to hear that. Always love to hear that. Cory, how about yourself, man? We missed you on the pod last week. You’re performing your civic duties at jury duty.

Cory Combs: Yes. It was quite fun to get out of a full day and then be asked, “What’s happening with this thing that happened while you had no access to a phone?” So, it’s been a fun week of catching up.

Andrew: Yeah, yeah. Well, it was a good experience for you. Glad to have you back, though, ahead of your trip over to the East here soon. I think you’ll be in China here soon, and I’ll be in China here soon. So, exciting stuff is coming down for both of us. As I mentioned last week, we’re going to, like I said, do a little bit of a deeper dive on key takeaways from all the things from the Two Sessions. We set the stage last week. Unfortunately, we don’t have Kendra on this week to talk about some of the tech stuff, which is hugely important in the 15th Five-Year Plan, but we will have tech angles when I talk with the Asia team on the latter half of this pod.

We will talk about, again, sort of macro goals that China has set. And then we will also talk about sort of the main ways China is looking to achieve those, which is technological upgrading and industrial upgrading. So, we will talk about this stuff today, specifically from kind of Cory’s angle. Obviously, listeners will understand the tech, the critical minerals, industrial upgrade, and this stuff is all layered together in China’s view. So, we’re going to talk about it from sort of mostly Cory’s angle today, but we’ll be sort of examining all these policy dynamics on an ongoing basis.

And I think that the thing to understand is that technological upgrading tech self-sufficiency remains as the sort of the core component, but there are growth elements of that, there are industrial elements of that, there are critical minerals materials, all of those stuff, it all fits together, and so we’re going to get them to different aspects. But before we do, I bet Dinny and Cory may have forgotten about this, but we have to start with our customary vibe check. Cory, I hear you laughing, how’s your vibe, man?

Cory: I’m excited. We just wrapped several big projects right ahead of travel. I’ll be in Hawaii, then I’ll be in… for work, by the way, for anyone who’s just like, “Oh, he’s just disappeared to the beach.” Yeah.

Andrew: So he says, yeah.

Cory: Just for a few days. And then Japan, where I’ll actually be on vacation a little bit. So, a bit in Japan and then on to China for the next through April. So that’ll be very exciting to be back.

Andrew: Yeah, good stuff. We’re going to overlap in Beijing for a few days, which will be nice. You have to fly to the other side of the world just to see each other. Dinny, how about yourself, man? How’s your bad?

Dinny: Oh, mate. I mean, it’s the change of the seasons. And so, the kids have been bringing bugs home. And I thought I managed to avoid it, laid out everybody else in the house. But yeah, there’s no avoiding the plague. So yeah, it’s my turn. So, once we’re done here, I’m climbing back into bed. So, my vibe is stupefied.

Cory: It’s a good vibe.

Andrew: I love it. Well, yeah, stupefied. That’s why people tune into the pod.

Dinny: Oh, no, no. I’m bringing my best material today. I’m hopped up on Advil.

Andrew: Oh, I believe it. I believe it. It’s like I always talk about Jordan with the flu, that game, I forget which late ‘80s, early ‘90s, when Jordan had the flu and just played lights out. Sometimes when you’re sick, you have your best performance. So, we’ll be expecting that today, Dinny. My vibe’s also pretty pumped. I’m heading off on a three-week trip starting on Monday. I’m going to be in Spain and then China and then in Indonesia. So, doing the whirlwind tour as well. Excited for that and excited for this conversation. But of course, before we get fully into the content, we also have to do the quick housekeeping. First, of course, a 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, which we will be talking about today, as well as 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 receiving more Trivium content, check out our website, again, triviumchina.com, where we have a bunch of different subscription options for China policy intelligence.

We’ve got paid options, free options, updates that look at the technology space, the market space, general China watcher space for executives who need to stay on top of what’s happening policy-wise on the ground. So, check that out. You’ll definitely find the option you need in terms of staying on top of China policy developments. And finally, please do tell your friends and colleagues about Trivium and about the pod. Word of mouth recommendations really help us out both to grow the business and to grow the reach of the podcast. So, we appreciate any efforts on that front from our listeners.

All right, let’s get into it. Dinny, I’m going to start off with you again today. You talked a little bit last week about how both the government work report and to some extent the 15th Five-Year plan are a little bit listless when it comes to figuring out exactly what it seems that Chinese leaders want in terms of the overall pace of growth. What are we trying to achieve here? We talked about the growth target sort of being 4.5% to 5%, or above if we can. But I just wanted you to talk today, after having had a week to dig into this stuff a little bit further, beyond just the headline growth target. What are the big economic goals you feel like leadership is trying to achieve both this year and beyond? If they’re wayward on the growth target, is there some other sort of clear economic framework they’re trying to achieve?

Dinny: Yeah, so I mean, the starting point has to be this growth target, right? So, as I spoke about last time, the Government Works Report supposed to… it exists to give guidance to the whole economy about the direction that they expect the state, local governments, state-owned enterprises to kind of be moving lockstep towards. And this 4.5% to 5% range, but we’ll be striving for better. I mean, I saw a government advisor say that this is a target with a floor, but without a ceiling. I think it kind of sums it up really well. It’s like when you’ve got a floor, which is 4.5%, which is 10% lower than the target for the last three years, and then at the same time, the Premier is saying, but actually, we’d like it to be higher than the target for the last three years, what are you telling people?

I mean, what are you striving for? And I think ultimately, the only thing that really matters from that sentence, the target is 4.5% to 5%, but we’re striving for better, the only thing that matters is the back half. They are striving for better. They want something faster than 5%. But it kind of begs the question, how are they going to get it? Because prior to the Government Work Reports, all the provinces have their own get togethers, their own legislative meetings and their own work reports. And I think we had 22 provinces that put out their growth targets, and 14 had set targets, growth targets slower than last year. And then all the others, most of them were kind of setting the target the same as last year.

So, prior to the premier saying, “Hey, we want faster growth,” most of the provinces were expecting things to slow down this year. And there was good reason for that. And domestic demand has been a drag. Investment last year was a drag. And the thing is the Government Work Reports or the NDRC report or the Ministry of Finance budget report doesn’t really address any of these issues in a meaningful way. So, if you look at the reasons that demand is being a drag, I won’t get into the details because we talk about them a bunch, domestic demand is dragging because of property, the impact of property on people’s wealth, because local governments are in a fiscal hole, and so they’re pursuing austerity policies.

Because overcapacity is undermining job security, and to a lesser extent, we’re starting to see the impact of China’s souring demographic profile impacting certain income groups, which is sort of undermining their spending. So, you put all of that together, and you’ve got weak domestic demand. And there wasn’t really anything in the work reports that kind of take any of that on head-on. I mean, Beijing has passed, seems to be, when it comes to property, has seemed to sort of resign itself to the fact or to the position that there’s no point in artificially inflating this market. The best thing they can do is let it burn out, run its course, and then rebuild from there.

And up until the point that happens, then the burden on softening the blow and lessening the pain falls on local governments. Local government financial distress. Beijing said exactly the same thing — This is a local government problem. No bailouts are coming. We’ll transfer a bit of money, but you’ve got to work out this thing yourself. So, in terms of turning around the weak domestic demand issue, there really wasn’t anything going on in the Government Work Report. And that was the same thing with investment as well. Investment last year, property investment declined 17%, and it accelerated in the second half of the year. Fixed asset investment for the manufacturing sector rose, which is good, but only 0.6%. Now, that’s been a major driver of investment over the last few years. I mean, the sheer scale of money that’s gone into expanding China’s industrial capacity since COVID, even during COVID, I mean, that’s been a big driver of growth.

Last year, 0.6% growth. I mean, that was a big change. And then infrastructure investment declined 2.2%, which is the first time in a decade. Now, usually, Beijing treats infrastructure as the lever it pulls if growth in other parts of the economy is weak. So, usually what you’d expect is it sees weak domestic demand, and it sees weak property growth and it sees weak investment in manufacturing, and it goes, “Right, investment in infrastructure. We’re going to do more of that.” And that’s what we were expecting from the Government Work Report. I mean, it’s been making all these noises over the last few months that there’s a big gap in the stock of infrastructure between China and developed economies, and that gives them plenty more runway to invest in infrastructure.

And we thought it was a pretty clear signal that we were going to see more money going this year. And we might, but you can’t tell that from what was disclosed in the government work report. They said, “Oh yeah, more of the money that local governments raise from issuing special-purpose bonds will go into infrastructure.” That’s great, but how much more? They said that the policy banks will spend an additional 300 billion RMB on infrastructure. That’s great, but what the policy banks invest in, it’s just not normal credit. What the policy banks do is they provide seed capital.

They’ve been doing it for the last few years because the local governments haven’t been able to do it themselves. So, there’s a question here is, is that extra $300 billion just trying to fill a hole that the local governments can’t be relied on to fill anymore or does this represent a real expansion in infrastructure? So, this is kind of where we are.

The reports aren’t giving us any indication of greater support for domestic demand or investment. And so, how and why does Premier Li Qiang think growth of faster than 5% is reasonable? I think this comes straight down to exports. I think Beijing looks around and goes, “You know what? What we pulled off last year, we can pull off again this year.” And that’s partly because of the trade relationship with the U.S. has improved because they handled trade conflict with the U.S. so well last year with the way that they used rare earths. And I think they look around and they see demand globally for some really important Chinese exports is rising. I mean, global energy demand is expanding and China has been central to helping anyone sort of build out their energy generation capacity.

Demand for Chinese cars, for semiconductors, for ships, it’s all on the up and up. And so, you’re in a situation where demand is rising, and that will support investment as well. And I think Beijing looks around and goes, “You know what, we can achieve 5% plus growth mainly on the back of global demand for our products.” And I think that’s where we are.

Andrew: Yeah, well, and that view would be supported by the fact that data this week, just I think yesterday, showed that exports for the first two months of the year grew at over 20%, right?

Dinny: Yeah, a mic drop.

Andrew: And so, exports are absolutely humming at the beginning of the year. And, as Joe Peissel, our lead macro analyst wrote, it’s very diversified, right? That’s still in the face of an 11% drop in exports to the U.S. You’re getting gangbusters growth to Africa, to large parts of the Global South, also to the EU. You’re also getting primarily large growth in high-tech exports to high-value-added goods. And so that diversification builds, not only offsets the weakness from the U.S., builds resiliency to future trade shocks. Now, I think a lot of people looked at that data and said, “Well, this isn’t sustainable.” Well, guess what? We’ve been saying that Chinese export growth is not sustainable for, I don’t know, five years now.

And just every single year, it seems like, oh, they can’t pull that trick off again. And yet they clearly intend to. So, it’s a great observation. I think that makes sense that that’s the plan. Hey, if it ain’t broke, don’t fix it. Let’s stick with what’s working.

Dinny: I think the Germans think it’s broken.

Andrew: Well, yeah, fair enough. I mean, but the German government might, but you know what? The German people are still buying all this stuff, right? Like the Europeans are buying all this stuff. And yeah, the European Commission doesn’t like it. And the various state governments in Europe don’t like it. But it’s happening. And there’s really no steps they’ve taken concretely to stop it. We keep saying geopolitical tensions are going to rise, people are going to be pissed off, but the consumers are voting with their wallets, right? And I think they will continue to, and China will sort of stick with the path until some of these other governments decide to really do something about it, if they ever do.

And so, that’ll remain a question. It certainly remains a downside risk, right, if these countries start pushing back. But one thing I want you to touch on a little bit further, I don’t know if you have some of the numbers at hand in your head or on your screen, but we’ve written a little bit about the mixed picture on the fiscal side. You talked about the special purpose bonds, how the Government Work Report said we’re going to spend a bigger proportion on investment, but we don’t really know what that means. We wrote a little bit today about how there’s more money for infrastructure, but it’s not clear where it’s coming from. Some from the policy plate, some from others. We’ve written about, Even talked through the fiscal deficit that hasn’t officially increased.

And the point is, which you kind of already touched on, and this is all before we move to Cory, the fiscal stance doesn’t align with this ambition to hit 5 or surpass 5% growth. And I’ve talked with Gerard DiPippo, who’s been on the pod before, who’s over at RAND, who’s an econ analyst, global econ analyst, focuses on China a lot. I mean, the numbers just aren’t there on the fiscal side for a lot of this stuff. So, I don’t know. How do you think about all of that in terms of the official fiscal stance when you look at the hard numbers versus just Li Keqiang’s like, we want to surpass the growth target? How are those at odds? Or how should we be thinking about it?

Dinny: Yeah. So, in terms of borrowing, special purpose bonds, which are local government, special treasury bonds, which are central government, same as last year. In fact, I think there’s marginally less special treasury bonds than last year because they’re not doing a particular… Anyway, for the most part, we’re not seeing an increase in borrowing. The budget deficit is the same as last year, 4% of GDP. So, of course, if the GDP increases 5% or let’s say it’s 3.5% in nominal terms because of deflation, then you know the amount of translations are higher borrowing. I think perhaps the most interesting additional source of revenue growth will come from taxes because last year, tax revenue only increased 0.8% whereas this year they’re targeting 2.9%.

So, that’s meaningfully more than they brought in last year except, of course, they want the economy to be growing at 5%. So, an increase in 2.9% of tax revenue, that’s pretty poor. The other thing to watch will be, of course, dividends, remittances from SOEs. Really interesting detail that our colleague, Wenye, dug out in Shanghai is that last year, the tax revenue target for the full year was 3.7% growth. They got nowhere near that. They got 0.8% growth. And it seems as though they made up the difference with remittances from state-owned enterprises, specifically centrally-owned state-owned enterprises.

There was a really big increase in the amount of money that went into… it’s complicated in China, the government has four different budgets. And so, the budget that takes in dividends and then sort of disperses it mostly back to SOEs as capital injections and subsidies, that really grew quite aggressively. And then rather than all of that being distributed back to SOEs, because usually that’s what happens, not all, but a big chunk of it, a significantly larger portion was then moved over to the Ministry of Finance and used in ordinary budget expenditures. So that’s kind of how they squared the circle last year. Tax revenue growth was far slower than expected. And so, they leaned on the standard enterprises to do that, to sort of fill the hole.

So, the question is, do they repeat the trick this year, right? So, they’re certainly expecting higher tax revenue growth than they delivered last year. They are also talking about an elevated level of SOE remittances, lower than last year, but certainly higher than what’s typically been the case in the past. So, we’re getting more sources of revenue here and there, but ultimately, the key thing to compare it against is what compared to last year. And so, I think So there’s definitely going to be revenue growth, but it’s not the sort of increase in scale that you would expect if you’re trying to deliver 5% growth. So, yeah, I’m not quite sure how this is all supposed to come together. But this is usually not how they go about delivering on an ambitious growth target.

Andrew: Yeah, well, lots of questions up in the air. I mean, in the past few years, they have left themselves a little bit of room to add fiscal firepower later in the year. It just doesn’t seem like that’s sort of their approach this year. And I guess, you know, the interpretation is just, well, we’re going to sort of keep the settings where they are and hope exports continue to pick up the slack. So, we’ll see if that comes to fruition. I think it’s pretty clear from our side, the economic plan in the short term is a little bit muddied. And maybe that’s because they are spending more time planning for this longer term industrial upgrading, the big economic transition to a new growth model, as we’ve talked about many times.

And we’ll just see kind of how it all plays out. But while we’re watching that, I do want to bring in Cory to talk about sort of a level deeper in terms of some of the macroeconomic goals, we’ll call them industrial goals. And here I also have to say, Cory did ping me on Slack while Dinny was talking to point out that I called the premier of China Li Keqiang, which is obviously incorrect — with the Premier being Li Qiang. So, before all of our listeners email me about that, we clocked it. So, hopefully, you can accept this as a mea culpa. But with that…

Dinny: Sorry, quick quiz, Andrew. Who’s the president?

Andrew: Yeah, um Hu Jintao. So, yeah, this is the danger of podcasting on a regular basis is your capacity to misspeak comes to the fore very often. But anyway, Cory, at this point, I want to bring you in. Talk to me about the next level down. We’ve said from the beginning, like tech goals are very clear here. Industrial goals are also very prevalent. Talk to us about the main themes that you’re seeing on those fronts from the Five-Year Plan in particular, especially since we didn’t get to have you on this discussion last week. What are you seeing?

Cory: Absolutely. So, it’s great that we’ll also have colleagues from the tech practice in later, so I won’t steal too much of their thunder. But the headline is really just the degree of focus on technological self-reliance. There’s a huge focus. And then this cuts across both, I mean, obviously technological upgrading and more advanced capabilities in that space. But there’s a heavy, heavy overlap with industrial upgrading. So, just as a basic example, in order to achieve tech self-sufficiency on the chip side, you need a lot of industrial capabilities that China doesn’t currently have.

And also to advance manufacturing in certain ways, especially in some of what were called the future industries. You need a lot more technological capabilities to actually achieve those industrial goals. So, heavy, heavy overlap. And I’d say the biggest, just at a high level theme, takeaway, whatever you want to call it, there is a whole section in this FYP dedicated to self-reliance. And the language that I think is going to keep a lot of analysts up at night is the call for the state to take “extraordinary measures” to reduce reliance on foreign technologies. And what does that mean?

Kendra and others have noted, we saw this language back in October of last year in a draft, in a preview, and didn’t know what it meant and was like, okay, maybe the FYP will clarify. It kind of, sort of clarified, but didn’t really. So, still a lot of open questions there, but what we do know, the specific calls for, again “decisive breakthroughs,” which, again, just means getting better at the innovation side, really, in integrated circuits, industrial machine tools, high-end instruments, software, and then something I’m going to focus on in particular is advanced materials, as well as biomanufacturing.

So, if you’re thinking about what spaces to look at, if it’s in one of those areas, it’s probably a good focus for the next little while. When it comes to these extraordinary measures and what might China actually do that’s different, again, this is not to steal tech team’s thunder, but just a little bit of lay of the land of how the innovation side is supposed to work in this Five-Year Plan period. Previously, I mean, really since 2018, but especially since 2021, 2022, 2023, we’ve seen a centralization of financing and of government coordination of science and technology R&D.

That is partly to help overcome some of the issues of fragmentation, like four different leading small groups running things back in the day. And now there’s the Central Committee on Science and Technology. So, it’s a better coordination system. But now the question is, okay, how do you actually make that more streamlined financing useful? How do you actually drive basic science innovations, bring them through the ecosystem from moving from an idea to a technology, moving from a technology to something that’s industrially viable? And how do you move that to something commercially relevant?

So, how do you actually get through that chain? And a lot of talk, a lot of policy thinking about that, that the tech team will talk about, obviously, chips are a major focus, but again, while they’re the top focus, I would argue, they’re not the only. There’s a much broader focus in terms of industrial upgrading. So, that’s the piece where I’d like to come in in more detail. But long and short, China has all of these upstream capabilities. We’ve seen it in terms of, you know, the moniker of the world’s factory, all the way through to, oh, this is where China’s asymmetric leverage lies in terms of export controls pushing back on U.S. tech control policy, etc. It’s all been this kind of upstream story. And by upstream, for listeners less familiar with the vocabulary, all I mean is things you pull out of the ground, purify, and then make ready to be useful for industry.

Things like antimony, your purified tungsten precursors, APT, whatever. And then midstream is more the materials that actually get used, your substrates, your gallium arsenide, your gallium nitrate, things like that. And then downstream talking about the things that people actually buy, your batteries, your cars, whatever. So, a lot of the focus has been on the upstream, both in terms of what China has invested in for a long time, and depending on your verbiage, dominates in many sectors, in many industries, I should say. And China wants to do two things.

It wants to, and it’s going to sound ironic to people who are used to thinking of China’s degree of control over industries so that the rest of the world is vulnerable, China also has its own upstream vulnerabilities. And so, one of the focuses of the last five-year period was really to shore up those upstream vulnerabilities. So, for example, getting lithium from sources that are not Australia and Chile, U.S. Treaty Ally and Strategic Partner, things like that.

Now, a lot of that same focus is being carried down to the midstream and downstream. So, the things you need to make semiconductors, right? So, that’s more of a focus now, increasingly downstream. But the other side of the same coin is, again, China’s had all this upstream industrial capability, but not a lot of value is created up there. The value is created in the midstream and downstream, like turning your rare earths into magnets. That’s something China’s done very effectively. But then turning that into motors, right? That’s where the value creation really comes in. The upstream sectors are really small in terms of financial revenue and total asset value.

And especially when it comes to increasing margins, like China needs more than just batteries and solar panels. It needs to start commercializing other downstream industries and not just dominating the supply chain, but saying, “Hey, if we have A, B, C down through W, we need to start making X, Y, and Z where all the value is created at the end of that chain.” So that’s kind of what we’re seeing is why the focus on technological upgrading, it’s both to shore up vulnerabilities, but it’s also to capitalize on existing advantages but move forward to where more value can be created. So, that’s the high-level story.

Andrew: Yeah, that’s super helpful. Why don’t you talk to us a little bit more about those upstream, midstream, and downstream aspects of what you’re seeing happening, break it down along that industrial chain for us.

Cory: Yeah, so upstream, this is where China’s really focused on hardening. Obviously, it works very differently than the rest of the world is trying to harden against China’s leverage. But specifically, China’s focus is really about domestic governance in many ways. There has been a focus on diversifying its source of imports, trying to get domestically some of the things it imports even at higher cost, what you might call a security premium, paying more for something just because it’s domestic. So that’s been in focus. But now there’s an intensified focus in the NDRC report and also the 5-Year Plan itself, the outline, the key phrase being ‘full chain management,” quán liàn tiáo guǎn lǐ.

What does that actually mean? And I think there’s a few things that it means, but the first is where previously there’s been a huge focus on China better governing its rare earth extraction and processing sectors, the next question is, okay, how does that relate to the downstream? Where is all of the different rare products, where are they all going? So, building out the map of that, figuring out what companies what industries are using it where. If you’re really thinking about export controls as your main focus, one of the natural questions would be, will this help China be able to impose downstream export control or midstream and downstream export controls? Will it help them understand the global ecosystem to better pursue extraterritorial jurisdiction, if and when it pursues that?

Again, absolutely. It’s also, though, about understanding where the value is being created and shoring up its own cross-supply chain needs. So that includes, for example, we’ve seen a lot of efforts over the last few years for geological survey, understanding where resource is. Now there’s going to be an increased focus as well on treating production site reserves as part of strategic assets, not just, oh, there’s a mine with some untapped resource, but actually calculating that as part of your strategic assets pool. Production capacity reserves, product reserves themselves, mapping that out more fully than China has in past. All that’s a security thing for China to see... And I should back up a step.

The key issue is no one knows exactly how fast the downstream demand will grow. I mean, China is banking on all the industries that use these things growing. But no one knows how fast. The last thing China wants is a shortage that bottlenecks that downstream growth. They’re going to make sure it has plenty of material, right? So that’s part of what all this is, is just mapping the whole upstream. Midstream is quite different. There’s a lot going on in midstream, but I’m going to boil it down to the most interesting piece in my view, which is a focus on what’s called new materials.

There’s a lot of ways you could read that, but what China really means is the types of, we call them advanced materials, specifically materials that are not your go-to commodities. Things like high-quality super alloys, ultra-high purity metals, high-performance fibers and composites. This includes bio-based materials. When you talk about bio-manufacturing as an industry, this is kind of more of a future-facing industry. So, what’s bio-based materials? We talk about recovery of materials from unusual sources, which is part of security, but also a value-added, a question of value-add.

All of these things, the difference between commodities and these things is that these things are incredibly hard to make. The IP is very strictly controlled. Very few people can actually do it. And so, you have scarcity by nature of how difficult it is to make these things. So, that means, one, you can sell them at high value. Two, you can make things that are also themselves high value and you’re not dependent on someone else. So, for example, if you see a military, you’ll frequently talk about advanced polymers, and advanced aerospace-grade alloys and supermaterials, the reason for that is obviously strategic, but it’s very hard to make them.

You don’t see them talking about steel quite as much. Everyone can make steel, right? China wants to basically be much more self-reliant in these advanced materials, but also start dominating the innovation side. It’s not enough to just make the things that everyone’s making, but more cheaply. They want to make things that no one else can make for a lot of reasons, right? To do that, you also need a lot of control upstream or a lot of security, I should say, upstream, right? So that ties in directly.

Andrew: Can you define, maybe we should have done this earlier a little bit more clearly, what you mean by midstream just for listeners? You’re talking about, let me see if I can do it, which is upstream is basically raw materials, with midstream being some level of processing. So, these are intermediate industrial inputs, but not finished goods. Is that sort of the way to think about what you’re describing here?

Cory: Yeah. And I will note, some people will use, there’s some gray boundaries. Like I consider purified minerals to be upstream. If you’re in the mineral industry, that’s going to be slightly different, right? But generally speaking, exactly, your minerals, your metals, the first things you make where, if you’re going to make a semiconductor, for example, you’re probably not extracting gallium from your bauxite processing chain. Someone else is doing that. So that’s upstream of you. And then you might make gallium arsenide. You make some chip substrates. That’s going to be midstream for the chip industry.

And then you have your thin film deposition, you start inlaying circuits, right? And then you make an actual semiconductor, you make an actual chip. That’s going to be a good you can actually sell. So that’s further downstream. So, when I’m talking upstream versus downstream, just talking about direction of travel. And there are certainly some great boundaries there, depending on which industry folks you’re talking with. But yeah, that’s exactly right. And there are different stages of the value chain. That’s critical.

In a lot of cases, why does the West not do much mining? Because mining tends to be very low margin. And so, if you’re going to make money, it has to be very, very high volume, just how iron ore works, for example, or copper. But it’s not how rare earths work. There’s a surprisingly low volume actually being used at any given time. And so, it’s low margin and low volume, which is why it’s not particularly attractive. Magnets, more attractive, motors, much more attractive, and so on and so on, right? This is true of a lot of industries.

Andrew: Yeah, we were talking about this, you and I, with some other folks on a call yesterday, and I didn’t get a chance to say it, but I’ll say it now. I mean, low margin, low volume is the absolute worst business you ever want to be in, right? If someone is trying to pitch you to invest in a business and says, “Hey, our business is low margin, but it’s also low volume” – run. Do not invest in that business.

Cory: That’s why it depends on government support. I mean, who’s going to pay for it? Basically, someone who has, again, this isn’t necessarily standardized language, but what I would call a security premium, someone willing to pay for it just to not get it from a particular source, right? Someone’s got to pay that.

Andrew: Yeah, totally. Well, keep going. I cut you off earlier. Were you about to go to downstream or did you have another point you’re going to make on the midstream piece?

Cory: Yeah, downstream is split. And I think this comes more fully back into kind of Dinny’s territory where there’s really two big downstream stories. And I should also clarify. For any one of these, there’s like 15 things going on. So, if you’re like, “Hey, you didn’t talk about X,” email us. There’s a lot more going on we can talk about. But just kind of picking a few high-level pieces or the primary pieces here. So downstream, I’d pick out two particular pieces. There’s managing overcapacity. Again, old story. Everyone’s heard about overcapacity to death. Still an issue. Surprise. Frankly, in one reading, there is an intensification of language around Beijing’s intent to deal with overcapacity.

On the other hand, frankly, I just don’t see it being that meaningful at this stage. I will wait to see the sectoral plans and other kind of specific industry siloed plans, but I’m not convinced at this stage that much is going to change on overcapacity issues until corporates just do more M&A activity and consolidate themselves. The other side of the equation, apart from overcapacity issues is industrial upgrading. Industrial upgrading space is, obviously, there’s a lot going on there, But I want to pull out a couple of interesting pieces. I should actually back up on one piece. On the industrial upgrading, there’s a set of industries known as the emerging industries, others called future industries, right? And so, this is the idea of batteries. It’s a thriving industry now, but it’s very young. It hasn’t fully matured. There’s still a lot of innovation.

We haven’t quite reached a steady state. So, it’s still emerging. And that’s a critical source of value creation and growth for China, right? So, those are strategic industries that will continue to get support. There are future industries that are kind of in principle, we’re on the cusp of them, that they’re not really big industries by themselves yet. Low altitude economy is growing. Biotechnology is very nascent. That’s going to be kind of a pillar for the future. So, we have all this stuff. Specifically connecting that to the capacity story, there is a specific line in the NDRC report, which I think is very, very telling.

It specifically says the government will allow appropriate surplus capacity while also encouraging competition and innovation in emerging industries. What they’re saying, to be very clear...

Andrew: This is good. I’m glad you’re bringing this back up because Ether mentioned this on our last podcast. And he was like, this is a little bit of a strange wording. And they talk all the time about shutting down capacity. And they mentioned that as well, shutting down overcapacity. But also they said appropriate excess capacity. So, I’m glad you brought this back up.

Cory: Exactly. Like, taking down overcapacity in low-grade things, like some of the lower-grade steel. And for those who don’t know, some steel is more valuable than others. A lot of the stuff coming out is just not that valuable. And so, there’s an effort to kind of pull that down and drill that down. And part of the way China will do that is through ostensible climate goals, carbon. So, carbon is being used as an industrial policy tool. I’ll get to that in a minute, but not necessarily at the scale that I think is going to really matter in the next year or two, maybe later. But then this other side, exactly.

It’s like, well, if this is an emerging industry, one, they don’t want to bottleneck it. Two, I don’t want to put words in Beijing’s mouth because this part’s not explicit, but I would venture to guess that, you know, looking at some of the industries with the worst overcapacity, such as batteries and solar panels and elsewhere, and electrolyzers too, what we’ve seen is that, yeah, companies take a huge hit. But at the same time, they have put so much money into competing with each other after bringing the cost curve down. How do you compete after you’ve run out of space to compete on price? You start making new technologies. You start making new versions of a battery, a slightly different one.

Half of the stuff won’t work, but it’s a very, very rapid prototype kind of system. It’s focused on a rapid prototype and getting new things to market. Is that sustainable? In no way shape or form is that unsustainable, right? But at the same time there are some short-term benefits as much as it’s painful for most of us observing the outside and anyone investing in the space. So, I wonder to the extent to which it is just a calibrated gamble that’s apart from not bottlenecking the space, let them fight it out and the best technology wins. Now that is very risky, I want to be very clear, because what you’re doing is cannibalizing returns that could be invested in more long-term assets or R&D for short-term turnaround.

Andrew: Well, it’s risky if you’re an individual business or an individual innovator, right? It’s less risky if you’re a government because that’s the whole point is the government’s assuming the risk of multiple technological pathways to future innovation and saying, “Go for all of it at once. We’ll see which one wins out.” I mean, we talk about the Chinese government becoming more like a venture capital investor where you back several different… you know, you build a portfolio, I don’t know, 20 portfolio companies, you expect nine of them or 19 of them to fail. But as long as one of them hits the moon, you’ve accomplished your goal, right? Is that a way to think about this?

Cory: Yes, but with a caveat, I think that was kind of the model, especially when local governments were picking their local champions, investing in each thing. And that was a mess from a debt perspective, local governments putting, you know, failing debts. That’s been somewhat remedied. Somewhat — there’s still ongoing issues. I think one of the issues here is that the question is how much of the investment is productive. And a lot of, especially when you’re looking at more future industries like advanced materials, robotics, you need many years of R&D to actually culminate in something useful. And you don’t have many years to wait while surviving in this kind of pace of turnover. So, there’s a trade-off there. If you have a relatively mature thing like a battery, and everyone’s like, “Let’s make a slightly different lithium-ion chemistry,” it’s worked terrifically.

If you’re like, let’s build something new in five years that no one’s ever seen before, a little harder, I think. That’s my guess, at least at this point. So, I’ll wrap up because I don’t want people to get bored with my voice, but the last kind of pieces here are those who know, I got on this from the climate perspective, and seeing the industrial transformation around the energy transition, climate transition. And it’s very interesting how China is and is not using carbon as an industrial policy tool. And I mentioned one, the strictest form of overcapacity control in kind of policy terms is really around the emissions of steel factories. And it’s basically a way to selectively cut out old capacity. That’s what it’s really doing.

But what we don’t see is any kind of absolute emissions cap, right? That is off the table. And critically, the headline climate/carbon target relates to carbon dioxide intensity reductions. For context, the 14th Five-Year plan had a goal of, over the five-year period, reducing China’s overall CO2 intensity by 18%. Partly because of the COVID recovery effort, China got nowhere close. If you’re being generous, maybe 12% reduction as opposed to 18%. We did not expect China to try to make up the difference in the 15th Five-Year Plan, But we also did not expect it to actually reduce the headline target. It’s now 17% reduction.

Despite not meeting the last one, you would think that it had more space to catch up. It’s basically, at a headline, what it’s saying is, this is a relatively weak headline carbon target. And I think that indicates they don’t want to add extra unnecessary costs. They don’t want a bottleneck industry. They don’t want to basically increase pressure that isn’t explicitly productive toward driving new value creation. There’s an element of compliance with CBAM and the European carbon market, right? But that’s not what this is really about. So, in that side, it’s quite weak.

On the other side, we have at a much more micro level that frankly is… I mean, we don’t have a strong take yet on how impactful this will ultimately be, but really worth noting, there’s a lot of focus in the 15 Five-Year Plan documents and in other policies that we’ve seen come out just ahead of it. On zero-carbon industrial parks, what’s really interesting about this? They’re already green and low-carbon industrial parks. And the idea there is make stuff you’re already making, but make it greener. The idea is hopefully kind of gradually commercialize lower carbon, lower-carbon-intensity industrial processes, start using that as offtake for green energy.

If you’re not aware, China has a surplus of green energy in most places. So how do you use it? Well, let’s send it to industry. And a good way to do that is have industrial parks that are literally built to offtake the green power and to have all these lower carbon technologies piloted and commercialized at these parks, which get a lot of policy support. The difference between that and a zero-carbon industrial park is this. You always generate some carbon, even if you mitigate everything you can.

So how do you get to zero carbon is you use offsets or you do carbon capture. Carbon capture is fixed asset investment of a very specific emerging technology. Emerging in terms of we know how it works, but it hasn’t really been large scale adoption. We haven’t seen large-scale adoption yet. And the other is to start participating in offsets. That is currently a voluntary market in China, carbon offsets, that is really weak and not doing much. The idea is that you want to transfer financial resources from high-emissions, typically older industries, to greener industries that can sell certificates for carbon offsets. That’s what zero carbon industrial parks are partly intended to help drive is, again, trying to help transfer those resources through carbon offsets in other markets, while also helping commercialize this carbon capture.

Now, that said, how much actual investment is going to go into that? Huge question mark, right? I still have to go through more details on the budget. But this is one of those things that could be really, really interesting if, say, several cities in Guangdong were just like, “You know what, let’s go full bore. Let’s fully support these parks and let’s make the best zero…” They can go into that. Companies have a lot of potential to profit from this. But will it be relevant at a higher macro level? I have no idea at this stage, but it’s one of the new pieces that I think is going to be very interesting. NDRC is like, let’s use green energy to manufacture green products and extract value from it. The big question is, can they create value from it? And that’s an open question at this point.

Andrew: Yeah. Well, thanks for covering that. The climate aspect of this, I think from our standpoint, often gets lost. As you kind of said, the climate goals are a little bit less ambitious than we thought they might be. But this is all sort of, I think it’s important to remind listeners, this is all in the Chinese policy mind, right? This is all part of the same coin, right? Different industrial policy, climate policy is technological and innovation policy. I just want to ask you, I probably should ask this at the beginning, but I want to step back a little bit and then bring Dinny back in. How do you think of all of this? So, you talked about upstream, midstream, downstream, we talked about climate aspects. How does all of this sort of industrial policy efforts, which is what I’d kind of categorize this as, fit into the wider economic upgrading strategy and economic security strategy.

And then, Dinny talked about this on past pods, you know, previewing the 15th Five-Year plan, want to get your thoughts on, if anything, has evolved in terms of how you see all of these efforts in terms of China’s plans to fully refashion its economic growth model. So, Cory, let me start with you there. Big question.

Cory: Yeah, no, I love it. The first thing I’d say, actually, maybe a little comparison is helpful here. I think the big takeaway, whether we’re talking about the upstream, midstream, downstream, whether you’re talking about climate and tech and kind of traditional industry, the major theme is that Beijing is very clearly trying to gain as many synergies as possible. Everywhere we look in terms of these policies, it’s trying to attack multiple goals with every given policy’s focus. Two big ones are resilience, so making sure that industry has what it needs and making sure that China isn’t facing the vulnerabilities that its own export controls pose on others, but from a tech perspective as well. And the other is to create value, to create new value from what it does have. Increasingly, there’s a point in the same direction. China needs the same technologies to shore up and to be more resilient and to create new growth, right? When we look at climate, it’s like, how do we get higher-value goods and materials?

It’s how do we move out the value chain there? It’s also, how do we use green energy? Huge storage, just to tie in Iran, for most of the world, fossil fuels are not energy security if you import them. Part of what China did, but China has coal as a backstop of energy security, but a central reason that it built so many green power, renewable energy sources, is not just because of climate goals. It’s because it was a form of resilience, right? It also led to...

Andrew: Yeah, I talked about this with Ilaria on last week’s pod.

Cory: Oh, perfect.

Andrew: About how a lot of developing economies are trying to invest more in purchasing EVs so that they don’t have a balance of payments in crisis when the price of oil skyrockets. So, anyway.

Cory: Exactly. And so you have three things there. You have domestic resilience. You’re not just dependent on oil and gas to the same extent that a fuel-driven economy is. Obviously, there’s still disruptions in China, but much less than others. And just to confirm for viewers, or the listeners, China has a lot of coal, a lot of renewables, not much domestic oil and gas, a bit. They refine a lot, but they’re not really independent there. And you have, it’s cheaper. Once they built it out, it’s now cheaper, which supports their industry. And now they’re exporting. Some of their biggest exports are these green energy goods.

And so, that I think is the prototypical case of climate, industrial, tech policy overlapping to meet multiple goals at once. That’s the ideal case. And what we see in a lot of these focuses on new materials and everything, it’s obviously a little bit more convoluted because it hasn’t happened yet. But a lot of what we see China pursuing seems to be attempting to do the same thing. It’s not one policy or another. It’s all of these grouped to multiple ends at a time. And I want to contrast that, for example. And this is not supposed to be a full-blown thesis of U.S. governance or policy or anything like that, but just one specific point.

When we look at the U.S. diversification effort for critical minerals, you see resilience. A thing happened, it caused disruption, let’s fix the thing that caused disruption. There’s no new value creation. There’s no tying that to other goals. It’s just fix a particular problem, that’s it. China’s goals are a lot more integrated, and they’re drawing a lot more synergies trying to basically maximize the return on every dollar spent on industrial policy.

Andrew: Yeah, there’s a lot more there to dig into. Some of that reminds me of the conversation you and I were having yesterday with that other group, but we can dive into that certainly on future pods. We’ve touched on a lot of different aspects of your portfolio there, Cory. I really appreciate all of that. Dinny, I want to bring you back in quickly to tie this into this bigger idea of China trying to transition to this new economic growth model, then we’ll wrap up this part of the discussion. What are your thoughts on how this all fits in?

Dinny: Yeah, well, as Cory said, it’s all about value creation. I mean, this is Xi Jinping’s model of new quality productive forces. This is, we are going to drive the economy through productivity gains. And what that’s all about, I mean, because productivity is an awful idea to try and explain, but what it’s about is it’s straight up about wealth creation, right? Which is one of the reasons they’re not doing consumption-led growth, which is just wealth redistribution. They see that future economic prosperity needs to be grounded in wealth creation. The idea is that this will allow them to continue to raise living standards, even in the face of a declining population and a rapidly aging population, they’ll be able to raise living standards such that China continues to converge with the living standards of the EU in the US.

And that, ultimately, value creation, productivity gains among firms generates high profitability, which generates higher-paying jobs, which those two things combined expand the tax base. And that allows Beijing to then be able to provide all the services that it will need to provide for a rapidly aging population, specifically pensions and healthcare. And so, you and I did a huge report on this for CSIS last year. Put it together by just pulling the strands, reading what China was saying, all the different places. The first time ever, I actually saw an official publication make that argument explicitly.

Earlier this week, the People’s Daily had a column talking about economic development in various places. And specifically, it was talking about one city where productivity gains was translating to higher wages and higher profits and was allowing the city to be able to spend more on aged care services. It just drew the link. A leads to B leads to C. And that’s what they’re doing. I mean, ultimately, the focus on value creation has a whole lot of different goals. As Cory was saying, we’re talking about resilience, we’re talking about security. But when it comes down to the new economic model, this is what it’s about.

Value creation is so important because it’s wealth creation, which is going to be increasingly difficult to do as the population shrinks and ages.

Andrew: Well, and I’ve got to say quickly here that as we describe Beijing’s goals and approach here, we’re neither endorsing it nor saying they’re going to be successful, at least 100% successful. I mean, my view would be they will at least be partially successful. But I just always want to put that out there that the goal here primarily is to describe how Beijing views this stuff. We’ll see if they’re successful over time. We’re not here to prejudge. We’ll be kind of evaluating that as we go. But also, I think for Western governments, the idea is, well, this is what the avenue Beijing’s clearly going to take by their own policy documents.

And hopefully, that kind of gives the U.S. government and others a chance to compete against those efforts. Guys, this has been great. Perfect place to end it because we’ve kind of pulled back up and talked very high level. I’m going to talk with the rest of the team in Asia here momentarily around other aspects of all of this. So, we’ve got more to dig into for listeners, but I think for this part, we’ll wrap up here because this has been really helpful. Cory, thanks a bunch for the time and all the thoughts today.

Cory: Cheers. Thank you both.

Andrew: And Dinny, thank you as well, man.

Dinny: Pleasure as always.

Andrew: All right. Listeners, stick around for my conversation with the rest of the Trivium team on all this stuff. Lots of 15th Five-Year Plan analysis to go through, and I hope you enjoy the rest of the conversation coming up.

All right, I’m joined now by, once again, by two of our analysts from the other side of the world over in Asia to talk like we previewed last week a little bit more in depth about some of the key themes sectorally within the 15th Five-Year plan and to some extent the Government Work Report over all the documents from the Two Sessions just to kind of give a little bit more color now that we’ve had a bit to ruminate on what all this means for various targets, various policies going forward. So, I’m once again joined by Even Pay, who once again is a Director at Trivium, a jack of all trades, covering ag, biotech, trade, and a few other things. Even, welcome back to the pod. How are you doing?

Even Pay: Yeah, it’s good to be here. It’s been a long week since all of these documents dropped, but my eyesight is coming back again. So, really excited to read some more policy documents today.

Andrew: Awesome. Well, I appreciate you getting on early for this. Trouble with running a small company that’s also a global company is dealing with time zones. So, it’s good to see you in your morning, my evening. And also from Shanghai, Bao Linghao. Linghao is one of our, really our lead analysts on the semiconductor space, who’s going to get a little bit more into the chips and compute side of things. How are you doing, Linghao?

Bao Linghao: I’m in the same boat with Even, final gas on. So, we can do this pod.

Andrew: Yeah, yeah, I know, I know. I appreciate it. The listeners definitely will appreciate it, I’m sure. I definitely appreciate it. And it’s also a good chance to step back from the screen. I guess we’re still on screens, but at least you’re not typing. All right, I’m going to start with Linghao today. Linghao, last time you talked us through some of the just quick hits on what you’re thinking in terms of how the Two Sessions address the issue of compute, but you wanted to dive more deeply into both the chips piece and the compute piece. So, start us off. And now that you’ve had a few more days to go through these documents, what are the big things that you think policymakers are thinking about in your space?

Linghao: First of all, there is a sense of urgency on chip progress coming out of this document because you see a language like calling for extraordinary measures to achieve breakthroughs in sectors like semiconductors, right? And they don’t use these languages lightly. They typically say that when they feel like they’re hitting a wall or they feel like they need to accelerate progress. And the reason for that is pretty obvious because a huge part of the AI race is a compute infrastructure race. The key pieces to AI development is basically compute, talent, and data, and energy infrastructure. I think China got all the pieces already except for the compute infrastructure.

And there’s a joke that the U.S.-China AI race is really a competition between Chinese engineers in Silicon Valley versus Chinese engineers in China, right? So yeah, China got all these smart people, and they can definitely do that. But they need chips and compute infrastructure to do R&D, right? It’s basically your R&D budget. But the thing is, I don’t think there’s a lot that Beijing can do at this point to help chip founders like SMIC to make more GPUs, right? I feel like at this point, any incremental policy support is like pushing on a string. It’s just a massive engineering challenge among the ecosystem chip companies.

So, it takes time. But there are other things that the government can do to help. I mean, The logic goal is if we can’t increase the volume of the leading edge chips, we should at least make the best use of existing chips we have. So, the name of the game has become about increasing computer utilization. And one way to do that is to push ender process towards cloud platforms. I think this policy push actually deserves more attention than people are paying attention to because cloud is the best way to achieve the highest utilization possible. The difference is like owning a car versus taking an Uber, right?

A primary-owned car sits idle most of the time, where an Uber car is always on the road, right? And when you have a limited amount of cars, you should tell everybody to take the Uber, not to buy the cars themselves. And I’ll give you this interesting piece of data. China’s cloud adoption rate was only 28% in 2022, where it’s 60% in the United States. And the one main reason for this low adoption rate is that government agencies and SOEs, which, by the way, is a huge part of the enterprise market, I think SOE revenue is like 30% of the total. But anyway, they’re a sizable part of the market. But SOEs prefer on-prem over cloud.

On-prem basically means you buy the servers and you use them for yourself. It’s the same with the private-owned car analogy. And they do it out of data security and privacy concern. To make the matter worse, in recent years, local governments have been rushing to build GPU data centers. But the problem is that they have no idea what they’re doing. These GPUs are super complicated to set up and very easy to break. And on top of that, you also need to run very complicated software and then manage it in a way so the customers can use it. So, anyway, not everybody can be a cloud provider. It’s a non-trivial task.

That’s why the biggest cloud platforms are the biggest companies in the world. So, obviously these local government-built data centers have huge poor utilization problems. And we saw, you know, last year NDRC tried to step in and try to stop that. Shanjie Zheng spoke out and they need to stop these poorly built data centers. Because if you think about it, like this kind of behavior, it actually exacerbates China’s compute crunch by taking those companies off the market, right? Which could have been run by, you know, AliCloud, ByteDance, or Tencent more efficiently.

I think the push towards public cloud is a recognition that there’s a huge amount of waste of computing resources in China, and they really need to fix it.

Andrew: Okay, this is super helpful. I’ve got a few questions for you. Some relate specifically to the Five-Year Plan, some that don’t. So the first one, I’m going to start with the devil barrel question. One is, I mean, weren’t just a few years ago policymakers saying the exact opposite about public cloud? Weren’t they trying to push users away from public cloud? So, tell us sort of, to the extent you remember it off the top of your head, the history and about face there, if that’s indeed correct. And then the second part would be, I know we’ve been having a debate internally about whether this push for use of public cloud will be good or bad in the end for Chinese hyperscalers. So, walk me through sort of the debate as you currently see it and kind of where you currently land on that debate. Does that make sense as a two-parter?

Linghao: Yeah. First of all, you’re right. A few years ago, when we were still in the whole tech crackdown campaign, we saw incidents where local governments or state-related agencies that were previously AliCloud and Tencent Cloud, tried to move themselves off that because there was this big tension between big tech and the government. I guess they were worried, if we’re about to launch a probe into these companies, would they actually know? Things like that.

So, there is some tension there. But I would say like that tension has largely, like the tension has ease a little bit. But the thing is like fundamentally these local governments and SOEs, they just don’t have the habit to being on cloud. To be clear, like they do a lot of cloud deals with the telecoms. But these are private clouds. It’s more like on-prem deployment. They’re not sharing the resources with other tenants. So the utilization is still very low.

Andrew: Right. So, it’s not that they need to move from private cloud use to public cloud use. It’s just that they’re not on the cloud at all.

Linghao: Right. So, to your second question, whether it’s good or not for the Chinese hyperscalers, the honest answer is I don’t know yet. I mean...

Andrew: Well, walk us through the two sides of the argument. Why might it be good? Why might it be bad?

Linghao: So because of the two ways to do it. One way to do it is actually let hyperscalers like AliCloud and ByteDance to do their job, right? To help them to succeed, to push the SOEs towards their cloud platforms. I think that’s going to be huge for increasing computerizations. And they can go even further than that. They can even let these hyperscalers to buy the residual assets from these poorly run data centers. They can get those chips back on and increase the utilization. If you want to go full force, that’s going to be huge for Ali and Tencent ByteDance, right? And the government can even, you know, help them get a cheap credit and to do the expansion.

But another way to do it is, you know, you could also let a telecom giant to do it, although they don’t have as much of expertise as the private sector hyperscalers, right? And I think if they do that, like it could be a mix though. And fundamentally, like the tension and the debate we’re having right now is that Beijing views compute as a public utility. And usually in these public utility sectors, SOEs dominate. So, we’re not totally sure if policymakers are willing to or comfortable with letting the public sector SOE hyperscalers to dominate the infrastructure of the future. If you’re thinking AI is going to be a huge part of the future economy and this infrastructure is basically supporting the future economy, then that is a gigantic and influential powerful sector.

And how the government is going to deal with the control, how they’re going to balance between growth and control is going to be a very interesting problem to watch going forward.

Andrew: Yeah, and I would say if we look at past examples of areas where the government has seen some sort of service or infrastructure become what is a utility in their mind, it doesn’t usually bode well for the participation of the private sector, generally, not even to speak of the profitability of the sector, right? Because the government tends to use the companies that are providing those public goods as kind of buffers, right? When things go badly, they can sort of increase costs through lower margins. Like this is why the government wants SOEs in those places, to sort of serve as a ballast in bad times in particular, and as a reliable partner, both in good and bad times. Is that kind of how you view it?

Linghao: Yeah, I think that’s a really good point. Also, there’s a parallel policy push to increase compute utilization, where it sort of makes this exact point where the state won’t control that layer. The policy push is actually called the National Unified Computing Power Network. That actually predates ChatGPT. And the key idea is that they want to build a platform on top of the cloud platforms. Basically, a master orchestration layer for all the available compute in China. I mean, if they can do that, I mean, the idea is similar, right?

It’s aimed at increasing compute utilization. Then when you can aggregate these supply together. But the problem is it essentially this intermediates the hyperscalers. Because if the master layer is customer saving, then what the hyperscalers are really doing, right? They’re basically setting up them centers that are not like customer-facing. So, that’s a major conflict of interest, right? And the hyperscalers aren’t really interested in being commoditized, although they publicly support it.

But if you look at one of the closed-door policy discussions that they had that got reported a couple weeks ago before the Two Session about the computing network, the think tanks were there, the telecoms were there, but the hyperscalers were not there. So, that’s very telling.

Andrew: Conspicuous. Yeah, yeah, for sure. And on that National Computing Network, correct me if I’m wrong, but my understanding is sort of, it’s almost like they’re trying to create a version of a smart power grid that would enable certain areas of the country effectively can use compute from other areas of the country that might have idle compute at certain times, just like you would store power on the grid from one area and try to ship that power to another area so that you kind of have various parts of the country absorbing or using power, or in this case, compute, when they need more and when other places need less. It’s not a very eloquent description, but is that generally kind of how you think about it?

Linghao: Yeah, I think that’s exactly right. I feel like they are treating compute as power, as one of those commodity market. But just as I mentioned before, building a cloud platform is non-trivial. It takes a lot of work. It takes a lot of expertise. That’s why we have the poor utilization problem in the first place because there are only a few players on how to build it. Maybe this market can be commoditized, but at this point, the companies building that should be rewarded for what they’re doing. It’s not a commodity market yet, and takes expertise to build that.

So I’m not sure if viewing, although they view it as a public utility, it does have some certain characteristic to that. But I’m not sure if that sort of fits with the reality of the market.

Andrew: So, I mean, last question, just based on your reading of the Five-Year Plan, I mean, do you think this is sort of one of the core elements of what they’re going to pursue in this space. Do you think they’ll be successful in, you know, alleviating their compute issues? Or at least maybe a better way to put it is making what compute resources they have more efficient or maximizing those?

Linghao: Yeah, I’m a little bit skeptical to how much success they can have in the short term. Because we just mentioned all these conflict of interest and the problems, like how they think about these issues. I mean, the best way to achieve the outcome is to let the hyperscalers to succeed, and help them to succeed. But I’m not sure that we’re fully there yet. So, yeah, we’ll see. Like, I think, you know, we’re going to see some signals maybe this year, in the next few months, to see how they’re going to go about doing it. Yeah, but I think, you know, they have recognized this is a huge problem.

And it is a huge problem because if you look at what has happened in the last few months, Chinese models has improved significantly, and also especially on the coding side. And coding is the first vertical that has proven to be a huge market. When we saw Zhipu launch their GLM-5 model, which is a really coding model, they just couldn’t service their customers. They launched the model and on the same day, they raised the prices. That’s unheard of in China. They raised the prices because they couldn’t like deal with the influx of the demand.

And we said like compute was an R&D budget, but you also need to compute to service customers. And when we are heading into this agentic AI era, which is going to consume several order of magnitude of compute, when we have these scaler apps in the future, China is going to have a problem to service them. That’s going to be a huge problem.

Andrew: Yeah, totally. Well, it’s obviously a core issue that they’re facing, as we said last week and you mentioned again today. It’s good that they’re zeroing in on this issue as what seems to be kind of one of the top priorities in getting the chips and compute space right. And so, we will be following that in the days ahead, in the weeks ahead, in the five years ahead, and beyond. So, Linghao, appreciate you kind of diving deeper into that for us. We’re going to bring in Even Pay to talk about a few different areas of her portfolio, as well as we continue to go through different aspects of the Two Sessions and Five-Year Plan. So, Even, why don’t you come in as we pivot?

I know we’re going to continue to talk about tech in some respects because tech and innovation was so central to the entire five-year plan, 15th Five-Year Plan, but we’d love your thoughts on kind of how you read the document generally and how the tech and innovation piece specifically kind of showed up in the areas that you follow most closely. So, what’s the top of mind for you, a week out from having had a chance to go through this document?

Even: Yeah, yeah. Good strong pivot. Last time I was on here, I chatted a bit in, I think, a really granular fashion about how exciting the bioeconomy contents were, which was a pretty kind of granular look at the plan. And a part of that was, you know, it’s 140 pages of Chinese text and it just takes us all a little while to get through. But over the last week, we’ve all spent a lot more time with the plan, and I have a much better sense at this point of where that fits into kind of the broader vision, right? And like you say, this is in no way a surprise, but innovation, you know, the innovation agenda, the new quality productive forces agenda is a major, major priority across every aspect of the plan.

It’s probably the most prominent priority in terms of where there’s ambition, where there’s adjustments to top-line targets, and where to the best of our ability to tell there’s likely to be funding commitments, policy movement over the next five years, right? And that shows up really clearly in the first place in those top line targets at the beginning of the plan, which are going to, in many respects, going to be the core areas of focus for local policymakers in terms of when they’re like, “Oh, what do we have to get done? What are we going to be graded on? You know, what is our report card going to say at the end of five years?” those top-line targets are really central, right?

So, there was an increase of over 80% in terms of the expectations for creation of high-value patents. In the 14th five-year plan, it was 12 high-value patents per 10,000 people. Now, it’s been raised up to 22 high-value targets per 10,000 people. So, really, this is an anticipatory target, but Beijing is looking for a lot more impactful innovation that’s translated into actual patent registration over the next five years. And policymakers also want to see R&D spending continue to grow at over 7% annually through 2030. So, there’s been a pretty healthy R&D spend growth for many years now, and that’s continuing to get juiced at a level that’s like nearly double GDP growth.

So, that’s a pretty firm commitment. But beyond those sort of the top line target items, when you dig into the plan, what you see is that basically every kind of problem or challenge or target or sector or domain is approached from an innovation frame, right? It’s all about, what are we going to do in this place to ensure we’re making breakthroughs, to ensure those breakthroughs are aimed at the industry’s actual challenges, and to make sure that if breakthroughs are being made, they’re actually going to get adopted, disseminated, and scaled into the real economy?

So, for example, in agriculture, the top line target for staple crop production was raised pretty significantly. The last five-year plan asked for 650 million metric tons in annual staple crop production by 2025. China had already exceeded that level in 2018, long before the plan came out. So, that was not an ambitious target. This time, the new plan targets 725 million metric tons. And China is still a little over 10 million tons short of that target. So, unlike the last time, it’s actually a reach target. And what the plan describes, all of the efforts for getting there, 100% of the efforts for getting there are squarely focused on adoption of ag tech to improve productivity.

That’s rolling out more farm drones and robots. It’s adopting using biotech and traditional breeding, whatever it takes to adopt new higher-yielding crop varieties. And it’s stuff like adopting AI models for forecasting and controlling pest and disease outbreaks or severe weather so that farms can prepare for anything that might impact yield. So, instead of expanding how much farmland is being used to grow crops, they’re just saying, “Look, we’ve got this amount of farmland or maybe even a little less by the end of the next five-year plan. You need to make it count.”

Andrew: Yeah. It does seem like, obviously, productivity and new protective forces at the heart of all this. And so, it’ll be interesting to see the ways in which they apply those to some of the more specific areas that are kind of beyond just industry, the big macroeconomic kind of macroeconomic drivers, right? Talk to me a little bit more about what you’re seeing in terms of… Dinny kind of flagged this, Dinny McMahon, our Head of Markets Research.

On the whole, it kind of combines a few things. One, the idea of consumer spending, but also healthcare and elderly care, and sort of welfare, social security spending, the whole idea of investing in people. It’s less on the innovation front, but I know you’re also following this closely. It’s just something that we haven’t touched on yet in all of our analysis of the five-year plans. I just wanted to get kind of your take on what’s going on in that sector, at a high level, but then also, like I said, for listeners, you do a lot of our work in the health space. So, what are some of the specifics that you see there as well?

Even: Yeah, absolutely. So, this is, again, another area where you’ve got some pretty significant challenges where there’s been this incredible drag on consumption that’s come from households’ willingness and ability to spend. And at the same time, you also have sort of mounting kind of demographic challenges where you have the birth rate falling pretty precipitously. You have that dragging down total population. You’ve got this growing population of older folks. And because almost everybody who is currently a working age adult came from a one child family or really, you know, the exceptions to the rule might have had a single sibling, you’ve got a situation where a household, two adult working age, parents who might be thinking about having kids, they also have to care for both of their parents.

There is not another sibling. So, each household has four grandparents and whatever number of kids they’re thinking of having. So, you can imagine the sort of financial sort of pressure as these households main asset, right? Their homes have lost value, right? And I think finally, there’s been a pretty clear recognition in Beijing that it’s dragging on the entire system. It’s contributing to the falling fertility rate. It’s contributing to sort of really lagging consumption because adult working age folks are just freaked out about the burden of care that is falling to them. Right?

So, at the top line level in the plan, we see a few relevant targets. There’s a brand-new target that’s calling for a six percentage point increase in child care enrollment rates. The 14th Five-Year Plan talked about opening up child care slots, new places that kids could fill into, but they didn’t actually talk about whether those kids showed up in childcare, which obviously makes it maybe less of a useful target. You’re not getting all the way to the goal that policymakers want. So, by 2030, Beijing wants there to be a lot more kids under three that are actually able to access childcare.

We’ve also been following closely a lot more subsidies, both at the local and central level, for childcare and early education, kindergarten enrollment. There’s another new target aimed to raising the proportion of nursing care beds that is relative to like a standard residential care bed in an elderly care facility. So, by 2030, Beijing wants 73% of those beds to be places in elderly care to be set up for people who need like really serious medical attention. And those are the folks where it is really important for them to be in a facility because if they’re having to live in a home, the adult children caring for them are probably going to be really struggling with what is a medical care provision on a day-to-day basis.

And then there’s also a target to raise, to expand the health care workforce. Previously, this target was applied only to practicing physicians. But in the new plan, they’ve expanded that target to include both practicing physicians and a separate target for registered nurses. And that’s really a recognition that the entire healthcare system is understaffed and making healthcare, especially primary care, work better is going to require more people. And at the same time, across at least two of these three areas, we also see some commitments to innovation in the space. And for better or for worse, there is a big call for increasing the uptake of AI in hospitals.

So a lot of that is, at least in the initial, I guess the initial push is going to be focused on trying to reduce administrative burdens. So, to free more staff up for more patient care while the AI deals with paperwork. We’ll see how that goes. We’ll see how much progress can be made over the next five years. But there’s also, in sort of the text of the plan, some other innovation relevant contents about how we’re improving care is a push to do more preventative care. And that includes efforts like rolling out more vaccines within the National Immunization Program, which makes those vaccines both free to patients and also highly, highly recommended prescribed by doctors.

So, what something like that does is, first of all, it creates a market for people who are developing vaccines. Of course, anybody in the medical innovation space will be interested and excited to see that. But more importantly, from a public health perspective, it reduces how sick people are getting. If you’re vaccinating against diseases, for example, most of China’s national immunization program has focused on kids, like most places in the world, you know, getting everybody’s basic vaccines done when they’re little.

But increasingly, there are a few things we know we should be giving adult booster shots for. Or, for example, the annual flu vaccine that many people get, older folks really should be getting in order to reduce how sick they get if there’s a bad flu year. And just including those as something that’s recommended can have a really huge impact on how hospitals are functioning, you know, through the winter. So, they’re looking to do that, and that’s really kind of a landmark development in this five-year plan.

Andrew: Well, we covered, man, a lot of ground. I mean, you didn’t even yet get to hear my conversation with Cory and Dinny, but obviously we touched on sort of tech aspects, but then within Cory’s portfolio, it was kind of the critical mineral stuff. Dinny, of course, talked about, a little deeper on the macro stuff and around infrastructure in particular. Linghao just covered the chips and compute piece. You’ve gone through some of the biotech, the healthcare. What else do we need to touch on here in the 15th Five-Year Plan that you think listeners need to know about that really jumped out in terms of some of the things that have not yet been on our list of discussion items?

Even: Yeah, it’s been hard getting through this past week in the context that elsewhere in the world, there’s this massive global crisis unfolding in Iran and the Strait of Hormuz. And I think one thing that we haven’t talked about is sort of Beijing’s stance on or positioning with regard to energy security and raw material security more broadly. And stepping away from the Five-Year Plan for a moment, one of the things that we’ve been watching really since 2018, when there were institutional reforms that brought a few various sort of dispersed responsibility around state strategic reserve management under one regulator.

And then again in 2023, when we saw sort of a post-pandemic, like a big uptick in spending on reserve management and a few more expectations for SOEs. We’ve been tracking a pretty big increase in the annual spend on strategic reserves, that over the past six months, we’ve seen a pretty substantial amount of sort of increased stockpiling specifically in the crude and petroleum product space in response. And when we look at this year’s Ministry of Finance proposed budget report, it flags yet another over 8% increase in spending on state reserves. And we’ve talked a great deal about innovation and how sort of forward-looking and ambitious and maybe exciting some of this direction is.

But I think it’s really important to remember that, ultimately, a lot of what Beijing is doing is preparedness, effectively, for gray rhino types of crises. You know, the innovation agenda is about breaking chokeholds and gearing up, not just to break chokeholds that exist today, but to anticipate and prevent any future chokeholds from emerging, right?

Andrew: And I don’t want you to lose your train of thought, but just for listeners who may not be familiar, the gray rhinos in the Chinese lexicon is there, that idea is kind of the opposite or analogous to black swans, which are sudden events that are catastrophic that you can’t see coming. The gray rhinos, as I understand it, are sort of obvious, slow-moving risks that you might not pay attention to because they’re so obvious and they’re slow-moving. But unlike black swans, have a very high potential to impact you negatively. And so, there’s things that you absolutely need to be in front of. So, for any listeners who aren’t aware, I just wanted to drop that in. Yeah.

Even: Exactly. Exactly. And I would contend that this is one of the strengths of China’s system, for better or for worse, is that with the current crop, at very least, of top leadership, there is a great deal, maybe even too much focus on preparing for managing future kind of gray rhino scenarios, whether that is another pandemic or another trade war or another choke point technology or a new conflict in the Middle East. We’ve seen years and years, we’ve seen how the system after the first Trump administration, spent years doing scenario planning for another trade war.

And at this time, as tensions mounted, that they had a really robust toolkit that has been very effectively used to get to the negotiating table much faster and, you know, much more kind of aggressively than the last round. And as sort of the conflict in Iran is starting to look more complicated and more intractable and like it may drag, initially, there’s been a lot of focus on, oh, China might be knocked off balance by this because they’re import dependent for oil and gas. And a lot of that is coming out of Iran and elsewhere in the Gulf. And then practically this incredible sort of long-term effort toward preparedness in the reserve system, you know, has kind of come into play.

And now it’s like, well, China’s going to experience kind of relative stability, actually. As long as this is a relatively short-term issue, those reserves and other aspects of how price management works is going to be able to tamp down on that risk. So, we haven’t dug too deep into how that is showing up in the 15th Five-Year Plan, but it’s certainly showing up in the annual documents, showing up in the annual budget line coming out of the Two Sessions that China isn’t going to start backing off reserves. It feels very vindicated, actually, in most ways, about building up those massive reserves and that is useful. It enables China to avoid global markets at times of crisis and shock. So, that’s not going anywhere.

Andrew: Yeah, that’s a good point. I was reading today about how Southeast Asian countries like Thailand are rationing fuel and maybe even going to a four-day work week because they’re absolutely going to be hammered by this. I feel like we could go on and on about the Iran situation and how it will affect China and Asia more broadly. But I will say, I think that’s a great place to kind of wrap it up because for two reasons. One is you hit on something that’s always like an evergreen theme in Chinese policy making, which is the idea of economic resiliency and economic security and kind of pushing forward on these long-term agendas year by year, five-year plan by five-year plan, but on an ongoing basis to ensure against these gray rhino risks that they see always kind of lurking.

But also, it’s an important point on China’s response to Iran, which we will get into much more in the coming weeks. We’ll next week have a segment on that. We’d love to have you join us, Even. We’ll definitely have Joe Mazur as well. So, that’s something we can and definitely will explore further on upcoming pods. So, I think great place to leave it. We’ve covered a ton of ground. Thank you, Even, so much for joining me early in your morning today.

Even: Awesome. Always a pleasure.

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

• There’s a ton of policy to wade through in both the annual government work reports and the FYP – from macro, to tech, to healthcare, to bio-manufacturing, and more.

On this week’s Trivium China Podcast, host Andrew Polk is joined by six different Trivium policy specialists to walk through their initial takes on what matters most in latest releases.

Then on the second half of the pod, Andrew is joined by Ilaria Mazzocco, Deputy Director and Senior Fellow with the Trustee Chair in Chinese Business and Economics at the Center for Strategic and International Studies, to discuss all the latest in the China electric vehicle (EV) space. Ilaria gets into:

• Successes and failures of Chinese industrial policy in supporting EVs

• The role of the private sector in realizing China’s EV dominance

• How countries throughout the world are responding to the Chinese EV juggernaut — from the US, to the EU, to a range of emerging markets – as they seek to protect or grow their own advanced manufacturing capabilities

• How it all plays into various national conceptions of economic security — in both China and the West

The conversation is a must listen for anyone who cares about the future of global electrification, as well as issues of economic security.

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 special treat. We’ve got a little bit of a different approach today because I’m sure, as listeners will know, this week is the Two Sessions, which is the big annual government meetings that happen every year to sort of set economic policy, tech policy, governance policy for the year ahead.

And this Two Sessions is especially important because they also have released at least the initial version, I think they’ll release a final version later, but a draft version of the 15th five-year plan. So, a lot of information to go through. There’s the annual government work report. There’s a work report from the NDRC, China’s Macro Planner. There’s the Ministry of Finance work report. There will be, I believe, some personnel moves later in the two sessions.

There is the 15-5-year plan. So, lots to go through. We are going to get into all of it with several different Trivium analysts. So, we’re going to just do a quick around the horn — we couldn’t get everybody on one call — so I’m going to start right now with two of our U.S.-based folks, and that is our Head of Markets Research, Dinny McMahon, and our Head of Tech Policy Research, Kendra Schaefer. Kendra, how are you doing?

Kendra Schaefer: I’m good. I’m good. We’re drinking out of a firehose over here.

Andrew: Yeah. Dinny, how are you, man?

Dinny McMahon: Oh, great, mate. Pleasure to see you, as always.

Andrew: We’re going to go quickly around the horn with Dinny and Kendra and talk about kind of their high-level takeaways. And then we’ll have a few other Trivium folks on from Asia, all on this pod, to talk about high-level takeaways. Then next week, we’ll do a deeper dive with the whole Trivium gang once we’ve had some real time, a week to really chew through this stuff. But that’s what we’re going to do in the first part of the pod today, and actually for the full pod next week.

But then on the second half of today’s pod, listeners should stick around because I have an interview with Ilaria Mazzocco, who is the deputy director and senior fellow with the Trustee Chair in Chinese Business and Economics at the Center for Strategic and International Studies. She is an expert in industrial policy, Chinese climate policy, and the intersection between the energy transition and economic and national security. So, it’s a perfect time to have a conversation with her.

We talk about EVs and industrial policy around EVs and the global geopolitical dynamics behind that, all very much driven by the context that’s happening this week in the policy space. So, stick around for that conversation on the second half of the pod. We’ve got a lot going on, but all of it’s well worth your while. Of course, before we get into any of the content, we have to quickly go through our customary vibe check. Dinny, how’s your vibe today?

Dinny: Mate, I am basking in the superiority of the socialist governance system. Seriously, five of your plans, mate. Imagine that. They have a plan, Five years of the future. God, this stuff’s gold.

Andrew: All right. You heard it here first, folks. Dinny’s a convert. All right. Kendra, how about yourself? How’s your vibe?

Kendra: Oh, I’m totally drowning. I mean, it’s a fun kind of drowning. You know, usually when I was based in Beijing, we would get up super early. We’d all crack a soda and watch, or get a coffee and kind of dive right into the two sessions, grab all the papers when they came out. But for me now, it happens in the middle of the night. So, I was up super late last night kind of reading all the documents as they came out. It’s fun. It’s fun. Everybody sort of hangs out together and trades notes, but it’s also a lot. And then we wake up today and sort of churn stuff out. So, that’s the story.

Andrew: Yeah. It’s a different vibe. I was at a dinner last night with a bunch of China folks in D.C., China analysts, China policy people, and then everyone started getting pings on their phone that the government work report was out. And one of them was like, “Oh, the government work report’s coming out tonight?” They had totally forgot. And it basically, it dawned on them that they had another two, three hours of work to do before they went to bed. So, I felt sorry. That’s great. Well, we’ve got Dinny converted to socialism. That’s great. And Kendra, you know, overwhelmed with all these policies…

Kendra: Oh, ages ago.

Andrew: Yeah, you’ve been converted for a long time. So, that’s awesome. It’s going to be a good pod. We’re going to go through a lot of different stuff. Quickly, though, I also have to do the housekeeping. 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, which we’re going to go through a lot today, and then also includes policy towards China out of D.C., London, Brussels, and other Western capitals. So, if you need any help on any of that stuff, 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 receiving more Trivium content, check out our website, triviumchina.com, again, where we have a bunch of different China policy intel options, both free and paid. We’ve got market stuff, tech stuff, on down the list, check it out. You’ll find what you need on the site. And finally, tell your friends and colleagues about Trivium, both about the business the podcast. Helps us grow our listenership so we can get the word out both about what we’re doing here in general and kind of educate the public about China policy and also to make money to drive customers to our business.

So, we appreciate those word of mouth recommendations. All right, let’s get into it, guys. Dinny, we’re going to start with you. One of the big things, of course, that everybody looks for from the Two Sessions each year is the GDP growth target and what that says about what they’re trying to do in terms of the pace of economic growth and also kind of the structure of economic growth. So, tell us your high level takeaway when it comes to GDP growth target, what you saw and what you think.

Dinny: Yeah, well, when is a target not a target? It’s when you get this, right? So, usually, we get a target, it’s an actual number, a specific number. Sometimes they give themselves a bit of wriggle room. So, for the last three years, it’s been around 5%. This year, we got a range. So, the range, the target range is 4.5% to 5%. But there’s a rider on that, which is they’re going to strive for better in practice. So, the range is 4.5% to 5%, but they actually want more than 5%. So, the range isn’t a range, it’s something outside of the range is what they’re going for. So, before the actual work report came out and we were kind of trying to work out what the target might be and what it would mean, we thought, look, if they go with 4.5%, that’s a pretty clear signal that it’s like, okay, it could mean two things.

One is that the days of 5% growth are over. That’s just a natural progression. Things are slowing down. Or it could also be a signal that, look, there’s a bunch of structural adjustment that needs to go on in the economy. Specifically, we’re dealing with a lot of industrial overcapacity. If they set it at 4.5%, that potentially signals that the authorities are willing to tolerate slower growth so that local government officials have a bit of wriggle room to deal with the problems.

It effectively opens up some space for reform, right? We thought, look, if they set it at 5% again this year, then it’s kind of saying the opposite, right? We kind of think it’s going to be a tough year for growth anyway. I mean, investments, look, was slowing the second half of last year. It’s unlikely to come roaring back anytime soon. Domestic demand, household consumption is still really weak. The economy is still very much relying on exports. So, it’s going to be a tough year for growth. So, setting it at 5% kind of says, okay, we’re still prioritizing growth. So, reform isn’t a priority. This is about holding the line.

What we did not expect is this kind of like, well, we’d like 4.5% or 5% and fire if you can manage it. It’s like one of those all bets are off things, go for broke. So, this target is not a target because the 4.5% says deal with your problems and we’ll tolerate slower growth. The 5% says we want things to be going exactly how they’ve been going for the last three years. And doing a little bit better than 5% is saying all bets are off, let’s just go. So, this is a target without a target. And if anything, it doesn’t tell us what Beijing wants. It tells us that there is clearly a complex shmuzzle at the top level of Chinese government at the moment. They cannot decide what they want.

They can’t decide what’s feasible. They can’t agree on what they actually want. They don’t know what they can deliver. And instead, we got this. And I think the government work report is great because when they give that target, the entire system knows what they’re aiming for. Local governments, state firms, they know what is expected of them over the next 12 months. This time around, no one has any idea.

Andrew: Yeah, and that’s a terrible way to make policy because when you have multiple targets or multiple goals, when everything’s a priority, nothing’s a priority, right?

That’s true for any government, being a person who’s spent my career doing China policy analysis. It’s definitely true of China. When policy is the best is when there’s one to two very clear high-priority goals, and everyone kind of sticks behind it. I was thinking, actually, as you were saying that, It drives me crazy — this is like when somebody gives you a deadline but says we’d love it earlier if you can. So, like I’m a very deadline-driven person. So, if somebody’s like, I need this on March 6th, you get it on March 6th.

Do not tell me it’s March 6th and then say, “Yeah, but I’ll take it before.” And then email me on March 4th and say, is it ready? No, it comes on the deadline. So, if the target’s four and a half, I’ll hit four and a half. If the target’s five, I’ll hit five. But if you say four or five, or better if you can… it’s a total nightmare. All right. Well, where they might have been slightly more clear, Kendra, is in your domain.

Dinny: It feels like you’re taking this very personally, Andrew.

Andrew: I know, I know.

Kendra: Well, I’m an overachiever, and if somebody told me, Andrew’s going to do right up to the line, only what is expected of him, and then he’s taking a frigging break, I’m like, if you tell me over 5%, I’m going to be like, “That’s it, we’re getting 6%. Go, go, go.”

Andrew: Yeah. Well, the point is the Chinese government is made up of individuals like everyone, and everyone’s going to interpret that differently, hence you’re going to have a total mess.

Kendra: Exactly. Exactly. Exactly.

Andrew: What about in your space, Kendra, SciTech? Were they a little clearer on the high-level stuff? What was your big takeaway from yesterday?

Kendra: Yeah, I’d say a lot clearer. If I had one high-level takeaway, it’s that the 15 Five-Year Plan and the government work report kind of taken together, all the signals kind of taken together, indicate the state is focusing on increasing the agility, speed, the flexibility, and the intensity of the policy tools and funding mechanisms they’re already using to pursue self-reliance and frontier technology. And you can see that in one respect, or one metric that kind of makes that very clear is the increased science and technology budget that sort of came out in the Ministry of finance’s national budget.

SciTech spending at a national level is going up 10% again, went up 10% last year. But the most notable part wasn’t actually that number. It’s the Ministry of Finance explicitly said, “Hey, look, other areas are going to be squeezed, but this is a priority, and we don’t touch SciTech funding. So that will continue to be fully funded. We’ll continue to pump money and support into that area. But it’s not just the budgets going up that are indicative of this sort of intensifying push towards self-reliance. I think we’ve kind of talked about it before. The last three to four years, China’s sort of been engaged in this big effort to rethink the role the state plays in innovation, right? The idea was to sort of reform the way the state thinks about supporting companies and researchers as they develop emerging technologies.

And the state has known for the past four or five years where its major problems blockages were in terms of supporting innovation. They generally knew how we wanted to solve them. And we’ve watched for the last three or four years as policy levers to do that have been tweaked and explored, right? The state knew that it wanted to sort of centralize control over strategic decision-making at the national level a little bit more.

It knew it wanted to get more financing to tech companies. It knew it wanted to commercialize technology faster. It’s something we’ve talked about on this pod quite a lot. But now it’s clear that the policy buckets that it has to do that, that the policy levers it has to do that, it likes them. It likes them a lot. And now it’s doubling down on what it has been playing with for the last couple of years. Very specifically, we see that in the fact that the 15th Five-Year plan calls on China to, or says that China will establish a critical and emerging technologies’ list at the national level, which is probably going to be similar to the U.S. critical and emerging technologies list, right?

We’ve got one. Technologies on that list in the U.S. are those which are considered significant to national security, significant to long-term competitiveness. And having that list helps coordinate the government support for those technologies at the state level, at the national level, all the different agencies, etc. So, that’ll be a key coordination tool that the sort of national government can use to, you know, get everybody on the same page and drive everyone in the same direction. But we also see a really interesting raft of policy measures in terms of speeding up drastically and rapidly speeding up commercialization pipelines. So, how breakthroughs get from a laboratory to a company and then out onto the market as soon as possible.

And that is going to be things like encouraging officials to be extremely flexible in the way that they design regulatory approval processes for things like autonomous vehicles, like full self-driving, which is coming out probably in the next couple of years, and flying cars in the low altitude economy and artificial intelligence-based services, stuff like that. It means asking universities and research institutions to license patents to small and medium tech firms on a buy now, pay later basis. In other words, try to make a technology with this. We know that you, as a small tech company, don’t have a ton of money.

So, try to make a technology with this. And if you succeed, you can pay for this patent from the proceeds, like those kind of arrangements, which lower the friction to SMEs taking something out of the lab and making a thing with it and trying to get that thing to market. So, there’s just a bunch of interesting levers like that that have been in, you know, that we’ve seen emerge over the last few years that now are being doubled down on.

Andrew: Very interesting. All right. We want to keep it tight. We will do a longer exposition of all this stuff next week. So, I’m going to give you each a chance to do sort of a quick hit on a little bit of a deeper issue in your space. So Dinny, we’ll start with you. You look at kind of what the Government Work Report, what the Two Sessions said about investment this year and about sort of consumption/investing in people. What’d you see?

Dinny: Okay, let’s talk about investment in infrastructure because I mean, I’m clearly waiting in a very different pool from Kendra. I’m just getting bog and mud in the infrastructure side of things because look, you know, we’ve talked about it, we’ve written about it. Second half of last year, investment was incredibly weak. Property investment dropped off a cliff, which is amazing to think that was even possible, five years into a property crisis. Anti-involution measures took a hit on manufacturing investments and infrastructure investment was contracted for the year.

And so, it’s really important that infrastructure investment sort of takes a step up this year. And certainly, all the signals we’ve been getting from the government is, yes, we’re going to commit more to investment in infrastructure. It’s just from the amount of money that’s been put aside, it’s difficult to actually tell whether they have committed to it or they haven’t. Because you look at the way the numbers line up and they’re not materially different from last year. I mean, they put a marginally bit more out of the ordinary budget. The general budget is going towards infrastructure. 800 billion RMBs worth of special treasury bonds. Same amount of last year is going towards major national strategic projects, which is a big chunk of that is infrastructure. Some of it’s for industrial upgrading and whatnot. And then 4.4 trillion RMB’s worth of special purpose bonds, which is what local governments use for infrastructure.

And that’s the same as last year’s quota, although by the end of last year in October, the local government’s got an extra 200 billion. So, the numbers, as they line up, they’re more or less the same. And so, in the past, we’ve kind of looked at the special treasury bonds, we’ve looked at the special purpose bonds, and they have been the signal. You look at those numbers and it’s like the government is committing more debt to investment. And that is the stimulatory impulse that the government is directing into the economy. And this year, we just can’t tell. And partly that is because what special purpose bonds in particular are used for, they’ve changed radically over the last decade. I mean, once upon a time, they were for infrastructure, right?

This was the thing that was supposed to wean local governments off their local government financing vehicles. Beijing was like we can’t have local governments funding infrastructure off balance sheet. We’ve got to give them the resources to do it themselves. And so, that’s what these things were for. Over the last few years, though, special-purpose bonds have kind of become a bit of a Swiss army knife. Every time Beijing has a problem that it wants to fix at a local level, which requires additional funding, they go, “We’ll use special-purpose bonds.”

And so these days they are used for paying down arrears that are owed by local governments to contractors and suppliers. They’re used to recapitalize local banks. They are used to buy back land from developers that don’t actually need it anymore. They’re used for other property support measures. So, there’s kind of been this sort of ever-expanding list of things that special purpose bonds are used for. So, last year, total amounts of special-purpose bonds that local governments got to issue, 4.6 trillion. Only about 3.2 trillion of that went towards infrastructure. And so, the question then becomes, this year, how much of the quota will go to the infrastructure? Will it be 3.2? Will it be 3.5? Will it be 3.6? And the thing is, we have no way of knowing at the moment.

So, whereas a few years back, we could look at those numbers for special purpose bonds and have a fairly good indication of the additional stimulatory impulse that is going into investment, these days it’s a bit of a black box. And so, this kind of goes back to the same point I was making before. Usually, the Government Work Reports send very clear signals about what we can expect from the government’s priorities for the year. And those signals then get translated by various state actors into economic activity. This year, the signals just don’t pay.

Andrew: Big stuff. All right. Well, we’ll see how all that plays out over the coming months. Thanks for that, Dinny. Kendra, what’s up? What are you watching?

Kendra: I got signals out the wazoo. That’s what I got. I got all the signals you need right here.

Andrew: That’s what the content people come to this pod for.

Kendra: Well, I mean, I don’t think it’s going to surprise anybody, honestly, if I say that I want to talk about what’s in there in terms of semiconductors briefly. I think most of our clients on the tech side and a broad swath of people not necessarily in the tech industry are heavily focused on what China is going to do on semiconductor manufacturing over the next few years. And the 15th FYP was really actually pretty interesting on that point. The message in the FYP was very clear — Domestic semiconductor self-sufficiency is now a generational project. It’s not a short-term response to U.S. export controls, right?

The state is digging in for a very, very long haul. And one indicator of that is that the Government Work Report identified semiconductors as a pillar industry alongside aerospace and biotechnology. Pillar industries are sort of defined elsewhere in these documents as industries that have large growth potential, high sort of concentration of technology, and broad market penetration. In other words, they touch a myriad of sectors. And so they’re going to serve as a sort of long-term ballast for large swaths of economic activity and for development of other sectors.

So, that’s obviously not going anywhere. Biotechnology and aerospace aren’t going anywhere, neither is chip development. But the other indicator was maybe even more interesting to me, which is that, no surprise here, the state targets support at China’s present-day chip bottlenecks. Those parts of the semiconductor supply chain that we all talk about ad nauseam, right? Equipment, materials, components, high-performance processors like GPUs, and high-density memory. Those are all the present-day constraints that China is operating under.

But the plan also looks further out. It backs next-generation wide bandgap semiconductors like SiC and GaN semiconductors, which are proven technologies. They’re still working towards affordability and scale. So, that’s cool. But it also additionally supports the generation past that. It explicitly names ultra-wide bandgap semiconductors such as gallium oxide and diamond. Those are early stage technologies with major unsolved commercialization challenges, and there’s no large-scale supply chain for that. So, that’s a long-termist strategy if you’re looking generations and generations of breakthroughs down the road into what you’re going to be prioritizing or where you’re going to be funneling your research.

And then finally, I’ll say the Five-Year plan also sort of signals a potential hedging strategy by supporting three approaches to chip development that do not follow current conventional chip development methodologies. And so, they’re essentially looking into alternative methods for developing semiconductors that don’t fit, right? If we can’t build chips the way that chips are currently built, can we get around that by building totally different types of chips? Even if we can’t do it now, can we do it 10 or 15 years from now? So, really a long-term view on semiconductor manufacturing.

Andrew: And you also had some thoughts quickly on AI, and then we’ll wrap up.

Kendra: Sure. I’ve got lots of thoughts on AI. I mean, I think that nobody who’s listening to this pod will be particularly surprised that there was extensive focus on AI+, the AI+ Initiative in several of these documents. Just quickly for anybody who’s listening for the first time, the AI+ Initiative is a strategic initiative, China’s sort of top-line AI policy, which governs how the state wants to see AI adopted in various parts of the economy. But the cool part is that the FYP also recognizes that AI development has advanced very rapidly, even from just 12 months ago, and that a whole bunch of new development frontiers have opened.

And so, it calls to, and I’m going to read a little quote here, “Encourage technological innovation in multimodal intelligence, agent-based intelligence, embodied intelligence, and swarm intelligence, and explore development paths for general artificial intelligence, or AGI.” So, the fact that agentic tools came out really in the last just couple of months, sort of exploded into popular consciousness, and now they’ve been wrapped into the FYP. I’m pretty sure that was a last-minute get-out-the-whiteout edit. You know, we better stick this in here. But probably most notably to AI policy watchers is the mention of AGI in this policy document.

Well, it is and it isn’t, right? Because it’s the first time that the term has appeared explicitly in a big, consequential, national-level policy document. And the reason that matters is because it lands at a moment where there’s all these questions about whether or not Beijing is sort of quietly pursuing AGI on a parallel track to U.S. frontier labs. The framing here suggests that the answer to that is like, no, not exactly right. Not really, not yet. Rather than urging tech firms to pursue AGI or indicating that the state will support basic research in AGI and really sort of funnel a bunch of state resources into that particular technology or that development direction, it uses very cautious language, only calling to explore pathways towards, you know, yeah, maybe kind of sort of this amorphous thing.

And the hedging is really telling because it suggests Beijing is not really fully convinced that current scaling approaches represent the only or even most viable route to AGI capabilities. And it could also just reflect genuine ambiguity within Chinese policy circles about what AGI actually means, right? The international AI community hasn’t really settled on a definition. It doesn’t really make sense for the state to set that as a target or a goal or to push funding towards something where the outcome is unclear or it’s not clear what everybody’s chasing. So, the state acknowledged that the term exists, but I wouldn’t say that they’ve named it as an explicit pursuit.

Andrew: Yeah, well, it is an interesting development. We, like I said, are going to dig a lot more into all this stuff in a more structured pod next week once we give the team a little bit of time to really further digest. But both of you, thanks so much. Those are really excellent insights on a quick turnaround for a bunch of documents that dropped less than 24 hours ago. So, really appreciate the time and the insights.

Listeners, stick around. We’ll have a few more of our Chinese analysts or our analysts based in China, some of them are Chinese, some of them are not, going through various aspects. And then we’ll have our interview with Ilaria. Lots of good stuff on this pod. So, stick around.

All right. Well, now I am joined by a bevy of Trivium Insiders, Trivium Analysts, to go through some more details and various aspects of the Two Sessions, which, as I mentioned before, included both the government work report and other annual work reports, as well as the publication of the 15th Five-Year plan. We won’t rehash all that. But we’ve got a lot to get through, so we’ll keep it quick. I’m going to start with Ether Yin, based in Shanghai. Ether is our overall policy guru.

And so, Ether, why don’t you talk to me just about your overall sort of impression from the Government Work Reports or the work reports for 2026? What was the overarching sort of feeling you got, sort of vibes-based read on what policymakers are thinking right now?

Ether Yin: Yeah, of course, Andrew. I would say my kind of feeling kind of reading through all reports yesterday, overall feeling is kind of disappointed or I kind of feel a bit kind of bored by it. I think the reason being, you know, nothing really kind of surprised us because we already know, kind of know what’s going to coming out because what’s in the Five-Year Plan, the kind of outline, the kind of key things, you know, last year in the Forth Plenum, you know, what’s going to come out of the government work report more as a kind of annual economic playbook is already kind of outlined in the Central Economic Work Conference last year. So, when we kind of come into this, we’re really looking for concrete measures, you know, would make how they’re going to tackle those economic policy issues kind of more concrete. But the overall impression is that we actually didn’t get much new things out of that.

And, on the contrary, one thing I feel like is everyone talks about the economy is not right. The policymakers need to do something about, in particular, the consumption, how they boost that. But after reading all the reports, that include the Government Work Report and the NDRC report, it feels like only one thing the policymakers are concerned about, that’s tech. because that’s the one area you feel like they are working towards a timeline. That’s one area they show the sense of urgency. That’s one area when policy talks about, they talk about there’s a kind of timeline, you know, within five years, five to 10 years, China basically must kind of control certain supply chains that include semiconductors.

Other than that, when you’re kind of reading through their plans for the economy, yes, there are some kind of direction, kind of shift. Yeah, we’ll do more to boost consumption. We’ll do more to kind of boost welfare because that’s also related to consumption. So, people can more confidently kind of spend. But the direction is kind of clear. There are some shift, but the plan is not concrete in the plan. That’s kind of my overall thinking, overall impression. And then the second one is like Chinese, you know, over 70s, senior policymakers sitting in the Zhongnanhai are as concerned about AI as, you know, Western investors or any company executives.

Premier Li Qiang mentioned AI seven times in his work report, and that’s just direct mentions. There are also a lot of kind of mention about computing powers, you know, how we build kind of, you know, ensuring data center has powers, you know, all that kind of things, all about kind of AI. That’s just to show you how they are seeing AI as both opportunities and also has an opportunity to transform the economy and opportunity that China had, first time had, can lead a kind of industrial kind of evolution for the first time. But also, there’s, again, a sense of urgency that if China missed it, then they can say goodbye to the goal to take a lead, even potentially overtake the U.S.

Andrew: Before you get into the third thing, I just have to quickly jump in because part of what you just said very much aligns with the conversation I had with Kendra and Dinny, which we were laughing because Kendra was like, there’s a clear plan on tech. They’re all in. They’re clearly ramping up the intensity. They see this as a specific window. And Dinny’s comment was like, well, the growth target was either 4.5% or 5%, or if you can, even more. Like, you know, what is it? Is it four and a half? Is it five? Is it extra?

So, your comments very much align with, I think, the conversation I had with them, which is good to know that we’re both reading this on different sides of the world, both groups of us, and kind of coming to the same conclusions, like a little bit of listlessness, lack of direction on the econ side, but plenty of firepower behind the tech developments. And then I was also just going to say, you know, I mean, everyone knows the U.S. is a gerontocracy, or at least it’s led by a geriatric, largely political class, right?

And so, it’s sort of good to know that sort of China is in the same boat. It’s all these old guys. Literally, they’re all guys, like, trying to figure out what AI is. I think a lot of listeners probably, like, are trying to figure out AI and feel like they’re behind. So, I guess we can all take some comfort in the fact that the Chinese government also hasn’t cracked the nut. So, anyway, just a couple of quick observations. What was your third point on what you were looking at?

Ether: Yeah, third point is kind of very kind of minor and specific is that, you know, of the kind of questions we go into the Two Sessions, kind of asking ourselves, because of clients, is asking ourselves, what’s the plan to tackle overcapacity? You know, there are some kind of bits here and there in the plan.

But what kind of made me laugh yesterday is that the NDRC report, it talks about we’ll do some kind of capacity monitoring, even, you know, plan to cut some overcapacity in key sectors. And I was like, good, they finally will do something to cut capacity. But then the second line reads, they use the word “encourage.” We’ll encourage appropriate overcapacity in emerging sectors. And they even give a reason because that’s good for competition.

Andrew: So, they literally said encourage overcapacity?

Ether: They literally said encourage and they give a rationale because it’s good for competition.

Andrew: Oh my gosh. Well, this is one of those where… I mean, that’s hilarious and we have to laugh, find moments of humor in our very serious job of trying or tedious, maybe it’s the right word, to read through Chinese policy documents.

Ether: Yeah.

Andrew: But, you know, it just speaks to everyone looks and says, “Well, overcapacity is a feature of this Chinese system. They can’t do anything about it.” And, you know, it’s destructive. But it’s interesting to understand that at some level, they’re encouraging and even going for overcapacity. I mean, obviously, Western economists would not prescribe that. But I’m sure that’s one of the targets they will definitely achieve is putting in some more overcapacity.

Ether: Yeah.

Andrew: Awesome. Well, thanks for that, Ether. Now we’ll go to an equally hilarious topic, which is geopolitics. Joe Mazur, our Head of Geopolitical Research, why don’t you give us some giggles on what you found on the geopolitical side in these documents?

Joe Mazur: Yeah, it was a real laugh-a-minute, I got to say, from the Government Work Report. No, but I think, honestly, I’m kind of in the same boat with Ether in that it was nothing particularly groundbreaking, nothing especially interesting. I mean, there’s a couple of bits that I think are maybe worth highlighting. So, you know, a slight change in the way they talk about opening up to the external environment. And, you know, you got to remember during last year’s two sessions, right, Trump was newly back in the White House. We were kind of at the height of the U.S.-China escalating tariffs. And I think China was a little bit in panic mode, right?

This is sort of before they’d hit upon their strategy of rare earth export controls, rather before it had been kind of fully developed to the extent that it would be later. And at the time, last year, they said something like, regardless of change in the external environment, we’ll always adhere to the principle of opening up to the outside world. Depending on where you want to put the emphasis in that sentence, that sort of reads like, “Oh, we’re going to do it no matter what. Nothing can stop us.”

And this year seemed kind of a lot more like normal Chinese policy documents, upholding win-win cooperation, steadily expanding institutional opening up. Like you couldn’t get a more boilerplate sort of statement on the external environment than that. I think that reflects probably the fact that China feels generally in a lot more secure position than it did last year. It’s got a fairly adroit method for dealing with the U.S. at this point. Certainly, it looks like the adult in the room compared with the U.S. in a lot of respects. And so, I think there’s maybe a little bit more confidence there than there used to be.

You know, another small thing is they added the mention of the Global Governance Initiative to go along with the previously announced Global Security Initiative, Global Development Initiative, and Civilization Initiative. That’s a pretty small thing. A lot of these initiatives start out aspirational and kind of gain steam over time. That sort of was the case with Belt and Road. As it is right now, these are more talking points than they are major, meaty frameworks for China’s vision of the world, at least in the sense that, you know, the extent to which they’re followed by other countries.

But, you know, it’s worth noting that global governance is now kind of officially in the mix in the canon of Chinese wisdom to the rest of the world on state craft. The language on trade, I think, was probably as expected, which is to say there’s no indication that China is really going to do anything about the trade surplus. And I think it was Trey who wrote up this piece yesterday for our newsletter, and the Government Work Report called for a basic equilibrium in the balance of payments, which sounds great, except when you read the part where they reviewed what they were doing in 2025, they said, oh, a basic equilibrium was maintained in the balance of payments.

Which, if you ask basically anybody else in the world, certainly in the U.S., Europe, other countries, they’re going to say, I’m not sure that’s how I would characterize it. That certainly doesn’t seem like a basic equilibrium. In fact, Xi Jinping has had European leaders hammering down his door, begging him to address the imbalance of payments. So, that seems like a little bit of an indication that China is okay with being criticized about the trade surplus they run with the rest of the world, and probably an indication they’re not going to do much to counter it.

Andrew: I think policy stances by the Chinese government are often much more sustainable than people think they are. I remember at the beginning of the Russian invasion of Ukraine, the talking point out of Washington was that, well, China can’t sit fence forever because that’s an awkward position to take. And I was like, they don’t care it’s awkward. They can maintain a fence-sitting position, which they now have for four years. So, I’m sure they can do that on the trade situation as well.

Okay. Let’s also talk, we can’t label this foreign policy, right? But another issue of geopolitics, shall we say, Taiwan, what did do you get on that front?

Joe: Yeah, in the absolutely not foreign policy category, I am a little bit torn on this because it is such an important piece and people do kind of dissect it incredibly closely, which they should. But I think it does sort of lend itself to every little movement in syntax, kind of makes people freak out. So, here’s my assessment is that we’ve seen a very slight hardening of language on Taiwan, and I want to emphasize very slight. And so what that is specifically is that in the 2025 work report, the headline goal was peaceful development. And that’s still a headline goal in 2026.

But in addition, we now have a second headline goal, which is advance the cause of national reunification. That language was also in the 2025 work report, but it was in the second sentence, a little bit lower down. It wasn’t in the headline. So, again, a very, very minor change. But given the attention that people pay to this, I think it’s probably worth noting. There’s also language about implementing policies for Taiwan compatriots to enjoy equal treatment, which as far as I can tell is a new statement. I think that’s sort of broadly in line with other integration efforts involving people from Taiwan working and studying and living in the mainland. I don’t know what the specific formulation of equal treatment necessarily entails, but worth noting that that’s new.

So, altogether, the Government Work Report gives us a very, very slightly more assertive tone on Taiwan. I do not think it represents a major departure from China’s longstanding overall goal of peaceful reunification and a focus on integration rather than… well, I say integration, carrots as well as sticks, right? The stated goal is integration through the simple draw of brotherly unity and economic opportunities. But certainly, there’s a lot of kind of coercion that happens as well. But anyway, so much to say. There’s no indication here that China’s radically changing its tack when it comes to cross-straits affairs in 2026.

Andrew: Excellent. Great stuff. That’s something, of course, that is of high interest in capitals throughout the Western world. So, something that we keep a close eye on. There’s no real eloquent way to pivot here, but we are trying to get kind of a smorgasbord of different views within Trivium on why all of these documents matter. So, we’re going to get a little bit more granular. I’m going to throw it to Even Pay, who’s a director at Trivium, who covers a range of things. She’s a specialist in ag, but also does trade in minerals and increasingly covers health for us and also is our biotech expert. So, a jack of all trades.

Even, talk to us about what you saw on the health side and the biotech side in terms of things that you thought were interesting.

Even Pay: Yeah, awesome. I like to think of my portfolio as whatever is so technically frustrating that nobody else wants to deal with it. Increasingly, that’s how I sum up my area of responsibility. So, let’s get into it.

So, Ether mentioned that one of the only places that we saw real ambition and sort of evolution and shift in the 15th Five-Year plan draft text that we just got is on the tech front. And, as far as I would say, that was true in my areas of interest as well. The place where I saw real movement in the plan is in what Beijing refers to as the bioeconomy. And as we all know, China’s had a lot of success basically implementing what’s essentially a leapfrog approach. So, purchasing Western 4G systems while laying the groundwork to lead on 5G or importing and licensing combustion engine IP while laying the groundwork to lead the world on batteries and EVs.

And what jumps out to me from this plan is that there’s a clear intent, at least, to do something like that again in the biotech space in a few different ways. So, first of all, we saw biomedicine identified as an emerging pillar industry. And these emerging pillars, that’s a new category that we’re only just beginning to get a clear definition of. We saw it for the first time, I believe, at least in a high-level document, in the party’s 15th Five-Year Plan proposals last October. And then in December at the Central Economic Work Conference, we’ve recently learned that Xi Jinping explicitly listed a few examples of what he thinks of as emerging pillars — semiconductors, aerospace, and biomedicine.

And then now that’s explicitly in the text of the 15th Five-Year Plan, which tells us that there’s going to be a great deal of structured kind of policy support. And, you know, it basically gives localities sort of a big indicator that this is an area that Beijing believes will be a pillar of the economy. You know, it’s already emerging as a pillar, and it will be a future pillar. We also saw biomanufacturing flagged on the list of future industries. It was also flagged in that proposals document back in October. But what we did see that was new here is that we got a much shorter list of much win sectors where Beijing is going to make a “extraordinary measures” to achieve decisive breakthroughs. And biomanufacturing was also on that list.

So, China is already home to about 70% of the world’s biofermentation capacity. And what the plan tells us is that Beijing is going to keep throwing resources into winning the innovation race at the high end of that sector. So, similar to semiconductors, broad manufacturing dominance doesn’t necessarily translate into winning the high end in biomanufacturing. But the difference here is that Beijing has caught that issue very early, right? And so now there’s going to be a concerted effort, extraordinary measures to make sure that Chinese IP owners are really successful at the high end and not just across the manufacturing base.

And this also showed up in the agriculture sector, where we saw the sort of 10-year-old broad push to revitalize the domestic seed and breeding sector, starting to get some really sharp, innovative teeth. Efforts to stockpile germplasm domestically showing up in the plan. Those efforts are extending to microorganisms, which this is really wonky, but it becomes a great, huge, essentially free or very low-cost public resource and enables bio-innovators to have a huge genetic library that they get to work with, using AI tools in crop breeding and livestock research, all kinds of crazy stuff there as well. So, it’s showing up all across the plan.

Andrew: That’s great. Well, it aligns with what Kendra said in our conversation earlier in the pod, and earlier today when she was talking about not just investing in semiconductor technology, but sort of looking down the track, like what is the future of semiconductor technologies that aren’t even really at scale yet or commercialized, and how can we compete at the very cutting edge? So, that seems to be a theme and we’ll get into a bunch more of your portfolio next week when we do the deeper dive on the Five-Year Plan on our next pod, but let’s round it out.

Speaking of AI and compute, Linghao, Bao Linghao, one of our tech analysts based in Shanghai, talk to us about what you saw in terms of China’s plans for compute for addressing the compute issues that it’s facing.

Bao Linghao: Yeah. So, like Ether said, AI is huge in this year’s Two Session. And the biggest missing piece to China’s AI development is compute, right? They have massive shortage of computing resources. We know the bottleneck is advanced chip manufacturing capacity, right? But in reality, there’s not much Beijing can do on the chip side, right? So, really, at this point, it’s just an engineering challenge among the ecosystem of chip companies. But what Beijing can do is to make better use of existing computing resources they have, right?

And there are several things that are mentioned in the FYP I thought was interesting, but I will talk about one thing today. One policy directive they’re going to do is to push companies or particularly SOEs and state agencies to use public cloud as their IT infrastructure. And just by the background, the cloud adoption in China is way lower than that in the United States. And the reason why that matters is because if you want to reach maximum of compute utilization, the best way to do it is to have everyone to be on the cloud.

Because you’re essentially like pooling resources together and you have a platform to orchestrate demand, right? So, that way you can get more out of the compute. And that’s a critical issue right now because the compute gap between China and U.S. is widening, right? So, China must like squeeze every bit out of all the chips they have today. Otherwise, I think it’s going to be really tough for them. Not even developing the models, even servicing the models is going to be a huge problem.

Andrew: Yeah. Well, I think it’s, I guess, promising from China’s standpoint that they’re zeroing in on that as a key issue, right? Like, I think they’re sort of diagnosing the key challenges they’re going to have properly. Would you agree with that?

Linghao: Yeah. I would actually see more of that in the plans. So, I’m not sure where they’re at right now. What I would like to see is that in the next few months, I would like to see a policy plan in terms of how to encourage people to use more public cloud.

And also, like face some other areas of this, you know, compute fragmentation problem that China has right now. Because I think this issue needs to be solved quickly and they need to be on it like right now.

Andrew: Right, right. Well, that’s exactly the kind of thing we’ll be looking at over the next few months as these policy documents inevitably cascade into a bunch more granular policy documents. Thanks, everybody, for weighing in just your quick bites, your quick sort of takeaways on the initial reactions to both Five-Year Plan and Government Work Report. I will say one last time, we are going to dive into all of this more deeply next week. And also, I just want listeners to know this is sort of what we do at Trivium. We talk about tech. We talk about econ. We talk about the overall policy space, geopolitics, semiconductors, compute, biotech. We cover it all. Tried to give you guys a little bit of an inside look at how Trivium approaches this stuff.

So, I hope it was useful for listeners in terms of dissecting what’s been happening this week in the policy level in China. And I really have to encourage everybody to stick around because I have a great conversation with Ilaria Mazzocco around China’s stance on, not just stance, but China’s presence in the global EV market and how it’s impacting not just China’s economy and manufacturing, but the global EV market and global economy and manufacturing. So, stick around for that. Otherwise, thanks, everybody, for your thoughts today.

I’m joined now by our latest very special guest on the Trivium China Podcast, and that is the Deputy Director and Senior Fellow with the Trustee Chair in Chinese Business and Economics at the Center for Strategic and International Studies, Ilaria Mazzocco. Ilaria, how are you doing?

Ilaria Mazzocco: Good. Thank you for having me on your podcast. I’m such a big fan.

Andrew: Well, that’s very kind of you to say. Thank you so much for taking the time. As we started thinking about having more external guests, you were top of the list to have on. So, I’m excited to discuss.

Ilaria: I’m really honored. That’s wonderful. Thank you.

Andrew: Well, for those listeners who may not know, Ilaria’s expertise is in Chinese industrial policy and climate policy, and specifically the intersection between the energy transition and economic and national security. So, things that are very much top of mind. We are recording today, which is March 5th. So, we’re recording just after the 2026 government work report came out and the 15th Five-Year plan, which is going to have a lot to do with industrial policy. But we’re not going to get into that stuff today. All to say our conversation is very timely, even though we’re not going to necessarily touch on the latest documents. There’ll be plenty of time for that.

I really just want to dig into kind of your area of expertise. And to start, Trivium does sort of macroeconomic coverage as a lot of the think tanks do, of course. But I’ve just noticed that over the past few years, our quote-unquote macro coverage has really trended towards more deep dives on specific industries and specific technologies. And it’s still macro coverage, but we’re honing in or homing in on those industries and technologies that sort of have an outsized impact on the economy more broadly.

And one of those that we cover a lot is the EV sector, electric vehicle sector, which you do a ton of work on. So, I just wanted to start with your initial thoughts on laying out why you think the EV sector is sort of so central and so critical to China’s economy generally and its economic growth strategy, geo-economic strategy, all those things going forward.

Ilaria: Yeah, thank you for the question, Andrew. Actually, if I can say something before I answer the question specifically, I would say it actually makes a ton of sense that even though you’re looking at macro, you end up looking at these sectors because industrial policy plays such a big role in China. And industrial policy, by definition, focuses on sectors and companies, right? And so you end up having a situation where even though you may be looking at the economy as a whole, you end up looking at specific sectors because that’s actually how the government is also looking at it.

And so some sectors are given priority over others and also just seeing really impressive performance of some sectors in China, such as the EV sector. I would just say that, you know, one thing that to note is that outside of China, I would say, especially maybe in the United States, often when we talk about electric vehicles, it feels like a niche topic, right? It feels like a thing of its own. But actually, if you zoom out and look at it globally, and also if you’re actually, frankly, speaking to people that follow the automotive sector day to day, it actually has a lot more to do with the broader automotive sector and sort of technological shifts within it.

And just more broadly, just the big technological shifts that are happening across the board, where things are just getting more connected, smarter, and more based on electricity rather than fuels. And so, I think that shift is happening in a lot of our sort of energy systems. And most of us don’t get to see the grid or grid-related technology on a day-to-day basis. But cars, we do, right? A lot of people spend every day on their car, right? And so you actually are seeing, if you are in countries where this shift is happening more rapidly, you’re actually seeing that on a very personal level.

You’re sort of seeing that technological shift. And this is something that a lot of companies internationally are recognizing is, I think even in the United States, there’s a recognition that eventually this is going to become a pretty important dominant technology, even though maybe we are, like in the U.S., a market with still fairly niche at this point. So, it’s much more of a debate of like just how long it will take and what percentage of the market it will take rather than, you know, does this matter or not? And the reason why I bring this up is because the automotive sector in general is like a big deal, right?

Most countries that have a manufacturing industry have an automotive sector of some kind, right? They have an automotive manufacturing sector of some kind. And so, China is part of that, but also basically Europe, the United States, Japan, but also a lot of emerging markets. I know perhaps we’ll get into that, but a lot of emerging markets also have manufacturing sectors that are part of the automotive value chain. So, this transformation has big implications for trade, but also for just actually geopolitics, right?

The actual sort of like who is providing technology, where is it shifting toward, what are the global value chains, matters in those value chains. And this is getting, I think, to your question, where China is now in a position where it matters in these value chains a lot more than before, right? It used to be the case that Chinese consumers were buying Western cars, which were made in China, or assembled in China, but a lot of the high-value-added parts of that car were still being generated in Germany, Japan, the States, etc. Now, when you look at the market in China, 50% of new cars sold last year were electric vehicles.

Most of those electric vehicles were Chinese brands, right? So yes, and we can talk about this, there’s still like a global value chain. Those Chinese brands are still very globalized, and they still rely on a lot of components and know-how that comes from abroad. And yet, you know, a lot of it is Chinese. And that’s just like a completely different paradigm.

There’s a big paradigm shift there, which I think is completely in line with what the Chinese government would like to see, which is more Chinese companies generating high, advanced technology and then maybe exporting it as well. And also, I think, provide the model, right? I think this is in some ways one of the more successful cases of this new techno-industrial policy that China’s been focusing on. So, it actually provides sort of this model and this idea that like, yeah, we can do it and it can be successful, look at the EV sector.

And I know we’ll probably get into of the challenges in the EV sector as well. But on the whole, yeah, it is a pretty impressive sort of feat that they pulled off in that sector. That’s, I think, generally speaking, how I think about it and why it matters.

Andrew: Yeah, that’s super helpful. And I think it really lays the groundwork well. And my colleague, Dinny McMahon, and I released a paper through CSIS, of course, where we work, talking about kind of the future of China’s industrial policy. And one of Dinny’s big takeaways from that research was sort of this idea that as China moves up the value chain, the stakes are higher because China is now competing with other countries that have advanced manufacturing.

The countries that don’t have advanced manufacturing are somewhat less worried about China’s move up the value chain. But that’s why the United States is so worried about the EV revolution in China, Germany, Japan, obviously.

I don’t know if you have any thoughts on that, but I guess I think about it as, for years, economists said to China, “Move up the value chain, the value chain.” Now it’s moved up the value chain, and suddenly everyone’s like, “Whoa, whoa, whoa. Actually, we don’t want to be competing with you here.” I don’t know if that resonates with kind of how you think about it.

Ilaria: No, I think that’s right. I think that’s exactly right. And this is not an industry like solar panels where countries may be willing to say, “Well, you know, whatever, like we’ll just import them.” This is like a pretty core industry, right? Everybody’s willing to fight for it. If you have an automotive manufacturing industry, you’re going to fight for it, right? That’s, I think, generally the case. And so, I think it sets up for a lot of trade tensions globally. I think it’s true. And I think a lot of maybe more developing countries, especially ones that don’t, even develop countries that don’t have manufacturing, automotive manufacturing sector. So, say like Australia or Norway, right? These are countries that are more comfortable with importing from China and don’t have direct sort of conflict.

But I think, you know, there are some emerging markets where there’s concern that China is, yes, transitioning domestically, but it still has a huge industry that’s producing all those other cars, some of them quite cheap, right? Internal combustion engine vehicles. And I should say, there’s Western car makers that are also using their old internal combustion engine vehicle factories in China to export more than they used to because they’re no longer able to access that Chinese market.

But we’re just seeing that there’s just been since 2020, this huge surge in exports of cars. And it’s not just EVs. It’s also a long-term combustion engine vehicles. And those are, I mean, aside from like the negative implications for climate, I mean, from a purely economic standpoint, that’s a direct threat with a lot of those emerging markets industries. So, if you look at Mexico, Mexico is now importing a lot of cars from China. And those cars are cars that Mexico is no longer making.

So, I mean, Mexico is doing fine because it’s exporting to the United States. But, in terms of its domestic industry, that’s like a pretty big shock. And that’s happening in a lot of other markets as well. So, there’s like multi-layered, I think, potential trade tensions that different countries are worried about. The political economy is complex.

Andrew: 100%. And I actually want to circle back to the emerging markets piece of it in a second because I know you’ve done a ton of great work on that and specifically published a big report on that back, I think, in October. But before we circle back to that, I kind of want to touch on a couple of other sort of macro things. We talked about sort of the idea of industrial policy. I mean, everyone knows that part of the reason that China has been able to develop a world-leading electric vehicle sector is because of government support in many ways.

But also, something that we often talk to clients and companies about and also sort of debate internally is sort of the role of the private sector. These companies are really good companies, right? BYD, you know, Chery, Geely. They’re producing excellent cars. They are absolutely cutthroat. They are, you know, not just doing what the government told them. They’re trying to be really great global companies. And in many cases, they are. So, I just want to get your thoughts on sort of the breakdown between how much, you don’t have to put a percentage on it, but how do you think about the role of the private sector in China in the development of EVs vis-à-vis industrial policy and state support?

Ilaria: Yeah, I think that’s spot on, right? You could have, you know, a lot of money being dumped in the wrong hands, investments in the wrong companies, which could lead to not very successful outcomes. And I think, you know, if you look at the Chinese aircraft industry, right, with Comac, you could see, you know, examples of, you know, state-owned enterprises that have really struggled to be super innovative. Instead, you had in China, I think, the preconditions, which were, yes, entrepreneurial companies, also sort of like an industrial ecosystem that was very complementary with this type of technology, right?

So, you had companies that were already producing batteries. You had companies that were very active in the electronics industry. And it turns out all those are actually very complementary with the EV sector, right? So, even if you look at a company like BYD, it’s a company that emerges from the ‘90s making batteries for electronics and then sort of decided to invest in, to bet, I would say, on electric vehicles. And then, you know, there was actually sort of, I would say, actually a lot of like interaction with the government where there was also BYD saying, “Hey, you know, we could make this happen if you only like give us sort of the right sort of policy framework for it.”

I generally think about it as sort of like multiple elements that led to success, right? So, one is industrial policy, but it’s not just industrial policy. I think it’s consistent policy over time that was supporting both the supply side and the demand side at the same moment. And, if you actually look more broadly at all those clean tech industries that China is doing really well in, right? So, just, you know, batteries, of course, but also solar, wind, I think you see that, that like generally speaking, the government sort of, yes, there were ups and downs and there were shifts in policy that sometimes were a little bit disrupted, but like overall, there was the sense that like, you know, the government is supportive of this sort of industry as a whole.

And there may be changes to the subsidies, but we’re not going away. And that was, I think, helpful because it also signaled to local governments that this was an industry that they could support. And local governments, of course, tend to provide lots of white-side incentives. But then local governments and the central government also worked really hard to create a market, which I think, you know, I recently got a question like, well, why did the U.S. not succeed at this?

And it’s true because those policies started around right after the financial crisis, both in China, and if you look at the U.S., that’s when Tesla got its loan from DOE. But you never had that sort of like comprehensive policy to really push the market in the United States. California did a bit of that, but at the national level, that didn’t happen. Well, in China, that was pretty consistent. It really ramped up. And it came also with restrictions on internal combustion engine vehicles. So, really, the government actually tipped the scales towards the technology. So, I think, you know, yes, there were a lot of subsidies, you know, absolutely.

And like a lot of cheap credit and a lot of all the things that we think about when we think of industrial policy in China. But there was also sort of this like broader policy support of just like ensuring that consumers would actually be there to buy these cars. And initially with public procurement and shifted to private consumers, etc. And then, yes, there were like really entrepreneurial companies, as we said. And these companies had sort of that they could supply from the broader ecosystem of companies that were just making already things that were relatively complementary with the supply chain that was necessary for these types of cars.

And then finally, I would say the timing was really good. They did an investment in China’s support for R&D for batteries for a long time. But I would say since 2010, that’s when you really start seeing ramping up of like actually like policies to try and promote the commercialization of EVs. Around the world, there was a lot of interest in this, as I said, in the U.S., but Europe, a lot of different governments were exploring these types of options. And that’s actually a signal of the fact that the technology was mature enough that governments were starting to take it seriously and consumers were starting to take it seriously as well.

Again, this is the moment when Tesla is starting to come out with its first models, etc. So, this was a good time because the technology was there, but there wasn’t enough competition to make it really hard to then actually get a foothold and become a leader. So, countries like India, for example, today, which is trying to replicate what China did, have a much harder time because they’re competing against China, which is like a really established juggernaut at this point. And it’s just really hard. But China at the time wasn’t competing against anything quite as dominant. And so, I think those different factors together played into each other in a really interesting way.

Andrew: Yeah, you make a great point about the demand side sort of policies. I think those are underappreciated. It’s something we’re thinking about internally, just how strong of an industrial policy support that element is. If you’ve got folks who are going to buy it, whether it’s companies or individuals, then you can really build an industry. You can sort of force the commercialization. And people often focus on the supply side subsidies when actually it’s the demand drivers that can really move the needle.

You also make a great point about kind of the timing. I hadn’t even really thought about it. I mean, it’s almost 20 years ago now when they’re doing this stuff. And it seems quite prescient, right? You say the technology was there and governments were getting interested, but certainly in the United States, while Tesla was sort of off to the races at that point, I think that Tesla was still seen as kind of a bit of a going off on a lark, right? By most U.S. consumers.

So anyway, the fact that they kind of went all in, or not all in, but really put some resources behind this 20 years ago, and now we’re seeing the fruits of it, I think is interesting. And to sort of dial forward to today, we now have a ton of Chinese companies, Chinese EV companies that are very competitive and sort of layering on the back of that idea about state versus private companies. Now, the big issue is that a lot of these companies are not very profitable because there’s such intense competition.

And a lot of the criticism of sort of Western investors towards these Chinese companies is, well, you know, they’re dominant, but they’re not making any money. I often point out, you know, that’s kind of the Silicon Valley way, right? Burn a bunch of cash, get a bunch of market share, worry about profitability after the IPO. So, maybe that’s too simple of an idea. But how do you think about profitability when it comes to the EV sector in China? Is that a fair criticism that these companies are on an unsustainable path because many of them are not profitable? Or I don’t know, what is your thought on that aspect of it?

Ilaria: I mean, it’s a really fascinating question, right? Because on the one hand, I think I completely agree with you with a lot of these companies, not all, but a lot of these are really impressive companies that have really impressive technology. And yet I do think profitability is an issue because otherwise we wouldn’t see this being one of the main targets of the anti-involution campaign in China, right? So, clearly, some people in Zhongnanhai think this is an issue and are trying to come up with solutions that are not too disruptive to try and address that.

I think there is this like complex dilemma where, yeah, on the one hand, they are doing really well and they are doing really well because they have really good technology. But on the other hand, it does feel like there’s a bit of a bubble situation, right? Where some companies may be overdoing it and the government is trying to rein them in a little bit. And I think, going back to the issue of like how this creates sort of a tinderbox globally, that’s been one of the big drivers of all the exports from China, which have been like a really interesting dynamic where these companies are sort of forced to look for new markets where they might have higher margins.

And so they’re literally going anywhere they can, which has big implications for the rest of the world. But in some cases, it’s also like creates tension, I would say European Union, first among many.

Andrew: Can you elaborate a little bit on kind of how you view the anti-involutional campaign in China? I mean, we’ve talked about it a lot on the pod. Broadly speaking, it’s partially about addressing this issue of weak profitability and deflation and overcapacity, but it’s sort of more than that in a lot of industries. It’s about moving companies further up the value chain. But I guess, do you have additional thoughts on China’s approach to anti-involution in the EV sector specifically? And have you seen anything that you think is going to be particularly impactful or successful to try to get some of these companies to stop the race to the bottom in terms of cutting prices?

Ilaria: Yeah, I think you’re probably more of an expert on anti-involution campaign than me. But I mean, what I’ve been seeing is, you know, there’s some measures, right? Like paying your suppliers in a timely manner, things that I think that the government has identified that are sort of like allowing companies to operate with very thin margins or at a loss. So, they’re trying to sort of crack down on those, but they feel fairly marginal. I think there’s also sort of just political guidance where it’s like, don’t overdo it, right? So, you’ve seen BYD maybe rethink just what their targets should be.

I mean, I think the interesting thing is that it’s still a fairly crowded market, but it is also a market where companies like BYD just take up a massive amount of the market, right? So, it’s like in some ways, there’s like three companies that are really the leaders there. And those are the ones that are probably setting a lot of the prices for everybody else. And so I think that’s quite mean. I don’t know how that’s actually going to be resolved at the end of the day because companies like BYD definitely, I think, have a sort of world domination strategy in mind. And they may or may not want to share with other companies. Right? So they see it in their best interest to like squeeze everybody out. Right?

Andrew: Yeah, that’s a good point. I guess maybe it sounds like you’re sort of making the argument that the industry is already more consolidated than maybe we think, right? We look and we say there’s 80 EV companies or whatever the number is, something around there. But you’re saying there’s really only three, four, five that matter.

Ilaria: No, there’s definitely more than that. There’s more than those. But like I’m saying, if you’re looking at who’s selling 50% of the cars, yeah, that’s just a handful of car companies. But you still see, I think, to your point earlier, you have really interesting, impressive private companies like BYD or Geely has done really well. But then you also have all the SOEs that they’re never going to go away, right? And so there’s a really impression of, even though they may not be making the top line products, they’re going to keep hanging on. And then you also have all those really impressive tech companies, which they’re always going to sell smaller numbers of vehicles.

But there, and I think normally what you would expect is some consolidation. And we’ll see how it works out. But that would probably help. But also, you know, there’s real questions of, do you want a monopoly where BYD is the only company that’s selling EVs? I don’t know. That’s getting a little beyond the sort of anti-evolution issue there. But I think there’s like some interesting questions there of what the end goal is.

Andrew: For sure. And I mean, our experts inside Trivium who follow this stuff think that there’s got to be a shakeout at some point. It’s kind of their view that eventually there will be some more aggressive consolidation. But to your point about the tech companies and some things BYD is doing, can you speak to sort of what you’re seeing on the technological front that these Chinese companies are doing that’s so impressive? Like, where are they pushing the boundaries? I think in the States, you know, I know we have listeners all over the place, but in particular, because there’s not that much EV take up in the States, we’re not thinking about the newest, best, brightest EV technologies.

But Chinese companies are pushing the edge. What can you point to a couple of things that you’ve seen that are particularly impressive on that front when you think about what Chinese companies are doing?

Ilaria: Well, BYD can make a car that goes underwater.

Andrew: That’s amazing.

Ilaria: You can find it on YouTube. There’s these videos of these young people saying, hey, and then going out… No, that’s not what I would put in the like. But it’s pretty wild. No, it’s across different segments or rather in different spheres. So, there’s really impressive stuff that’s being done on the battery front, right? And I think that’s actually been like a key advantage for the Chinese company, right? Is that they’ve had access to these lower cost, high performance batteries, which have allowed them to lower prices overall.

And that’s actually why BYD is able to squeeze a lot of other companies, because even though their margins too have been quite low, is because they’re entirely vertically integrated, right? So, they can really sort of take advantage of their own R&D in batteries, which has been, just the number of engineers working at R&D and BYD is like incredible, right? And it’s quite concerning, I think, if you work in any other automotive company. So, I think there’s really impressive things happening on the hardware side of things.

But then also, I think, on the sort of software side of things and the platforms, sorry, software platforms, there’s really interesting stuff that Chinese companies are doing as well.

And there, I think, you see an interesting dynamic where some of these companies, Chinese companies that do come from more of the startup techie kind of world, right? Like Xpeng, Leapmotor, they’re actually starting to partner with Western companies to provide them with some technology in exchange for, say, probably liquidity. And so you see that Volkswagen has a partnership with Axe Xpeng, and Stellantis has a partnership with Leapmotor.

And initially, this was supposed to be things that were only going to be really relevant for the Chinese market. Well, it turns out now Stellantis is going to be using some of that in Europe as well. And so, I think if the big OEM, international OEMs are looking out for this technology, then I think it tells you that it’s valuable technology, right? They’re quite aware, I think, that this is also a threat, right, to them. So, if they’re embracing it, it means that they’re evaluating that it’s quite attractive. If you want to see where the really impressive stuff is, I think look at what the international OEMs are trying to acquire.

And if you look in the U.S., Ford has a partnership with CATL, the battery maker, to make LFP batteries, right? Again, tells you sort of like things where Chinese are doing really impressive stuff. The foreign OEMs are not stupid, right? They know what’s the Chinese advantage.

Andrew: Totally.

Well, I was going to ask a question about other emerging markets, but on the back of that, I wanted to follow up with the idea of more Chinese investment in specifically the EV sector and the battery sector and clean tech has been floated as sort of part of a potential ongoing deal or negotiation between the U.S. and China. And I think a lot about this, you know, China has the best EV technology. Ideally, the U.S. would buy more EVs. Why don’t we have them come invest in the U.S., force them to license us their technology, create JVs, all that stuff, sort of the reverse playbook that they have done to U.S. and Western OEMs in China all these years.

What is your thought on whether or not that’s a good move for the U.S. and other Western countries to really try to attract more Chinese investment? And you also worked on U.S.-China stuff. Do you see that as part of a potential, you know, we got the Trump trip coming up to China, is that going to be part of those negotiations, do you think?

Ilaria: So, I would say, first of all, basically everybody else is trying to do it except for the United States. I think that puts us in a pretty awkward position if we’re not at least considering what we may want to do. Secondly, as I said, there are some examples of existing partnerships, right? The CATL-Ford licensing agreement, for example. And so I think those are worth sort of exploring and thinking through more carefully, right? There’s been a little politicization, but I think that actually taking a very close look of like, you know, maybe there are things that didn’t work or are not working and some things are.

And sort of trying to think like what the right model is. I think in terms of whether it’s politically feasible is a really good question. I find it very hard to envision a scenario where a company like, you know, say BYD is invited to open a factory in the United States that’s directly competing with Detroit. I just don’t know what scenario that would be. Now, it’s possible you could get some sort of like a joint venture scenario. That might be a little more realistic. That would actually probably be more attractive to the Chinese companies as well because they’d be a little more shielded from political blowback in the United States. So, potentially that’s one scenario. Another scenario is maybe licensing of some kind.

Ultimately, again, what you want, like a deal scenario is something where the U.S. company learns from the Chinese company and is not just like fully dependent on the Chinese company forever. It’s dependent in the short term, but the other companies sort of continue to do R&D and like acquire some skills. And then you sort of have, maybe the partnership continues forever, but you still have like actual innovation happening in the United States. I think that’s ultimately the best scenario.

And that’s complicated, right? Because even in China, we know that when they tried to mandate doing ventures in the internal combustion engine vehicle industry, it didn’t really work. I said this on a panel, and somebody was like, well, there’s a paper to prove that like there was some skills, blah, blah, blah, blah. But, ultimately, it didn’t really work. And that’s why they invested in electric vehicles. And so I think that’s just like things to think about. But as I said, it’s happening around the world, right? And so there’s actually good examples that the United States can draw on if it wants to do so, of both failures and potential successes.

The one problem is that it’s been so quick that we don’t have very established long-term models. But can also gives you a little bit more time. Like, you’re not actually entirely behind everybody else as well. I think those are just worth considering. But I mean, I don’t know if you wanted to get to this, but I mean, I think the interesting question is, up until this year, I would say, or maybe some time, even this year, the U.S. has been pressuring Mexico a lot to not accept Chinese investment in cars, in the automotive sector.

And actually, Mexico has introduced now higher tariffs on EVs. And then Canada went and made a deal with China that would allow some EVs from China to be exported to Canada. And they’ve been talking about investment. And, you know, of course, there’s the USMCA review that is ongoing. And now, you know, now the U.S. is talking about like maybe we would want investments. So, It’s just like a really weird dynamic, I would say, within North America where there’s some resistance and there’s talk about putting quotas on Chinese content that, you know, is coming across the border.

And yet at the same time, there’s discussion of like, well, but maybe we also want some of that technology. Like, if it seems to reflect how undecided the U.S. is or how unexplored this debate has really been and maybe how maybe rapid the shifts have been over time. The U.S. went from like a decade ago like full engagement to you know trade wars to decoupling to know we’re doing de-risking but also, investment is still happening but we just don’t talk about it, to now we’re thinking it again. I think it’s making for not entirely very clear policy.

Andrew: Totally. Well, and then you’ve got a bunch of cross-cutting sort of rationales, right? So, there’s the national security rationale of we don’t want any Chinese cars on our roads because they’re going to suck up everyone’s data and maybe like Beijing will have a back door into them and can crash them all under bridges, which is, I think, kind of silly. But there’s that argument, which is just no Chinese cars on the road for national security interests at all. And then there’s the idea, well, wait a second. These cars are really good. And we do want investment. And Mexico is getting investment. And Canada is getting investment. So maybe, you know, we would like the money. But then we also want to protect our companies. And there’s the aspect of the sort of whole NIMBY thing. And yeah, you know, some localities just don’t want Chinese companies investing in their space.

So, I agree with you. It seems a little bit all over the place. I will say, I don’t know if you have thoughts on this, I was quite skeptical, even pessimistic on whether, I’ve said this on the pod before, the world would move forward with really good electric technology and vehicles, mostly driven by the Chinese. And the U.S. would just get left behind, right? And we’d just have these old ICE vehicles, years old technology because of largely the national security arguments against having Chinese cars on the road. But then in early February, there was the reporting that Ford was holding talks with Xiaomi.

And it reminds me of the point you made where the OEMs, these companies, they know what’s good and they’re going to go try to get the best tech. So, maybe actually Ford and GM and others will take the politics out of it and say, actually, we need to partner with these Chinese companies because they’re going to actually help us on the next leg of innovation. I don’t know. I guess I’m as confused as you are. I don’t know if you have any thoughts on that Ford Xiaomi thing or if you think we’ll see any kind of breakthrough in the confusion.

Ilaria: Well, they both denied it.

Andrew: Yes, of course.

Ilaria: But then, there is, I think, also a deal in Europe where Ford is going to be collaborating, I think, with Geely for production. I don’t know the details of that, but that was an interesting report as well. But Ford is clearly very active, at least talking to Chinese companies. I think there’s also like an interesting Geely, which owns Volvo, which has a factory in the United States. So, that’s like an interesting other dynamic. And I think Geely has made statements that it’s coming to the U.S. in the next few years. I don’t know what that means, right? I don’t know if that’s real.

I don’t know exactly how they’re going to navigate the connected vehicle rule, which is what you’re pointing at, right? That we have rules in place in the United States which restrict the use of software and hardware that are, you know, trade conflicts, but essentially made in China or by Chinese companies. And I think that’s been a real constraint. But I think there’s two points just to respond to your point. One is, you know, a lot of these technologies, not just cars, but more broadly, even technologies that plug into the grid, right? Like solar power inverters, etc., there’s just like a higher risk of cybersecurity in general. Even the connected vehicle rule, when you read the actual sort of the arguments that Commerce Department made when it was valuating the risk, they made the example of like hacking of a car remotely.

But this was like something done in like a lab. So, it wasn’t necessarily a Chinese, right? You know, obviously they’re saying like if it was Chinese software and it was like Chinese government intervention, this would be a higher risk. But to me, when I read it, I was like, oh my goodness, I hope they’re making these cars secure because dudes in labs everywhere around the world could hack into our cars, right? So, I think there’s just a broader cybersecurity problem, which is not a China problem. There’s just an issue, and that’s just going to become more and more of an issue for everything, right?

From our fridge to our cars to, obviously, our phones to everything else. And then there’s sort of the China-specific issue. And there, too, I think, obviously, there’s real risk. And I think, though, we need to have honest conversations of like, what is the risk where we actually want to sort of put a red line and say, “That’s stuff that’s core infrastructure. We don’t want any Chinese DNA. Nobody should touch it. But only American companies can touch it,” that sort of thing. And then where can we say, “Well, this is something where we can maybe like use Chinese hardware, but we put American software on,” right?

Which actually would be like a really sweet deal for some American companies, right? And I think there was, again, reporting that Waymo was importing cars from China. And Waymo’s argument was, well, this is not really a risk because we’re stripping it. We’re like buying it without any software and then we put Waymo software on it. And so actually, yeah, the data, the spying is not being done by Chinese companies. It’s data that Waymo is collecting.

Andrew: It’s being done by Silicon Valley companies.

Ilaria: It’s done by Silicon Valley, right. I don’t want to say that they’re spying, but that’s really the argument. So, I think there’s sort of interesting dynamics there. And ultimately, look, if there’s a deal on TikTok, right? Wasn’t the concern that TikTok was going to be collecting data on American citizens? I mean, if there’s deals there, that perhaps could even be sort of like give us a template. So, I mean, I think national security risk can be taken very seriously, but I think we should also be very clear about what are national security risks because otherwise it just becomes like a complete confusion. Everything becomes a national security risk, and that means that we’re not actually focused, like actively laser focus on what is real, and we’re just spreading our resources to thin and like realistically we’re not actually addressing what really matters.

Andrew: Yeah, I totally agree with that. The bright shiny object syndrome has a way of really impacting China policy, just like chasing whatever is kind of in the news instead of focusing on what matters. That’s something that I decry all the time, but I think that’s a great point. I do want to quickly pivot sort of back to the emerging markets piece, because again, I know that you have done a lot of work on this. We spoke about kind of how the U.S. is thinking about this from a regulatory and political standpoint. But how are various, you did a lot of research looking at how emerging markets fit in, are thinking individually sort of about where they fit into the Chinese EV supply chain, how they can kind of ride the wave or fight against the wave if they need to.

What were kind of some of the big themes that you took away from that research effort over the past, I guess, year or so that you were undertaking?

Ilaria: Yeah, and we’re hoping to actually continue to research this coming year as well. So, we’re looking forward to doing more of that, hopefully. But the really interesting part to me was that, again, you know, we talk sometimes of EVs as sort of a niche thing. But when we started looking at these countries, a lot of them are taking this as a really significant technological shift that the governments are taking quite seriously. We actually found it was difficult to find a country that didn’t have some sort of like, you know, at least a white paper where the government sort of had a strategy that they were outlining for EV.

Now, that doesn’t mean that everybody is being successful at this, but I think it just points to the fact that it’s something that a lot of countries are watching. And a lot of countries also have their own industrial policy because, as I noted, a lot of the bigger emerging markets actually have significant automotive manufacturing costs. So, they may not be significant when you’re looking at like who’s in the top five for producing cars. But when you’re looking at that country’s economy and that country’s employment, it’s quite significant, right? And often there are exporters as well, etc.

So, shifts in the industry matter quite a bit to them as well. And so we found there’s like significant variation. A lot of these countries are recipients of FDI. So, you know, if you look at countries like Brazil or Indonesia or South Africa, a lot of the manufacturing is happening, foreign OEMs that are producing in the country. And so, what they are thinking is, well, if there’s a technological shift, it’s not these companies that are producing in our country that are going to be sort of benefiting from that shift. We need to hedge and start getting more of that investment from the companies that are going to be more significant in this sort of more electrified future.

And so you’re starting to get sort of interest in like attracting more investment in EV manufacturing as well in part because the Chinese companies are the ones that have the low cost EVs that they could sell in the market. They’re not necessarily the dirt cheap cars, the dirt cheap EVs but it’s definitely like the EVs that are going for less than $45,000, right? Those are the ones that are most popular in these markets. And so, I think that there’s this interesting dynamic there. And then there’s other countries where there’s real concern about India, right? India has domestic manufacturers that are trying to make EVs.

So, they have been extremely concerned about Chinese investment or Chinese competition. They’ve been very careful there, even though ultimately, a lot of these Indian car makers are still using Chinese batteries, right? Because if you want to… Mahindra has these new models. They’re really cool. They’re around $20,000. Well, they use the BYD Blade Battery, right? Because ultimately, if you want to make a $20,000 car and you need an LFP battery, and who makes the best LFP battery? It’s the Chinese companies, right? So, that creates a lot of difficult choices and tough admissions on the part of the Indian. The Indian strategy is made more complicated by this.

So, I think that’s all worth noting. And I think, on the whole, there’s been this really keen interest on just attracting more investment from Chinese companies rather than just being benefiting from exports. On the part of the bigger, again, emerging markets. If you’re a small developing country that doesn’t produce parts, there’s a lot of openness to these Chinese EV exports. Because in many cases, these countries are highly dependent on oil exports. I mean, I think even this week has become apparent oil is a commodity.

Andrew: Well, I’m not sure what you’re talking about.

Ilaria: There can be a lot of disruption and volatility. And also it can really be really expensive to import that oil. And a country like Ethiopia essentially banned internal combustion engine vehicle imports because, reportedly, the main reason for this was they were really concerned about their exchange rate. And they were really concerned about reserves and that they were too dependent on or the oil made them like too exposed. And so, the EVs have played into their financial security, not just their energy security.

So, again, this is a country that, you know, they’re not producing a ton of cars. They’re just like swapping one type of import from another type of import. But this matters for whoever is exporting those cars, you know. And that, again, gets to that question of like, this is why this is such a big trade fight with developed countries.

Andrew: That’s really interesting, the Ethiopia example, I hadn’t even considered that. And it makes a lot of sense, right, that this can play into sort of the whole economic and financial security thing. Were there any other specific countries that jumped out? And no problem if you don’t have this off the top of your head, but as having kind of unique or creative approaches to trying to fit in or figure this thing out?

Ilaria: Yeah, Ethiopia, I should say, it was actually not one of our case studies because in part there’s like very little data. Costa Rica is a good example of that type of approach. I would say actually some of the more creative policies come from Southeast Asia. So, Indonesia, which was one of our case studies, has adopted a similar policy to Thailand, where they basically temporarily reduced tariffs to allow imports on car companies that then are committed to building factories. So, that’s been pretty successful. Now, Indonesia has this complex strategy because they produce nickel.

So, they have this whole vision that they could develop the entire value chain. As it turns out, Nikol is not used in LFP batteries. And so, the cars that are made for the Indonesian market largely use LFP batteries. So, it’s kind of a bit of a mismatch. But, you know, they have now received a lot of investment. There’s a lot of factories, a lot of Chinese companies. But not only, right? VinFast, there’s a Vietnamese company, it’s also building a factory. I don’t actually know the status of it now, but they’ve committed at least to build a factory in Indonesia. Hyundai already had a factory in Indonesia for EVs.

And they’re hoping to become more bigger exporters as well. I don’t know how that’s going to work out because if you’re trying to be an exporter, again, you’re competing with China, and China has some huge advantages, as we know, and etc. But this has really actually boosted domestic sales in Indonesia because they opened up the market, they got this big inflow of sort of attractive, lower cost vehicles, consumers actually liked them. And so, Indonesia skyrocketed in terms of its electric vehicle sales share above the United States, for example. And I can’t highlight how surprising this is because up until like just two or three years ago, there was this very established understanding that EVs were like a rich person’s developed country technology.

And now, it’s turning out they’re actually wildly popular in a lot of emerging markets as well. I will take a little caveat. When we talk about EV shares, keep in mind these are much slower markets, So it’s much easier to shift the market, right? Yeah, we’re talking for less than a million passenger vehicles sold in Indonesia every year, right? But still pretty impressive. Again, nobody expected this, right? And when you look at Thailand, it’s over or at least around 20% at this point.

Andrew: Oh, wow.

Ilaria: Which is, it’s close to the European Union’s share.

Andrew: Wow. Well, I mean, it’s going to be fascinating to see how all these global supply chains and global demand shifts around what is clearly such a key part of the global economy and each individual country’s economy. But you just mentioned the EU. We haven’t touched on Europe a bunch, and you’ve been generous with your time, so I don’t want to take up too much more. But we talked about the U.S. We talked about some various emerging markets. Can you give us the 101 on where, obviously, there’s no Europe-wide view on this? But what’s the 101 on how Europe as a whole and some of the key European states are thinking about the China challenge on the EV front?

Ilaria: Yeah, I think Europe has been a really interesting example because, as we know, that that’s where a lot of the OEMs that used to, well, if you look at Volkswagen, for example, this was like a leading brand in China up until recently, and now they’ve been really struggling. And now what used to be an export surplus in the automotive sector from Europe to China is now split, right? So, now there’s now deficit for Europe and surplus for China. And some of that is actually Western European brands that are making cars in China. I think there’s actually a bit of a misconception, right? So, the European Commission introduced tariffs on Chinese-made battery electric vehicles a couple of years ago.

Those don’t just apply to Chinese brands. They apply to anybody who’s making cars in China, And so actually Volkswagen has a higher tariff than BYD based on how it’s calculated. Tesla is also subject, although they got a small share and it’s like a different share by brand. But yes, it affects also Western brands because there’s this weird or complex situation at the moment where you’re having some European brands that are saying, “Well, you know, if we made the car in China, we could be competitive because we could take advantage of these like brand new facilities in China, the really integrated value or very integrated industrial ecosystems and the high levels of automation, all the other things that gives advantages to manufacturing in China, we can make them there and then sell them into Europe and they’d be very competitive.”

And at the same time, Chinese brands are saying, “Well, but don’t worry, we can make the cars that we make in China, we can make them in Europe and hire European workers and we can contribute to your European supplier ecosystem and all the things that you’re concerned about in terms of competitiveness and innovation in Europe, we can help you with that.” And so you are getting this very awkward situation where European officials off the record might say, “Well, yeah, I mean, ultimately, the Chinese companies might be giving us in some cases a better deal than some of the Western or European companies that are trying to flee Europe because of all the problems that exist in Europe with manufacturing at the moment,” right? A high prices and some challenges to competitiveness.

So, I think that’s the awkward situation for Europe. And so, I think that creates a situation where different groups have very different views on it. You have those who are very concerned about national security, and you’ve been seeing now more policies coming out, especially the commission, that are really sort of emphasizing localization and local content. I think that’s also a reaction to this. So, it’s not just national security, it’s also economic security. I think that’s actually the priority the main concern in Europe. It’s really sort of, you know, is Europe being de-industrialized as a result of competition with China. But then you also have, especially national governments, they’re saying, “Well, maybe one solution is we get more Chinese investment.”

And as a result, you actually have a fairly uncoordinated approach to this where still there’s like debates of like well if we allowed investment in, what would be the best structure, and how could we get more companies? But that investment has largely been committed at this point because there was sort of like this race to getting it. And a lot of the investment is in Hungary which is frankly probably the least or a country that’s not particularly in line with either the commission or coordinate very closely with other European partners. So, I think you get this sort of like an awkward situation where there’s a lot of thinking and really original thinking, I think, and really good thinking on the issue in Europe. But then when you look at implementation, it’s like all over.

And I think it’s very hard to get everybody to have sort of like a constructive, or rather not constructive, but more unified view that would make it a little easier to deal with China and give Europeans a little more leverage. So, it’s a difficult complex multi-level, multiplayer game that I think is playing out in Europe at the moment.

Andrew: Yeah well I mean it’s just fascinating to me because, I mean, obviously pretty much every country in the world is thinking about how are you going to react here? I mean, the U.S. is kind of all over the map. There’s a bunch of creative solutions and emerging markets — Europe, as you said, it’s very complex. And there’s creative thinking but sort of lackluster implementation. I mean it’s just strikes me as this is going to be an ongoing challenge for a really long time that countries have to think about from a geoeconomic point of view and economic security point of view, geopolitics. So, it’s not going anywhere. And I hope that we can have you back on at some point soon to kind of let us know the latest as things continue to unfold and talk us through more of your research on an ongoing basis.

Ilaria: Yeah, absolutely. That would be fantastic.

Andrew: Awesome. Well, thanks so much. We covered a lot of ground. I really appreciate all your insights, Ilaria, and great to have you on. Appreciate it.

Ilaria: Thank you.

Andrew: And we’ll see you again soon. And thanks, everybody, for listening. Bye, everybody.

• Both countries seemed satisfied with the follow-through from their October meeting in Busan and have kept a lid on trade tensions ahead of Trump’s planned visit to China in late March and early April.

But a political development in the US has thrown a wrench into the gears: Last week, the US Supreme Court (SCOTUS) ruled that US President Donald Trump overstepped his authority in invoking the International Emergency Economic Powers Act (IEEPA) to impose sweeping tariffs on most US trading partners.

• The IEEPA was the basis for Trump’s 34% Liberation Day tariffs and 20% fentanyl-related tariffs on China.

Surely the invalidation of Trump’s tariffs is good news for China, right?

• Not so fast.

Trump was furious with SCOTUS’s decision and immediately began searching for alternative legal avenues to keep tariffs in place.

• As a stopgap measure, he invoked the Trade Act of 1974 to impose a 10% flat tariff on all US trade partners, which will expire after 150 days unless approved by Congress.

• The administration is working on raising the figure to 15%.

Quick math: Even with the 15% tariff, the SCOTUS ruling will reduce China’s overall effective tariff rate.

The problem is, Washington may not stop there:

• On February 25, US Trade Representative Jamieson Greer hinted that the US could replace the affected tariffs with duties under a Section 301 investigation into China’s implementation of the 2020 Phase One Trade Deal.

• Greer also highlighted Section 301 investigations into forced labor and excess capacity as potential avenues for “reconstructing” Trump’s now-defunct Liberation Day tariffs.

Greer repeatedly emphasized that the administration’s goal was “continuity” rather than escalation – in other words, to bring tariff rates back to the level they were before the SCOTUS decision – but we’re not sure China will see it that way.

• Also on February 25, a Chinese Ministry of Commerce (MofCom) spokesperson defended China’s record in implementing the Phase One Trade Deal and warned the US against “shifting blame and…using the opportunity to create trouble.”

• MofCom also threatened countermeasures if Washington “uses the investigation as a pretext to introduce restrictive measures such as tariffs.”

Don’t panic: With just over a month until Trump’s trip to China, both sides have a strong incentive to keep relations on track and talk through any disagreements in person.

• But the confusion surrounding Trump’s tariff regime shows that there is still no shortage of trade-related gripes that could harm the long-term prospects for Sino-American stabilization.

Additionally, SCOTUS taking away Trump’s favorite weapon (massive, at-whim tariffs and the threat thereof) is not necessarily an unalloyed win for China.

• Trump may now turn to other levers to pressure Beijing in future disagreements, including increased support for Taiwan, tighter export controls, and financial sanctions, among others.

• This would move the China-US rivalry into less familiar and possibly more dangerous territory.

For its part, China still has a strong hand to play against the US.

• Rare earth export controls remain Beijing’s ace-in-the-hole to use against all manner of American chicanery and will be for the foreseeable future.

• With Trump’s tariffs now increasingly subject to Congressional oversight, China could crank up the pain on business in key US constituencies in a bid to hurt Republicans’ electoral chances in the 2026 midterms, hamstringing the White House.

We’ll say it again: Tensions are under control for now, but that doesn’t mean they’ll stay that way.

• Assuming relations don’t break down in the next month, businesses should be prepared to capitalize on the good vibes from Trump’s upcoming China visit to address supply chain vulnerabilities.

• While global business has grown accustomed to the perpetual threat of US tariffs, the SCOTUS ruling should prompt multinationals to assess which other aspects of the US lawfare toolbox they are exposed to and update their risk mitigation strategies accordingly.

Most of all, global business should monitor for signs of new or renewed disagreements that could fray the fragile Sino-American equilibrium.

• Each breakdown in ties makes it less likely that future agreements will hold and harms prospects for long-term stabilization.

Joe Mazur, Head of Geopolitical Research, Trivium China

What you missed

Econ and finance

Infrastructure investment is set to expand significantly in 2026.

• Infrastructure investment unexpectedly declined 2.2% y/y in 2025.

• Authorities are signaling that they intend to turn that around, with Party publications in recent weeks repeatedly arguing that China’s capital stock significantly lags that of developed economies.

According to the readout from the State Council executive meeting on Tuesday, Premier Li Qiang wants to “unleash the consumption demand of the elderly.”

• China is home to over 320 million people aged 60 and above – and by 2035, that figure is set to exceed 400 million.

• The State Council promised measures to boost seniors’ spending power, including direct support like elderly care consumption subsidies.

• It also pledged to expand “inclusive” elderly care, building a “universally accessible” system covering urban and rural areas.

Tech

On Monday, Anthropic released a blog post detailing several large-scale campaigns by Chinese AI companies to illicitly take training data from US AI companies.

• The post alleges that three Chinese AI companies – DeepSeek, Moonshot, and MiniMax – have launched distillation attacks against Anthropic’s Claude.

• “Distillation” is a process in which one AI model asks another AI model questions, and then learns from the answers, speeding up its training.

• Anthropic alleges that Chinese companies used coordinated armies of fake accounts, running through proxies, to ask US models questions and harvest the answers.

On February 12, the industrial regulator (MIIT) released draft mandatory safety standards for automated driving systems (ADS), or self-driving vehicles L3 and above.

• “Mandatory standards” are issued sparingly and carry similar legal weight as regulations – most standards are “voluntary.”

• The draft standards revise and upgrade ADS voluntary standards issued in 2024, with the biggest change being the addition of detailed technical requirements for L3 and L4 vehicles, respectively.

• MIIT is aiming to implement the standards in July 2027, although this date is not set in stone.

Foreign affairs

On Tuesday, the commerce ministry (MofCom) issued two notices targeting 40 Japanese entities, tightening the screws on Japanese access to Chinese dual-use exports.

• Twenty entities, including Mitsubishi Heavy Industries, Kawasaki Heavy Industries, and IHI Corporation, were added to the Export Control List, barring them from receiving dual-use exports from China.

• Twenty entities, including Subaru Corporation, Sumitomo Heavy Industries, and the Institute of Science Tokyo, were added to a watch list, subjecting any dual-use exports to case-by-case approval under stricter scrutiny.

• This is the first time MofCom has deployed the watch list, which was created under the Dual-use Item Export Control Regulations issued in late 2024.

On Wednesday, German Chancellor Friedrich Merz kicked off his long-anticipated visit to China with a 30-person-strong business delegation in tow.

• Germany has grown increasingly concerned about the yawning trade deficit with China and threats to key German industrial sectors, including autos.

• Merz addressed the issue bluntly in a meeting with Premier Li Qiang: “I pointed out that we have had a considerable imbalance in the trade balance for about two years…which have arisen primarily from overcapacity in China.”

• Merz later said the two sides had agreed to restart bilateral governmental consultations and that China had agreed to buy up to 120 aircraft from Airbus.

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.

• All of this volatility – and what it might say about the role the US will play in the world going forward – can lead to some pretty lazy assumptions that China will automatically benefit by easily positioning itself as a stabilizing global force.

But reality is more complicated: Chinese leaders are likely just as befuddled by the rapidly changing landscape as their counterparts in NATO.

On this week’s Trivium China podcast, host Andrew Polk sits down with Jude Blanchette, director of the RAND China Research Center, to unpack how China actually sees “The Rupture” in global politics.

• This is a conversation you won’t want to miss.

But wait, there’s more! Before talking with Jude, Andrew is joined by Trivium’s Head of Markets Research Dinny McMahon to discuss Beijing‘s recent focus on the need to “invest in people,” and the step-change that might signal for the buildout of China’s welfare state during the next five-year plan period.

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 Markets Research, Dinny McMahon. Dinny, how are you doing, man?

Dinny McMahon: I’m doing good, mate. Good to see you.

Andrew: Yeah. Great to have you on, as always. Dinny and I today are going to get into a little bit of a 15th five-year plan preview, but from a specific macroeconomic angle. For those listeners who don’t know, next week is a big week in the Chinese policy calendar. There’s the annual government meeting. They will drop the government work report for the year that outlines the headline policy, economic, and governance policy goals for the year. But they will also drop the 15th five-year plan, which, of course, outlines the major policy and governance, and social goals for the next five years.

And we are going to be all over that at Trivium, so you’ll definitely want to be listening to the upcoming podcasts as we get into all that stuff and what it means for China’s economy, geopolitics, companies, investors, etc. But today, we’re going to talk specifically about sort of a change we’ve been seeing, or Dinny in particular has picked up on, when it comes to Beijing’s willingness to support welfare spending or to offer welfare spending. Of course, with an eye towards supporting consumption in the economy, but also just kind of creating this bigger social safety net for Chinese citizens.

And the chatter, the policy chatter we’ve been seeing has kind of started to evolve a bit in a way that we think is going to be sort of officially stated in this 15th-five-year plan next week. So we’re trying to get a little bit ahead of it. Well, I guess we’ll see if we’re correct in about a week, but we’re pretty certain, based on the policy chatter, that this is the way things are moving. So we’re going to get into all that today with Dinny. And then listeners should stick around after my conversation with Dinny, I have an interview with Jude Blanchette, who is the Director of the RAND China Research Center.

Jude’s a longtime China political analyst, one of the best out there. We talk about sort of what he calls, or Mark Carney first called it, but others have referred to as well as the rupture, the big tectonic shifts in geopolitics that we’re seeing these days, in part driven by actions from the U.S., in part driven by actions from China. And we get into the rupture, and we talk about sort of how Chinese leaders are thinking about it, what their role in the rupture has been, and how they may react to it going forward. So, stick around for that fascinating conversation after Dinny and I wrap up.

But, Dinny, of course, before we get into any of that, we have to start with our customary vibe check. How’s your vibe, man?

Dinny: Yeah, mate. I think knowing that this is my last winter in Chicago is making it all the harder to deal with it. So, yeah.

Andrew: Oh, Senioritis. It’s like senioritis, right?

Dinny: What’s that? Oh, right.

Andrew: That’s when you’re a senior in high school, you start mailing it in because you don’t want to do the work because you’re so close to the finish line.

Dinny: Something like that. We had a beautiful, warm, I mean, it happens every year in Chicago. You kind of have these false springs. So, we had a week of beautifully warm weather last week. And now it’s back to sort of like Arctic conditions. And I’m just sitting here going, why? Just why? So, as much as I love this city, I am really looking forward to upping stumps and moving to North Carolina in a few months.

Andrew: Yeah, listeners may not know, Dinny’s about to head out to the Durham Area, right?

Dinny: Yeah.

Andrew: North Carolina?

Dinny: Yeah.

Andrew: The balmy climbs. That’s cool, man. Excited. I don’t want to dox you or anything, but I guess… That’s great, man. Well, I’m excited to have you one hour closer, on the same time zone as me here soon. My vibe is just like podcasting. I was just telling Dinny before I started that I recorded the interview with Jude yesterday. I’ve been prepping for next week’s pod, and then right after this recording another pod with another group. And so, I didn’t know my career would lean so heavily towards podcasting at this stage, but that’s where we are, and I’m enjoying it. And so, I hope the listeners are enjoying it as well. We’ll make sure to flag those other pods so you can check them out. And also, we’ve got a lot of cool programming coming up.

We’re going to be bringing more and more outside guests on. So, it’s going to be a lot of fun. And I think listeners will get a lot out of it. So, we’re going to get into this stuff today as well, but have to, of course, also do the very quick housekeeping — a quick reminder, first, 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 across a range of issues, as well as policy towards China out of Western capitals like D.C., London, Brussels, and others.

So, if you need help on any of that stuff, 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 receiving more Trivium content, check out our website. Again, triviumchina.com, where we have a bunch of different options, both free and paid, for subscription services around Chinese policy intelligence. Basically, we track Chinese policy along the items that matter for investors and in the markets, for companies that are involved with the tech sector. We have finance. We’ve got general China watcher/cross-cutting business issues.

So, go check out the site. You’ll definitely get the China policy intel you need. And finally, do us a favor, tell your friends and colleagues about Trivium, and also like and leave us a rating on the pod so that we get the listenership rates up and we can continue to grow that and get the word out. All right, we are going to get into this welfare piece now, Dinny. So, you’ve talked a lot before about why China hasn’t pivoted sort of to a consumption-led economy. As everyone says, China needs to rebalance the economy towards consumption. That’s been the thing for a decade plus.

And you have argued, I think rightly, that the reason that Beijing’s not really wanting to do that, even though everyone says they should, or at least all the Western economists say they should, is Beijing’s unwillingness to fund an expansion of welfare, the welfare state, from debt by borrowing money on the central government balance sheet. But you wrote something on that for us this week, I kind of previewed it at the top, suggesting things might be starting to change, the relationship between the government’s views on debt and welfare might be starting to break down based on some policy chatter that we’ve seen.

And not just chatter, but official writings from key policy advisors and from party outlets. So, we think this could have really significant implications, like I said, specifically in the 15th five-year plan and policy around both developing a welfare state as well as supporting consumption. So, we want to get into all of that. But to set the stage, why don’t you start by giving us a refresher on why Beijing so far has been so reluctant to ramp up welfare standards?

Dinny: Well, regular listeners have been more than familiar with this framing at this point. But what I’ve argued is that if China really wanted to boost consumption, it needs some sort of large-scale wealth redistribution. And to deliver it on the sort of scale of redistribution that’s necessary, such that it could have a meaningful impact on consumption in a relatively short period of time, for that to happen, Beijing really needs to do it via government spending. There’s a bunch of tools they could use. They could use helicopter money or spending more on healthcare. They could introduce an earned income tax credit like in the U.S., which is effectively a reverse income tax.

They could put more money into pensions, a bunch of ways that you can kind of put more money into people’s pockets so they can start spending. But let’s just lump all those things together as higher spending on welfare, right? Because as long as ordinary people are constrained by the need to save for medical bills or to save for an underfunded retirement or for high childcare or education costs or whatever, as long as they’re constrained by those sorts of demands on their income, they’re going to save far more than is ideal. And so, if you want to release that savings, you kind of need some mechanism to reduce those costs to put money into people’s pockets.

And in theory, Beijing has always kind of said that it is absolutely on board with spending more. Officials, Xi Jinping included, say repeatedly that they want to spend more on welfare-like programs. But in the same breath, they also say that they want to do it within the scope of the economy to be able to pay for it. And what that really means is that they don’t want to fund it with debt because they see welfare as effectively a bottomless pit. Once you start spending on welfare, you can never stop. After you’ve made a certain commitment to spend more on pensions or spend more on health care, you’re kind of locked in and you end up in a situation in which Chinese officials, researchers refer to as Latin Americanization.

But they look at the experience of Argentina and Brazil in the last century where they tried to build western-style welfare systems on the back of a developing economy, and they ended up with a situation where they had more debt than they could ever really manage or pay down. And so that’s where we are Beijing has been left trying to… because it’s unwilling to fund welfare, just however broadly you define that because they’re not willing to fund welfare from debt. They’ve kind of been left trying to boost consumption with supply-side measures that are designed to unleash latent demand, which hasn’t been hugely effective because the real problem here is that people just aren’t willing to spend more at current levels of income. And Beijing hasn’t been able to reduce their propensity to save because they’re not willing to put more money into people’s pockets.

And so that’s kind of where we’re at and why we haven’t seen a meaningful, We’ve seen incremental increases in welfare, don’t get me wrong, but we haven’t seen the sort of expansion that could have a meaningful impact on consumption.

Andrew: Well, thanks for laying that out. It’s good to sort of lay out that foundation, which you’ve been, of course, have been sort of talking about for a while. So, some listeners will be-

Dinny: I’ve been flogging this horse for ages.

Andrew: No, I think convincingly so, and you’ve converted me. I think that is a pretty reasonable take and one that’s sort of not necessarily unconventional, but one that’s not well recognized. But now you’re starting to say, okay, well, maybe there is a new wrinkle at the very least here. I mean, you’ve previously just made the case of this aversion to welfare spending through debt is pretty hard-baked into the system. But what are you seeing now to suggest something might be changing?

Andrew: So there’s this expression that’s made its way into, I was going to say sort of government documents, but really Xi Jinping has been using it for the last couple of years. And what it is, is he’s been talking about the need to invest in people or invest in human capital, tóuzī zīběn. And it’s important to note that this idea, this phrase, she’s been using it for a while now. So, the first time he used it was at a big party conference focused on the financial system back in 2023. And then in 2024, he wrote an essay in which he dealt with the idea, used the expression again. Then this idea of investing in people made its way into the Government Work Report last year in March. Then it turned up in the decision documents for the five-year plan in October.

And then it also got a shout-out in the Central Economic Work Conference readout in December, right? So, the idea has been around for a little while. The reason we’re particularly interested in it now is because since the Central Economic Work Conference, there really does seem to have been a material pickup in the volume of just stuff being written about this concept in official publications like Qiushi and the People’s Daily. Now, the really interesting thing about sort of the longevity of this idea, because I mean, what, Xi started talking about it three years ago, is that what it means has really evolved a fair bit since it first started being used. So, when Xi first started using it, it kind of gelled very much with how we’ve kind of articulated our idea of what Beijing’s trying to do with the economy.

The idea was that, look, it was based on Beijing’s concerns about how to manage an economy with a shrinking and rapidly aging population. So, the idea was like, okay, the population is shrinking, it’s getting rapidly older. So, how do we deliver common prosperity and rising prosperity given those constraints? And the idea was like, well, look, we can’t continue on our merry way where so much of growth was driven by investment, be it in housing or infrastructure or whatever. Those days are gone. The returns on investment aren’t as high as they used to be.

The way of the future to be able to generate rising wealth and rising prosperity in an environment where the workforce is shrinking and the percentage of the population of retirees is increasing, the only way to deliver prosperity under those conditions is with higher productivity through innovation, greater efficiency, and whatnot. And so the way to deliver greater productivity is, yes, yes, investment in traditional style investment in robots and AI and technology, still very, very important. But increasingly important, and perhaps even more important at this point, is investing in people.

And then the idea of investing in people was mostly about upskilling, giving the Chinese population the skills to be able to operate in a more advanced economy, increasing education levels, increasing the resources dedicated to research. It was about creating a more productive and efficient workforce. Now, also tacked onto that was a whole lot of ideas about providing greater support for fertility policies and trying to raise China’s rate of childbirth. But that’s kind of where the idea was coming from. That was a problem here that China needs to deal relative because of its population, its demographic profile, and upskilling and investing in people with kind of the way of the future. Now the reason we’re interested in it all of a sudden is partly because clearly there’s more and more interest in it.

The state media, the party media is clearly identifying this as an increasingly important thing for the five-year plan. But what it has come to mean has changed a lot from three years ago, from what I just outlined then. And all that stuff is still there, right? The idea that we need to create a more skilled, a more highly educated workforce, still there, as is the stuff about trying to increase the number of births and expand family size. But also wrapped up is we need to spend more on healthcare. We need to spend more on elder care. We need to do more about equalizing public services for migrant workers.

And so, in some ways, the idea has kind of changed from just being a solution or a tool for dealing with demographic decline, and it’s increasingly couched in Marxist terms that China is now at a stage of development where it’s not just enough for the authorities to oversee an accumulation of capital. We’re now at a level where it’s important for ordinary people to start enjoying the fruits of China’s economic development, not just as economic actors, but also as individuals so they can properly enjoy their lives. And so, the idea here is that to kind of increase not just the economic capacity of China’s workforce, but to also kind of share the wealth in a way that allows people to more fully enjoy or celebrate their lives.

I mean, it’s not the sort of thing that you usually see wrapped up in sort of analysis of new economic policies, but that’s kind of where this is going. And so, very clearly, you’re kind of seeing this enunciation that this is about allocating more fiscal resources, not just to education and upskilling and investment in the labor force, but it’s also about providing resources to things that we have traditionally considered as welfare. The whole sort of, you know, childcare, neonatal policies is definitely part of that, but also the healthcare, elder care, and sort of just ensuring more equalization of access to public services for migrant workers.

Andrew: So, just to make sure I’m sort of hearing this right, it sounds like you’re sort of saying that effectively Beijing and Chinese authorities are trying to sort of disguise an expansion of the welfare state as being an investment in people. I don’t know if disguise is the right word, but at least message it that way. Do I have that right, first? And secondly, why would they take that approach?

Dinny: Yeah, I think you’re right. And this comes back to the debt problem. It’s kind of what I was saying before about how Beijing officials often say, “Yes, we’d like to spend more on welfare, but we want to do it within our means.” I mean, going back to what I was saying before about Xi Jinping talking about this idea of investing in people back in 2023, it was like, yes, we want to spend more on childcare, yes, we want to spend more on upskilling our workforce, but it needs to be within our capacity to support it. But increasingly, you’re not seeing that caveat so much, or at all really, in discussions of this.

Han Wenxiu, who is the Deputy Executive Director of the CCFEA, which is kind of like the party’s main body on economic and financial issues, he, just a few weeks ago, wrote something on this. And he, often when he’s talking about the need to expand welfare, that makes that caveat that I just mentioned. Yes, we want to spend more on welfare. No, we’re not going to do it unless it’s within our means. He was talking about investing in people and the caveat wasn’t there. And you’re not seeing it in a lot of the discussion of it. And as I said, I think this comes back to debt.

Beijing traditionally hasn’t been willing to fund welfare from debt, but it’s always been more than happy to fund investment with debt. And that’s because investment generates a return. By definition, if you’re making an investment, the expectation is that it will eventually generate sufficient returns to be able to pay off the debt, whereas welfare is just a recurring expense. And so, I think what we’re seeing here is an effort to refrain the narrative. Sure, maybe this is linguistic gymnastics, but I think they’re in a position where they can’t overturn or go back on this fairly deep-rooted aversion to funding welfare from debt.

But we have seen in the past that when they change the narrative that money does appear for certain issues. Now, we saw this a couple of years ago when Xi Jinping declared that China’s low birth rate was a national security issue. And so, by doing that, all of a sudden, childcare, maternity care, other neonatal policies, they were no longer welfare programs. And once that happened, the money kind of materialized for those sorts of pro-family, pro-child sort of funding programs, because all of a sudden, it wasn’t welfare anymore. It was a national security concern. So, I think that’s what we’re seeing here.

Beijing isn’t trying to dismantle its traditional position on welfare because it spent too long building that up and it’s kind of hard-baked in the system. And so rather than arguing the merits of spending more on welfare, we’ve got this new argument that China needs to invest in the future. That’s going to be the key to economic prosperity in the future. And also, at this stage of development, it’s just important for the Chinese people. And so just kind of reframing it as an investment as opposed to kind of a welfare expense, I think that’s what they’re doing here. And it’s kind of laying down the foundations for making government fiscal resources available for spending on things like health care, pensions, child care, elder care, etc.

Andrew: That’s all great. I’m going to take us a little bit off our roadmap here, maybe throw you a little bit of a curveball. But as you’re saying that, so first of all, I guess that my question here is, do you think, I’m going to try to put my thoughts together, I’ve got a lot here — do you think that this is something that sort of Xi Jinping or senior leaders are reframing as something to message domestically about how they’re approaching this? Or is this something some advisor to Xi Jinping who wanted to support consumption, and welfare came up with to justify it politically within the system?

So, it jumped out at me when you said how neonatal policies, or pro-natal policies, not neonatal policies, were kind of flagged as a national security issue. There’s no better way to get funding for something in any government ecosystem than to say, well, this is national security. That’s how famously Liu He convinced Xi Jinping that debt was an issue, was to say our debt issue, our debt crisis is a national security challenge. So, the question is, do you think this is something Xi kind of came to on his own, and they’re messaging this now like top down? Or was this a clever advisor who came to Xi Jinping and said, “Listen, this isn’t welfare. This is an investment. And here’s how it’s an investment.”

So, with the caveat of we don’t really know, we don’t always know how decisions get made in the system. Just interested in your overall gut sense on that, because I’ve actually been part of conversations in D.C., similarly, that were to try to build constituencies for bills on Capitol Hill that will invest in people. The narrative is often, well, we need to invest in our people as a down payment on the future that we will get back and higher skills, upgrading, better more productive workers, which actually, as macro economists, is something I do believe in.

But that is, even in the U.S., used as a narrative to fight back against just saying, well, this is just putting money in people’s pockets. This is an expansion of the welfare state. So that was a lot. But what do you think the context is internally on this for China?

Dinny: Yeah, my sense is that I think Xi Jinping has full buy-in on this, and there’s a few reasons for it. One, the whole national security thing I get, it’s a really easy way to reframe an issue. It’s like, well, this is a national security issue. Can’t you see it? This has national security implications. You carve out something, you rebrand it. I mean, it’s obvious implications, right? But for this, as I said, I mean, it requires some real gymnastics here to kind of get your head around how, yeah, it really does feel like the scope of what they’re trying to reframe as being investment is really quite significant within the scope of sort of the Chinese political economy.

Now, you’re right, Western democracy, everything’s an investment, right? A politician turns up to open a school. “We are investing in our children’s future.” Turns up to open a hospital. “We are investing in the well-being of our people.” And so there’s definitely an element of that in sort of what’s happening here in China with this sort of formulation of investing in people. But the idea here is that they’re pairing it, it’s not just a rhetorical tool, they’re pairing it very much with the idea of investment in things isn’t generating the returns it used to.

Therefore, we need to invest in people to generate the prosperity of the future. And to a certain extent, it’s quite what I was explaining before, where this kind of idea started with investing in people to the extent that you’re kind of upskilling and investing in education in order to be able to generate a more productive workforce. I mean, that kind of makes sense. But the next step that seems to have taken over the past year, where it’s like we need to invest in healthcare and in elder care, the returns on those things as an investment aren’t immediately obvious.

And at the same time, you’ve kind of got these articles being written about this idea that are coming specifically from a Marxist perspective, which I mean, maybe I’ve never kind of looked for it in the past. But in the past, when there’s kind of been a new government economic or financial policy, it usually doesn’t get steeped in Marxist terms. And yet there’s a lot out there written about investing in people from a Marxist perspective, that at this stage of China’s economic and social development, it’s now time for us to kind of engage in a better development of people as individuals rather than just as economic beings.

As I said, I just haven’t really seen that before. And so that’s my kind of my sense that this is something that has buy-in from the top because it feels very different than just a convenient way for an advisor to kind of reframe a particular issue that is their hobby horse. Just the sheer scale of reframing what investment is and what this means for the economy seems to be happening on a much larger scale.

Andrew: Yeah, that’s a great point. I tend to agree with you. It’s a vibe reading, right? And it’s kind of all we have. But just the various ways it has been expressed so far in the outlets within which it’s been expressed, and the fact that Xi Jinping is one of the torchbearers for this, at least at this stage, seemingly, would seem to say it’s more fundamental. Of course, that doesn’t mean that it wasn’t policy advisors over time, right? You know, kind of seeding the idea. I get what you’re saying. This isn’t a signature, a pet priority that someone’s going to sneak through under their radar. It’s meatier than that. But I do just kind of wonder if there was someone who consistently pounded this drum enough that it started to sort of change the calculus in terms of how senior leaders were thinking.

Although that said, I also will say, I’ve said before, I’ve just gotten this sense, again, just reading all this stuff, and I can’t point to one individual thing, but that senior Chinese leaders were sort of trying to convince themselves to do the right thing on this front. Meaning like they’ve been slowly inching towards more welfare spending, slowly inching towards more central government-funded infrastructure investment both in soft infrastructure and hard infrastructure, kind of there’s an aversion to using the central government balance sheet too aggressively in that way.

But they know ultimately like the local governments can’t do it and they’ve got this massive demographic problem. So, like the answer is obvious, there has to be more government spending on it. And so, I wonder if that was maybe part of the process as well. Of course, that all said, we’re not 100% sure that this is baked in. Like, this is our early read on something that we think is going to happen. And again, we think, well, the proof will be in the pudding. The first chance for the proof to be in the pudding will be next week if something along these lines is at least nodded to, if not explicitly sort of outlined in the 15th Five-Year plan.

But given that we’re not 100% sure this is happening, what would push you towards more certainty that, okay, we’re now moving more concertedly in this direction?

Dinny: Yeah, I think the first thing is I’m going to be reading the five-year plan document with this in the back of my mind to kind of see if the ball moves forward. Because as I said, this idea has popped up in a number of documents so far, but there just hasn’t been meat on the bones. I mean, it was in the Government Work Report last year. It was in the decision documents for the five-year plan. It was in the Central Economic Work Conference readout. So, it keeps popping up.

So, the question is then, okay, given that there seems to be momentum building, how would that manifest itself in the final five-year plan document? So, that’s kind of what I’ll be watching for. And then beyond that, we really kind of need to see not an increase in spending on welfare here and there, but like new programs. You know, perhaps the central government funds some programs to ensure that migrant workers get better access to public services in the cities they live, or maybe there are new programs to support elderly communities.

I’m not sure exactly what this would look down, but it really comes down to where they start spending more money. I don’t think we’re going to get explicit programs in the next week, but at the very least, hopefully, we’ll get a much more succinct direction of travel.

Andrew: Well, that kind of pulls us back to the question of where is this money going to come from, right? So, next week, we’re not just going to get the five-year plan with big ideas on governance priorities, but we’ll also get the Government Work Report, which will detail, I guess it’s not both the Government Work Report and the budget report come out. I forget which details are in which one exactly at the moment. But either way, we’re going to get details on the budget for 2026 as well.

And so, you know, last year, the central government budget deficit was 4% of GDP. That was the highest it’s been in 30 years. In fact, the first time it’s cracked 3% of GDP in 30 years outside of, I think, once during COVID. So, I mean, where’s this money going to come from? Are they going to raise the budget deficit this year, you think, and commit some legit fiscal spending to these priorities?

Dinny: You know I really don’t have a good answer for this one because 4% budget deficit is already high. I mean, it’s hard to imagine them ramping it up two years in a row. Now, our colleague [Wen Yien 00:30:38] noticed that Xi Jinping talked about extracting greater fiscal resources out of state-owned enterprises, which is something he said during, I think, December at the Central Economic Work Conference. Maybe that’s where it will come from. So, that would allow the budget deficit to stay at 4% while effectively redistributing wealth from the state sector to households. Maybe.

But there’s been talk for years about taking more profits from state-owned firms and redistributing them to the state. It’s been happening incrementally, but it has been like pulling teeth. So, I’m not sure the degree to which they can expand that, how quickly it will happen, what sort of pushback might occur. But I mean, that is the perhaps one source of potential income that the government has without having to resort to raising taxes or without needing to borrow. So, I mean, I don’t have a good sense, even though this whole thing seems to me to be an effort to reframe spending on welfare so that they can borrow to do it. At the same time, I just don’t see there necessarily being an appetite for higher government debt levels, regardless of what that money is being used for.

So, I mean, this is really the open question at the moment. If they go down this path, where does the money come from? And I don’t have a good answer yet.

Andrew: Follow the money. That will always get you the answers. I mean, it would be remarkable, absolutely, like a game changer if they finally, you know, they’ve been talking about this for decades, like finally, really, in a concerted way, re-channeled money from, or funneled money from SOEs into direct financing for investments and people. I mean, that’s the old Michael Pettis hobby horse, right? That the households have been subsidizing the state sector for decades and decades. And the only way to sort of adjust the structure of the economy is for that process to go into reverse. And so, we’ll keep an eye on that. I’m not super optimistic, or I’m skeptical that that would happen.

I don’t know if optimistic is the right word in terms of whether or not that happens, but it would be monumental. It would be the beginning of that whole process going into reverse and increasingly signal the state is willing to subsidize households, but that’d be a big, big change.

Dinny: Yeah, it would.

Andrew: All right, man. Well, thanks for running us through all that. We’ll have more answers to this. We obviously won’t have the answer, but we’ll get a ton of information next week when the 2026 Government Work Report comes out, and the 15th Five-Year Plan also drops, and we will be all over that in our next couple of pods, if not our next three or four pods, dissecting various aspects of that. So, stay tuned with us. We’re going to have a lot of really meaty pods in the next few weeks. And in the meantime, please stick around for my conversation with Jude Blanchette, Director of the RAND China Research Center on how China views the rupture in geopolitics. It’s a really good conversation. But Dinny, thanks a bunch for joining me today. This was great.

Dinny: No worries, mate. Pleasure as always.

Andrew: Thanks, everybody, for listening. Stick around for my conversation with Jude. Thanks, y’all.

I’m joined now by a very special guest that we have on the pod. I kind of previewed this a few weeks ago that we were going to make some changes in the structure of the pod, and that is to bring on more and more external guests. And so, our first external guest of 2026 is somebody I’m really excited to have on. Really needs no introduction. But for those of you who may not know him, he is the director of the RAND China Research Center, an expert in Chinese politics, but really all things China. And that’s Jude Blanchette. Jude, great to have you on, man. How are you doing?

Jude Blanchette: Great to be here. Although the idea of anyone being expert in all things China...

Andrew: Oil markets. Talk to me about China oil markets.

Jude: Yeah, I was going to say we can test the limits of that in about five seconds here.

Andrew: Well, I mean, yeah, you set the standard. We’ll put it that way for those of you...

Jude: Mile wide, inch deep is my sweet spot.

Andrew: Well, I’m super excited to have you on. For listeners who don’t know, Jude and I worked together in pre-pandemic life, which was sort of a different life altogether at the Conference Board in Beijing. And so that was back, what? 2016, 2015?

Jude: 2015.

Andrew: Yeah, so over a decade ago.

Jude: Yeah, 2015 is when I joined the conference board.

Andrew: So, and now we’re both here in D.C. in the swamp. And so really appreciate you coming on. I wanted to talk to you today, start out a little bit more high level, because I know, you know, you’re often are working and thinking sort of at the strategic level when you’re doing work, both, you know, in support of various government outcomes, but also for the private sector. And we were talking the other day, and you were talking about kind of this idea of the rupture, these geopolitical ructions that are happening all around us. And that term specifically was used by Mark Carney at Davos, a speech that got a lot of attention, some of it controversial, some of it highly praised.

But his general point was, we’re not at a transition period. This is not a temporary thing. This is something completely different. It’s a rupture. And so, you know, we’ve seen a lot of volatility, of course, in terms of geopolitics at the beginning of the year, Venezuela, Greenland, now threats to Iran, Supreme Court tariff ruling, all this stuff. And with those kind of things happen immediately, and the sort of bigger idea of the rupture in the background, you often get this analysis from people that I kind of view as like somewhat lazy, which is China’s going to benefit from all this. Amid chaos, all this change, China is going to act as a stabilizing force, and countries are going to increasingly sort of hedge their bets, if not fully turn away from the U.S. and either align with or have some kind of relationship with China to bounce out their relationship with the U.S.

So, I kind of want to get into sort of all of that and specifically how China might be thinking about this. But to start, I wanted to ask you, when you talk about “the rupture,” What do you mean by that? I mean, Carney may have meant one thing, but how do you think about it?

Jude: Probably similar to you. I’m less steeped in IR literature on this, and it’s more driven by lower elevation observations and interactions with governments, with companies. And I think Carney’s speech hit on something that everyone has been feeling for a while, and it was the first really prominent national leader to make it so explicit. But since 2016, Brexit, Trump, we’ve been talking about sort of end of an era.

Some of those assumptions felt a bit premature in 2017. But I think since certainly, you know, Trump’s first administration, then building with Russia’s, you know, full-scale invasion of Ukraine, we can talk about this later, but I think this brewing China Shock 2.0 AI, you know, first starting with ChatGPT, or at least for popular awareness, starting with ChatGPT a few years ago, and now just over the course of a few years, we’re in just an entirely different universe of thinking about the disruptive possibilities of the technology.

I mean, we’re recording this the week that that sort of sci-fi report from, what is it, Citrini? I’d never heard of them, but sort of set equity markets alight on Monday, Tuesday, with just some sort of sci fi speculation about disruptive potential of AI. We also have Trump’s Greenland threats, which I think, although they didn’t materialize in the end, but I think coupled with Russia’s invasion of Ukraine, Chinese saber rattling on Taiwan, you do have this eerie feeling that while the post-World War II period was by no means fully peaceful, that we are in with the coupling of these sort of technological, global governance, China, territorial aggression, we can no longer use the same basic assumptions or structural assumptions about what underlays global politics, economic security, to describe the world we’re in.

You know, Carney’s speech, in one part, was cathartic for many people who got a sugar high from hearing a Western U.S., pro-U.S. leader saying essentially, screw these guys, they’re being bullies. We can no longer look to them for the type of support that we’ve counted on. That sugar high, I think, evaporated within a couple weeks of Carney’s speech. You’re left thinking, well, what is the alternative to that? But I think the second part of it, which does make sense to me is in a very sort of Antonio Gramsci sort of way, we’re seeing the death of one order. We know a new order is coming into being, but we don’t entirely know what the rules of it are.

And I think part of it is that new order is being formed right now through iteration, interactivity. Trump is going to leave office, I would imagine, in a few years. But obviously, the global trading regime will just look different from what it did. And so, I think it’s the accumulation of both these structural and contingent events that have happened over the last decade, coupled with the idea that we know that order is deteriorating, collapsing, but we just don’t know what the new order looks like yet. That is really, I think, what, to me, is captured in the idea of a rupture.

Andrew: Yeah, and there’s obviously a lot of uncertainty, which I think is one of that uncertainty of not knowing what replaces the old order, I think, is what sort of causes a lot of anxiety, both in individuals and in nation-states. But so I want to ask you, Xi Jinping, bringing China into this piece of it, of course, always says the phrase that we’re seeing changes unseen in a century. And I mean, correct me if I’m wrong, but I think he generally means kind of the demise of the West and the rise of the East. Maybe it’s not that simple, but that’s kind of how I tend to read it. I think it’s undeniable, we actually are seeing, you know, through the rupture changes unseen in a century, but I’m not sure that that’s what, it’s actually what Xi Jinping is describing. Do you see what you’re describing as something different than that, something bigger than that, or how do you align those two ideas?

Jude: Yeah, just first an observation on what I think is an underappreciated advantage of the Chinese system, and this could be political culture as much of anything, but I think the party has always been more attuned to shifts in economics, politics, geopolitics, domestically and internationally. And I think this is born out of an acute sensitivity driven by an unceasing view that the precipice is never that far away. And so anticipating shifts, understanding emergent trends, getting ahead of them is, from a foundational perspective, imperative for regime security. I also think they know that it is important for accumulating power.

And so, Xi Jinping has shown this skill multiple times. Early on, it was clear, like, to be fair, like Hu Jintao and other leaders, but I think Xi Jinping was really attuned to shifts in technological order driven by new emerging technologies, which China, it was imperative that they did. And it was also strategically important that they harness these technologies because they were not legacy technologies where there had been an established Western dominant order around them. And this was sort of an opportunity for China to pass on the curve. And also that these technologies, I think the Chinese saw, certainly earlier than we did, that these were going to have just a real penetrating ability to shape domestic and international order.

Changes Unseen in a Century, I think, falls in that where, you know, that came out at a formal top level after bubbling up through think tank discourse, sort of really emerged in 2016. I guess where I slightly differ on an interpretation of it is I think it is a bundle of concepts and has evolved over time. So, I think initially it was a very teleological frame that was capturing some of what was happening in geopolitics in the mid-2010s. So, redistribution of global power towards China, but away from the West, erosion of sort of Western institutional dominance, rise of these non-Western centers of economic and political power, you know, multipolarity and technological revolution. So, I think it was that bundle.

Where I think it has evolved a bit is you do hear more on the official discourse of them talking about the profound changes being both opportunities and risks. So, it is both moments where China can grasp history and move forward boldly. But it is also, I think, as you see in the discourse about these sort of growing challenges, I don’t have the language at the top of my head, but it is something like you see this more of sort of strategic opportunities and risks coexist, you know, challenges and uncertainty could be coming greater. So, I think within that construct of great changes, the Chinese know there’s some opportunities here, but this also comes with risk to the Party. And I’m curious your thoughts on this as well. I think people underappreciate how, in many ways, small-c conservative Beijing is.

If the status quo is providing benefits, it’ll often just latch on to that, even if a shift from the status quo potentially offers new opportunity space. The unknowns about a shift off the status quo will, I think, often keep Beijing in its fixed position. Once changes do occur, you know, sort of exogenous changes like we’re seeing now, I think China immediately goes into the balanced assessment of risk and reward. But I think in general, as you noted in the framing your question, China looks at shifts in order and shifts of the status quo in some ways initially wearily because I think it is a risk-obsessed organization, which in many ways is what has given it such durability over a century plus.

Andrew: Yeah, I think that’s right. I think there are certainly Chinese aspects of that. I think that’s also largely a feature of government to sort of default to the status quo to be largely risk averse. So, I mean, I take your point that it’s like fundamentally inherent to sort of the Chinese Communist Party and its approach to governance. But I do wonder if part of that is just part of leading a large country, that you tend to be more reactive and weary of getting out in front of big change.

Jude: Completely makes sense. We would not say that Mao’s regime in the high point of the Cultural Revolution was a fundamentally cautious actor. And again, that was a China that was funding guerrilla movements across Africa. So, yes, I do take your point. But I also think there is not just a bureaucratic explanation for this. I think there is a political cultural explanation that predates Xi Jinping and has this as an institution which is so focused on survival and regime durability that it is not highly risk taking. In a way, you could make the same argument that the United States should be just as cautious, given that it is a large bureaucratic entity as well.

But I would say you see how leaders matter here. And Trump is moving this big bureaucratic institution to do some pretty remarkable things.

Andrew: Yeah, well, he obviously is a unique figure in and of himself. I actually wanted to circle back to how you opened your comments on the changes unseen in a century, which is your observation, which I agree with that sort of the Party in particular, or the Party generally and Xi Jinping in particular has this sort of capability to take the temperature of evolutions in sort of technology, geopolitics, governments. I mean, this is a little bit more of a tactical question, but how do you, I agree, how do you square that with this idea that we often think of about Xi Jinping not getting good information? This is a bit of a dogleg, but do you think he gets good information, or is it possible for them to be bad at receiving information or like policy feedback, but also be good at scanning the horizon?

Because kind of what you said makes me think, well, they must be good at sort of projecting out their own vulnerabilities. Does that make sense?

Jude: Yeah, I think there’s a caricature analysis of this, which is that Xi Jinping is up in the castle keep, totally isolated from reality with everyone, you know, scared to deliver bad news to the boss. Obviously, that is not the world we’re operating in. And policy coming out of Beijing does not reflect an isolated madman who has no grasp on reality. That being said, I think it is undeniable that Xi Jinping has created a ruling coalition around him, which is rowing in the same direction and is not staffed with sort of team of rivals where, unlike Trump, who I think likes a bit of a squabble and to see…

In some ways, Trump is unique, where I think even in contradistinction to previous U.S. presidents, and maybe even other Western leaders, Trump may be more plugged in to what’s happening outside of the White House because he will spend an hour watching cable news at night and in the morning and get on an unsecured cell phone and talk to Mr. Pillow, I think a range of other people in the private sector and contacts. And I think that actually makes him somewhat unique. I think we can be sure that Xi Jinping is not in touch with sort of man-on-the-street sentiment, or at least it’s not reflected in policymaking, trying to distill a course correct.

I think you still do see Beijing make tactical decisions, which indicate to me that information, albeit circumscribed, gatekept, aligned with Beijing’s top-level priorities is still flowing up. It’s a Leninist regime. They’ve got technically multiple information channels that are moving up verticals from the local level up through. So, I think the reality is we’re likely to see a mixed picture here where political incentives and ideology, concerns over career advancement shape what information is moving up and down the silos. I think Xi Jinping has a imperfect but broadly realistic picture of where China is. Again, I’ll throw the question back to you.

Can we think of policy areas where you could say something like, well, they’ve been talking, there are areas where China clearly should make pivots and where they’re talking about making a pivot, and they haven’t, consumption being one of them? I don’t think that is explained by a bad information environment. There are things like when they initiated the three red line policy seems like an inopportune time to try to initiate a course correction in the real estate market in the depths of COVID. So, maybe there are moments when we can see that the policymaking, decision-making system was maladroit.

But I don’t see Xi Jinping as being a leader severely disconnected from reality in the way that some of the kind of bad information, bad choices out framing seems to indicate. But again, you’re closer in a lot of the economic policy domains.

Andrew: No, I think you’re 100% right. I mean, typically when people ask me the question about, you know, is Xi Jinping surrounded by yes-men? Is he getting good information? You know, people often make very simple comparisons, right? And they are often comparing him to Vladimir Putin. So, what I always say is Xi Jinping is not Vladimir Putin. Vladimir Putin is isolated. He is only surrounded by yes-men. He’s making decisions based on his own intuition, often very cloistered. That is not Xi Jinping. And maybe like eventually the system like Xi Jinping becomes more Putin-esque as he is in power longer and longer and longer so it’s always a risk, but that’s just not how we see the Chinese system working.

One, based on how information flows, but two, exactly as you said based on course corrections that they’ve made. And so you’re 100% right I think a lot of times we look at policy decisions that are made and say, “We think that was a stupid policy decision. They must have made it because they don’t have the right information.” But actually, maybe they just have different outcomes that they’re pursuing than we would be pursuing or that we think they’re pursuing.” For example, on the consumption piece, you know, Dinny and I, my colleague Dinny and I talked a lot about how we don’t really think they want to bounce towards consumption. Or if they do, it’s at the end of a very long process.

So, you know, if you think they want to bounce towards consumption and you see them not doing it, and of course you think, well, they must not understand what’s going on, but maybe actually their goals are different. And so, I think you’re right. There’s like a bunch of things that get lumped together and often people just kind of say, well, maybe they just don’t know what’s happening on the ground.

Jude: It’s also a difficult thesis to falsify because we just don’t know what information flows really look like on especially the most sort of sensitive matters that we care about. So, it’s hard to know what information he should be getting that is in the pipeline. So, I think it just is a benchmark, though. Are we seeing Xi Jinping act in erratic, irrational ways that seem to be completely divorced from the obvious realities on the ground in China? I don’t see that. Now, I admit there are areas like on Taiwan policy where we now have a defenestrated Central Military Commission. Xi Jinping, basically only in there with the Central Inspection propagandist. Now, there’s still senior commanders at the theater commands, but that’s one of those areas where you just don’t know, for good or for ill, what the decision-making and information flows are.

So, when I say this, I don’t mean to say that, and I don’t think you are either, that this is a perfectly well-oiled decision-making machine. Dictatorships tend to err, and especially over time, towards poor and poor decision-making. We’re going to come up on another party Congress, and if we’re going to discuss this, but my guess is he’s staying on. Yet again, the personnel in the system will further orient towards Xi Jinping’s vision that minimizes the space, in theory, for heterodox views on how China should move forward, builds some path dependence. That is not a great equation for decision-making.

Andrew: Totally. As I said earlier, I think the risk becomes greater the longer he’s empowered. I think that’s both evident in China and historically evident. I appreciate you pointing out, yeah, we’re not saying just because the system can self-correct that everything’s perfect. That dichotomy is a trap we run into often in China analysis, in Washington in particular. If you’re not saying if Xi Jinping is getting terrible information, you’re saying he’s getting perfect information. Well, no, there’s gray area in the middle and there’s middle ground between those two things.

But to bring it back to the rupture piece that we started with, speaking of what information Xi Jinping is getting and how he’s thinking about the world, I mean, how do you think he and the Chinese leadership are making sense of what’s happening in the world? Is this rupture sort of something that they envisioned in any way, as we alluded to at the top, changes unseen in a century, or are they just as confused about what’s happening as everyone?

Jude: Yes, that would be my answer. I will try to disaggregate it. So, I, without a doubt, think that the leadership and Xi Jinping himself think in many ways, where we are now is exactly what we have been preparing for and anticipating for more than a decade. I think Xi Jinping in some ways looks prescient, anticipating and preparing for a world of just much more contested geoeconomic and geopolitical space. I think everything in the past several years validates the Chinese, in their own logic, validates the Chinese approach of self-reliance, self-sufficiency, of just building technological and economic resilience so that they could fight with a better toolkit the next geopolitical struggle, which they did in a few rounds last year with the United States, where China leveraged its export control dominance here.

I think there is some deeper critique of capitalism, which I think Xi Jinping is still wafting the flames of, that comes from a genealogy of Marxism and Leninism, which looks at inherent contradictions, building in capitalism, which inevitably lead to its weakening and self-destruction, which they see occurring here. I think they, again, like Lenin, see imperialism as an inherent part of capitalist expansion. And so that’s how they make some sense of the Greenland push, the Latin American push. I think they see this as confirming that the era of Western preeminence and hegemony is collapsing.

So, in that sense, I think they’d say, yes, this is at a macro strategic level and theoretical construct level, we have been anticipating this. Now, that being said, these people also put their pants on one leg at a time. And every morning, the leadership in Beijing has to look out at a landscape geopolitically, which I’m sure is vexing to them, right? Starting in Latin America, where I think you saw the Chinese react to the Maduro raid in keeping with what we’ve been saying so far in this discussion, relatively coolly. There were some downsides to this in terms of losing a sort of friendly beachhead in Latin America.

But on the other hand, you know, so 4% of China’s energy imports come from Venezuela. And most of that was going to the teapots. And they basically wanted teapot consolidation anyway. So, like, life gives you lemons, you make lemonade. But still, for them, the big question out of Latin America was less like, “Oh, no, we just lost Venezuela.” It was more, does the United States double down on a hemispheric strategy? And that comes at a zero-sum tension with their Indo-Pacific aspirations. And I think they’re still assessing that. Then I think, you know, they’re looking at Greenland.

I think they know that this was not really driven by Trump’s fears of Chinese influence in the Arctic. But I think they see this as a imperialist push to gobble territory and resources. But having talked to many Chinese about this since those threats were made in earnest last month, they see this as a positive fracturing or deterioration of transatlantic ties on China. I was at the Munich Security Conference, what, a week and a half ago, and you’d just say that there was not much talk of transatlantic coordination on China policy as the U.S. and Europe were still, I think, experiencing the wounds of the Greenland threats, amongst other things.

I think the Chinese look at the war in Ukraine and feel that they are in a fairly settled position there, that they have taken some hits in their relationship with Europe, but by and large, they have been able to stand by their strategic partner, Russia, and if anything, increase in important ways the support they’re giving for Russia in satellite surveillance capability, drones, drone parts, and they haven’t really taken much of an additional hit for that. I think they look at the Middle East and strikes on Iran, which I think they’re watching with uncertainty.

Iran is a bigger supplier of oil to China than is Venezuela, but still, I think most of that is going into the teapot refineries and so is replaceable. I also think China is showing the limitations of strategic partnership with China where there’s really only so far as they’re going to go for... Russia, I think they went further than we should ever expect them to go for Iran and Venezuela. But just to summarize, there’s a lot of moving parts. And at the center of this, in everything we just talked about, is a mercurial, unpredictable leadership in the United States that I think China sees benefits flowing from Trump’s omnidirectional energy, to put it politely, in the global arena.

Again, they’re always looking for bank shots. But I do think this also raises, look, China is an absolute beneficiary of the U.S.-led order in the post-World War II period. And that’s why anytime I hear the Chinese say that the United States was trying to contain China, we have done the most ham-fisted job possible of that. It’s not to say that U.S. views on China were wholly benevolent. I think that’s a falsehood as well. But China has significant, significant stakes in the existing status quo international order. Their sweet spot was a lulled United States propping up an international order that gave China a massive runway of technological, economic, military.

And that’s changing in unpredictable ways. And I think for Beijing, they’re coolly assessing where this is going. Again, we’re separating U.S.-China relationship for the time being. But I think it’s, again, as is usually the case, it’s a net assessment China’s doing on all these.

Andrew: Your last point there’s a great point. And I actually wanted to bring that in. I mean, how much is China motive actor, like in the rupture, right? Like these tectonic shifts, in your view. We all seem to look at it and say, “Well, it’s the United States driving this and the mercurial president of the United States driving this.” But, I mean, China is playing in in some way to set the context for this restructuring, right?

Jude: Oh, for sure. Yes, yes. And this is one where I think Beijing is quietly aware that it is a dominant motivator of the rupture, but is publicly being silent. And they would love to place all this on Trump and the United States. I mean, first point is, I don’t think we will really appreciate the role China has played in driving the current moment in geopolitics for a decade. I think this is one of these where we’re just way too close to it.

In the same way that it’ll take us, I think, 15 years to really know the effects of COVID politically, sociologically on the world of the United States. I just think China is such an outsized player here across a number of domains that it’s just hard to separate this. First, I think it’s hard to separate Trump and Trump’s initial election and the wave he rode without understanding the role that China played in that. Of course, remembering that 2016, the year of running for election, was the year that the China shock work came out, which has been complicated, and I’m not trying to get into that. But the point of an assessment in a narrative of China as this massive, massive trade and manufacturing juggernaut, which disrupts political and economic realities in trading partners, especially the United States.

We’re experiencing that with Europe right now. This very much to me is redolent of Karl Polanyi in The Great Transformation talks about the double movement of sort of unalloyed capitalist neoliberal progression, which then feeds a backlash. And I think in 2016, starting in 2016 in Europe, the United States, but here in the United States, you saw it go in a sort of emerge in a Trumpist-right and a Bernie Sandinista left orientation that both were reacting to grievances around what economic engagement with China had done to the United States.

Again, I think there’s a complicated reality that avoids the sort of shoulder shrug or the full-on China shock narrative because I think it was complicated. But nonetheless, I think that was an important role. Take something like Greenland. I think it is only in the world we are in now with a logic of strategic competition really deeply embedded that Trump could actually claim that one of the reasons he wanted to annex Greenland was because of a China threat. I don’t think they would have thought to use that in early 2017, but we were deep, we’re a decade deep into a really deeply held political logic of strategic competition that’s driven by China.

I think some of the belief that the existing international order doesn’t work is because it has been difficult to assimilate China. I praise this paper all the time, but I’ll do it once more. Mark Wu’s paper, The China Inc. Challenge to the WTO, which I still think is a wonderful summary of how difficult existing Western post-World War II multilateral institutions, how poor of a job they can do of bringing in, in China’s case, a hybrid state capitalist economic system. So, I think China really plays an important role here. I suspect some of this, again, why I’m saying I think we need to wait 15 years. Some of this we might be exaggerating the actual role that China is playing.

But for me, I think Beijing right now dramatically underestimates how powerful a propellant it is for a rupture, which in many ways will erode an existing international order, which it has done very well of.

Andrew: Totally. And it’s funny, you bring up the Trump administration using the China threat as some of the justification for the Greenland threats. I forgot they had even done that, to be honest with you. It didn’t even clock, I didn’t even clock that aspect of it just because it seemed like Trump wanted Greenland. So, I didn’t really think about the justification all that much. But of course, you can just throw it.

Jude: Which, by the way, was the exact right way to play that.

Andrew: Cool. Well, then I want you to sort of let me know the vibes of the Munich Security Conference. You were there a week and a half ago. Obviously, they’re in Europe and Munich, and the Europeans are stuck in the middle of all this. But, you know, what were the vibes there, both in terms of the U.S. aspect of things, but also the China aspect of things?

Jude: Maybe similar to the rupture conversation, the surface level was all about Trump. But I think deeper down, the real strategic dilemmas were in many ways or equally, equal to the United States were about China. So, this was the second year in a row that I’ve gone. And, as with last year, it was the U.S. who sucked a lot of the oxygen out of the room. Last year, it was Vice President J.D. Vance’s speech, his meeting with the AFD right before Munich and again a week before Germany was having elections. This year, it was all anticipation of who would the U.S. send, what was Rubio’s speech going to be, Secretary of State Rubio’s speech going to be.

Obviously, the wounds of the Greenland threats had not healed, and I don’t think will heal, hence the rupture point. I think some large amount of the distrust and friction between the United States and Europe, I think, will take a generation to repair. So, that stuff, I think, has been captured well in the media. I think what I felt more deeply is, just to veer away from China for a second, one, 2026, I think, just will be a really impactful year because it will settle some trajectories. I don’t know what you think. I don’t think we’ll get to the end of this year with it looking very much like it does now. Things will have to break one way or the other, right? I think domestically here in the United States, we’re recording this just after the Supreme Court ruling on IEEPA. Last night was Trump’s State of the Union. You know, we’re going to have the midterms later this year.

It strikes me that Trump is now a bit wounded. I think his reaction to being wounded is to lash out. So, I suspect this is going to be an energized year here in the United States. I think in Europe, this will really be a rubber meets the road or not on strategic autonomy in Europe, remilitarization efforts. I think we’ll see how Europe is going to land on China. Chancellor Merz is in Beijing today. Obviously, you’ve had Macron was there recently, Starmer. So, I think this is going to be an important year to see how Europe navigates this new challenge of theirs of both having their first and second largest trading partners and the two superpowers at odds with each other.

And for Europe, having them in some ways, both superpowers at odds with Europe. China, for structural reasons, about both support for Russia in the war, but also, and we can talk about this, the sort of China shock 2.0. And in the United States, Europe is dealing with a whole host of issues that the Trump administration is throwing their way from trying to wrap up the war in Ukraine to, I think, continued persistent threats of tariffs and, of course, Greenland. On China, I just came away again feeling the weight of strategic dilemma that Europe is facing over how they’re going to move forward with their relations with Beijing.

There is no Europe view on this and there is no Europe exposure. But given that the meeting was in Germany, you can feel the unworkability and the unsustainability of the status quo here, wherein you are definitely seeing European companies and industries decimated by competition with China and that building deep political resentment that is in some ways feeding political parties like the AFD and certainly feeding populism. I don’t get the sense, I didn’t get much clarity on how Europe is going to navigate this. And I think the reality will be not that well, because it is a sui generis position to be in now that Europeans have not had to deal with of losing, in some ways, meaningful support from their primary security and economic patron of the United States, having a deep trade and economic partner in Beijing, which is, in its own way, moving towards degrees of bellicosity and weaponizing interdependence.

And I think China’s export controls on rare earths last year were a significant, significant shock to Europeans that I heard in all my private meetings in Munich of just how deep of a shock that was. But dealing with that is costly, painful, and it’s not clear to me that the political will has fully been mobilized to wean yourself, for example, wean yourself off support on dependencies of China on rare earths, for example. I mean, that’s a decade-long project of extraordinary investment, and I just don’t see the will there.

Andrew: And that’s an amazing observation because I’ve gotten the same sense, maybe not quite as viscerally or explicitly as you did, just how deeply the Europeans were impacted by the rare earth export controls. And they were collateral damage of that entire thing. It wasn’t even aimed at them. And yet they seem to have felt it more deeply, even in the U.S., in a way.

Jude: Yeah, because this is a lose-lose-lose-lose situation for them. On the one hand, China can squeeze and push the carotid artery. On the other hand, Europe’s in the back of the line… Not in the back of the line. They’re behind the United States, let’s say, in the corporate queue to get licenses approved. So, even in a best-case scenario where China really opens up the tap, we can’t unsee the threat of China choking off again. So, everyone is going to be doing what they can to stockpile where they can. The United States is going to have more ability to be passing lists over the table of specific licenses they want approved.

I think the United States is going to be in a better position to lock in supply from China while we’re still buying from them. If you look at the critical minerals initiative that the White House is pushing, they held the initial meeting under the auspices of the State Department a few weeks ago. That looks good. The problem with there is that was still, I think for many Europeans, is still a very unilateral US-driven initiative where it didn’t feel like a sort of everybody’s equal, we’re all in this together. So, I think Europe’s just doubly squeezed on this.

Andrew: Totally. Well, in this, we’ve seen this movie before. The Europeans were, and European companies in particular, of course, were super worried during Trump’s first presidency, right? When the first trade war was there, or the first part of the trade war was happening. And that negotiation made the Europeans really nervous because they thought it was going to really give preferential trade access and treatment to U.S. companies at the expense of the Europeans. Now, that didn’t end up happening, but this is like that x10, I think.

And I just want to get you on one other one before we have to wrap up, which is speaking of trade, news of the day, you mentioned it, the SCOTUS ruling on the IEEPA tariffs, Trump’s IEEPA tariffs. I guess I’ll just ask about that, but also broaden it out, so two-part. What do you think China is thinking about the tariff negotiation now that Trump’s been undercut by the Supreme Court to some extent? Do you think they think that gives them more leverage? Where are they in that journey generally?

And then what are you thinking about U.S.-China over these next 10 months with Trump’s upcoming trip in April? You said at the end of this year, it looks much different than where we are now. Is that true for U.S.-China as well? So, kind of a two-part.

Jude: In some ways, I think this is, again, another net assessment for China that you could easily spin this as being an unalloyed positive for Beijing. But I think it comes with some downsides, the Supreme Court ruling. First on the upside, I think this clears away the remaining IEEPA tariffs, which China was going to try to negotiate away anyway. So, this removes that. I think this also puts Trump on a bit of a back foot going in to the Beijing meeting. His signature economic policy has been struck down by the Supreme Court. Of course, he’s come back right away and said, 122, 232, 301, we’re coming back with the kitchen sink.

But the reality is, this is the approach he had been using, given its flexibility, the fact that you can layer it on and take it off quickly as a negotiating tactic. So, signature economic policy. They’re going to look at his low approval ratings, and I think they’re going to see this as him coming in a bit more battered and wounded than he otherwise could have been. On the other hand, I have talked to a few Chinese over the last few days in Beijing who have said one of the concerns is what IEEPA did at a minimum was meant if Trump needed to blow off steam, it was going to ramp up a tariff, you know, a tariff rate, which China felt like, look, we’ve gone to 120%. We can fight that war.

I think where there’s some worry is if Trump doesn’t have his tool du jour…

Andrew: His valve.

Jude: …when he’s frustrated and can vent, his valve, where does he go? I don’t have a good answer to that, but I think there are some who are a bit worried about that. The second is if Trump now moves into a much more codified tariff policy that he goes to Congress for, at least has, is on more solid legal footing. And by the way, I’m not sure the 122 tariffs are on super solid footing because I don’t think we’re in a balance of payments crisis. I also don’t know who has standing to bring a lawsuit on this. But point being is I think obviously 122, certainly 301, 232, an expansion of those will be time consuming, will stress USTR, will stress Commerce BIS, which is already overstressed.

But if he could push those through, I think the Chinese know that those tariff regime is just going to be much more sticky and structural and harder for them to spin off. So, I think the Chinese are sort of looking at it in that net assessment way as sort of more durable, bipartisan approach to tariff policy cuts both ways. On the one hand, they get the IEEPA tariffs off. But on the other hand, it means their idea that they could just sort of wait out Trump and then reset on trade is unlikely. Like with Biden, I think if you’ve got a robust 301, 232 tariff regime in place on China, going into the next administration, whoever it is, even if it’s a more probably someone who’s closer to trade, on trade than I am, I think politically it’s going to be challenging for them to roll back all those tariffs on China.

Andrew: Yeah.

Jude: I forget what the second question is. Or was that-?

Andrew: Just like where you see us 10 months from now on U.S.-China in that context?

Jude: I’m weary of anyone who’s going to do any confident predicting of this, and I’ll just say that…

Andrew: Come on, Jude. That’s what we do here.

Jude: Nine months ago, I thought an idea of an April of Trump going to Beijing was unlikely. But I was reading too much into where we were in the summer with the export control war that the two sides were in. And I think I underestimated how much Trump wants the deal. So, I’m having to reset my priors a bit. Let me speak a little bit more confidently, which is on the Chinese side, because with Trump, who knows? I think the Chinese view this as a dance, that it’s not about April, it’s about 2026. And using the stepping stones of three meetings for sure, maybe four, if there’s going to be another summit between Xi and Trump, that that’s how China is going to play this.

So, it depressurizes April. You don’t have to get everything done you want to get done. My sense is Beijing is spending as much time planning on the symbolism of a Trump visit as they are. And Trump seemed to support this. I don’t know if you saw his comments last week where he was saying Xi Jinping, you know, he gave me the platinum treatment last time. He’s got a top it this time. So I think for the Chinese, it’s like, how big is the parade? Bring him to a part of the wall that no one since Qin Shi Huang has been to.

I think that deliverables on this round seem to me pretty easy to hit. Trump has been clear, I think, on what he sees as part of this. It’s soybeans, it’s energy. It might be at least an announcement on some inbound Chinese investments to the United States, which would be meaningful insofar as that would have been politically unthinkable a year and a half ago. But I think we don’t need to think of this summit as essentially being the set piece for U.S.-China relations. I think it is really, for the Chinese, the real kind of opening move. And if they can string together productive meetings across the year and essentially buy a year of stability, that’s the lowest threshold for success.

I think if they can buy that year’s stability and get a rollback of some of the export controls, if they can get Trump to make some new statement on Taiwan, whether that’s just riffing on the importance of peaceful unification or saying we oppose independence, that’s a win for the Chinese. What I think that leaves us, though, is a U.S.-China relationship that is still profoundly competitive. I think things like the export controls, that sort of fully weaponized interdependence is going to be a defining feature of this. I think for the Chinese, the export controls are too effective of a tool to imagine that they’re not going to keep that loaded gun on the table.

The other thing, too, is the Chinese are fully utilizing this against the Japanese right now. But for the forbearance of the Trump administration, that, in and of itself, could be a much bigger deal than it is, and frankly should be. And then the final thing is this relationship is so multifaceted and in such close proximity that there’s no good reason to think we can fully avoid some unpredictable exogenous shock to the relationship, whether that’s the proverbial collision. There’s just so many ways in which some, again, COVID was an exogenous shock that completely upset the U.S.-China relationship. I don’t think it will be a repeat of that, but I think it does indicate that. Take away Trump himself, and I think the U.S.-China relationship looks deeply and structurally competitive. And so, Trump alone is not going to overcome all those dynamics, even if he can brute force his way through a series of summits and deliverables.

Andrew: Maybe temporarily can kind of tactically provide some, I don’t know, stability is the right word.

Jude: For sure.

Andrew: But yeah, no, that totally makes sense. Well, listen, we have covered a ton of ground. You’ve been very generous with your time. I know you’ve got to get going and we should wrap up. So, Jude, this has been great. Really appreciate you coming on, man. Thanks for the time.

Jude: Yeah, brother. Anytime.

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

In this podcast, he and Trivium Co-founder Andrew Polk discuss Dinny’s observations and takeaways from the trip.

After dissecting the vibe on the street, the gents get into:

• Where there might be some potential for investment growth this year

• Why the only thing that will unlock household spending is a housing market recovery

This one is short and sweet, so please enjoy this fun-sized pod.

And a note to listeners:

• The pod will be off for the Lunar New Year next week.

• But we’ll be back in your feeds after the holiday with some exciting new content, so stay tuned!

Transcript:

Andrew Polk: Hi, everybody, and welcome to the latest edition of the 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 Trivium’s Head of China Markets Research, Dinny McMahon. Dinny, how are you doing, man? It’s good to have you back on.

Dinny McMahon: Great as always, mate. Good to see.

Andrew: Yeah. We are going to talk about today some more macro themes, but specifically we’re going to talk about them from the lens of Dinny’s recent trip to Beijing. So, Dinny was in Beijing last week doing a workshop for some folks on China’s economic rebalancing. There were sort of Western and Chinese academics and analysts there, and so had a really robust discussion. And then, of course, had a bunch of other meetings around that. So, from the economic rebalancing discussion, I wanted to pull out some of Dinny’s observation, of course, that was all Chatham House rules. So, he’ll kind of just talk about the interesting things that came up without attributing anything.

And then also other sort of observation from meetings around town, which included clients, journalists, government officials, all of the above, to kind of get a vibe check of what’s going on, on the ground. And speaking of vibe checks, Dinny, got to start with our customary vibe check. How’s your vibe, man?

Dinny: Who came up with this bloody idea anyway? Vibe check. Mate, I’m still buzzing from the trip. I don’t get back to China anywhere near as often as I’d like to. Just being back in Beijing for, I mean, it was four full days, it was great. I mean, just catching up with familiar faces, wandering around the old neighborhoods. It was really great. So yeah, I’m still caught off the trip. Or maybe that’s just the jet lag.

Andrew: Yeah. Good to hear, man. Well, I’m glad to have you back. And I’m also excited because I’m going to be heading to Beijing on my own trip in sort of late March. So I’m excited about that. Excited to see colleagues and touch base with all sorts of people from our past lives there. For those of you who don’t know, listeners who don’t know, Dinny and I both lived in Beijing. I lived there for 10 years. Dinny, how long were you in Beijing? You were in Shanghai for a long time and then Beijing. What was the total?

Dinny: Yeah, so working career, it was four years in Shanghai followed by six in Beijing. But in the land before time, I was also a student in Beijing. So, you add it all up and it’s close to seven, seven and a half years.

Andrew: Wow. Well, we’re going to talk about your trip and some of the observations that we can take away from it as listeners to really hopefully get some insights into what’s happening from a macro standpoint in China’s economy. But of course, before that, we have to do some quick housekeeping. First, 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 areas, as well as 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 receiving more Trivium content, check out our website, again, triviumchina.com, where we have a bunch of different subscription options in terms of China policy intelligence and China policy monitoring. We’ve got tech policy, markets policy, which Dinny oversees. We’ve got general China watcher for business executives and academics and folks who need to stay up on the day-to-day on kind of generally what’s happening in the Chinese policy space. So, check that out. You’ll definitely find the China policy intel option you need on our site. And finally, please tell your friends and colleagues about Trivium and about the podcast. Help us grow our listenership and grow our business. We’d really appreciate it. All right, with that, Dinny, why don’t you just give the people a gut check?

I think a lot of people listening probably have lived in Beijing, some live in Beijing, China generally. Well, we have a bunch of listeners who haven’t been, maybe ever, and who probably don’t go regularly. So, just kind of initial takeaways from being there on the ground over the past few days.

Dinny: Yeah, I think one of the best observations I heard was from an old colleague of mine at the Wall Street Journal. He left for a bit and came back, and he said the thing that got him when he came back is that Beijing more or less looked the same. So, he came back in 2022, so it was a few years ago now. But Beijing more or less looked the same, which is if you’d lived in China during the 2000s, the 2010s, if you went away for a while, you wouldn’t expect to come back to a Chinese city and for it to look the same.

I mean, just the sheer pace of construction constantly. I mean, there was a sense that if you stood still long enough, someone would build something on top of you. So, to kind of come back after a few years and the pace to look the same, in one sense, is quite significant. But although everything looks the same, it also kind of feels incredibly different. And the feel, it’s partly just the way people live their lives. I mean, everyone kind of talks ad nauseam about how everything’s done online, on people’s phones. Everything’s done in WeChat. All payments are done electronically.

I mean, it’s stuff like that. But it’s also just how people feel about their everyday lives at the moment. When we were there, in some ways, it kind of felt like the sheer fact that you were living and working in China, you felt like you were part of history, right? Everything was onwards and upwards. There was a real optimism about what was happening. There was a kind of brightness about the future. There was a degree of uncertainty about what the future would bring, but everything seemed to be moving in a certain direction where things could only get better.

And that’s not really the vibe there at all whatsoever, which is quite interesting because if you spend any time online in sort of Western countries, it’s all bright, shiny, sparkly China. I mean, it’s all the infrastructure porn. It’s all the tech innovation. I think a lot of people who do go on sort of investor trips or whatever to China, and that’s kind of what they see as well, particularly if you’re just sort of kicking around, even just as a tourist. But you get talking to people and that sort of unbridled optimism about the future that kind of used to exist doesn’t really seem to be there anymore.

And I think a layer of that optimism back then was like, things have been so great, they can only get better. But also, hey, the state really has this thing under control. And whenever there’s a dip, we always come out the other side. Whereas now, that doesn’t really seem to be there. There doesn’t seem to be that sort of underlying, “Oh, don’t worry, somebody’s in control of this and we’ll sort things out.” It’s more, you scratch the surface and everyone has a story about somebody who had their pay cut, right? Or if they’re not talking about income, they’re talking about property. People just having seen, particularly young people, I think people who acquired their property in the ‘90s or early 2000s, sort of boomers in particular, I mean, they’re sitting pretty because they’ve just seen the value of their homes absolutely explode.

But anybody of kind of our generation, either their property, the value of their home is underwater, or any of the gains in wealth that they saw have been massively eroded. So, between that sort of those income cuts and the property devaluation, there’s a sense of like, what’s going to happen to you? People are genuinely worse off than they used to be. And, of course, the other thing that’s really palpable as you’re kicking around is just how cheap stuff is. And I think that’s particularly obvious having come from the United States as well, where nothing particularly feels cheap anymore.

And so, in China, when you kind of pick things up at the shop and it’s like, “Oh, wow, this is fantastic.” But, you know, that’s kind of still part and parcel of the degree to which people have seen their wealth or their income eroded as well. So, the only real glimmer, and it comes up a fair bit, is the stock market, which did incredibly well in the third quarter. It kind of moved sideways in the fourth quarter. It’s sort of showing signs of life again. But some people did really well out of the stock market. People have got one eye on that.

Not everyone’s invested in it, so it’s not going to be a source of renewal of wealth for the vast majority of Chinese people. But that kind of just is lurking there. People are wary of it, but that’s kind of lurking there as one of those things of like, “Okay, maybe there could be a real opportunity here.” I think more than anything, It was just really experiencing quite palpably and personally something that we talk about a bunch, and that’s how really China is two economies at the moment.

It’s not a two-speed economy. It is two distinct economies. And the first is the one that we see from abroad and I think also what you kind of see on social media, which is all about not just the sheer sort of robustness of China’s export machine, but even the nature of what’s being exported and produced — the electric vehicles, the flying cars, the humanoid robots, that sort of stuff. And then there’s the other side, the other economy, which is the one being experienced by ordinary people in China. And that’s one where incomes aren’t what they used to be, where they’ve seen their wealth really take a hit, where prices aren’t rising. And, of course, I mean, I was only in Beijing, right?

Beijing is not representative of a whole country. And from what I understand, certainly in some small towns, places where communities were really badly off, the government has really made an effort to sort of support their incomes. Places like that, you know, there is a degree of optimism. People are a lot better off than they were five years ago. But I think what I was seeing in Beijing is pretty much the common story around all, let’s just go with most of China’s big cities.

Andrew: Yeah, I was actually going to make that point about Beijing. I had a few reactions to what you said, but one is exactly what you said. Beijing is not China, just in the same way that D.C. is not the U.S., or New York’s not the U.S., right? So, we have to take that sort of with a grain of salt. And I think a lot of the conversation in Beijing, because it’s the political capital, lends itself to policy and politics, especially when you do what we do for a living. And so in this moment, when people are talking about there’s going to be, I think, a lot of negativity in terms of policy isn’t doing what a lot of people hope it would be doing.

I remember an anecdote from when we were doing a briefing on the 19th Party Congress. We had been doing them in Beijing. So, this was the 19th Party Congress. That would have been, I don’t know, 2018, I think. And we did some briefings in Beijing. I went with a colleague up to Shenyang, capital of Shandong. And we met with the U.S. consulate at the time, who, I believe, was Sean Stein, the current president of USCBC, who’s been on the podcast before. I didn’t kind of connect to that he was that same guy until actually pretty recently.

But point is, everything politically is so in your face in Beijing. And I remember going on that trip. It was during or right after the 19th Party Congress. So, one of the most political moments in the calendar, in the five-year cycle. And I saw one billboard with Xi Jinping’s face on it and some political slogan on the way in from the airport, a couple of miles from the airport, and then never saw another one the whole time I was there. So, your experience and everything we’re saying is definitely colored by being in Beijing specifically. And I think we just want to acknowledge that.

And the second thing I’ve obviously said, we’re going to take your experience in Beijing, the anecdotes and try to draw macro conclusions.

Dinny: And extrapolate it to the greater Chinese experience.

Andrew: Exactly. We are not doing that. The art here is to take anecdotes that really sort of bring life to your analysis, the macro analysis that we do, and looking at the data and looking through the policies and the trends that we see and then kind of put a fine point on it. So, we’re not extrapolating, but we are using these anecdotes to try to bring a little bit of life or poignancy to trends that we’re already seeing. So, I just want to make sure that’s clear. And then finally, your point on prices. I have probably said this on the podcast before, but I say it to people all the time. Our colleagues in China, all the time, they move every year because their rents get cheaper if they move to a new place.

They’re hugely benefiting from the involution in the food delivery sector. You can get great food for crazy, crazy cheap because the companies are competing against each other. And that’s one side of deflation, which deflation is definitely a very insidious macroeconomic challenge. But from a consumer standpoint, as long as your wages aren’t decreasing, low or stable, or even slightly declining prices are not something that you hate. So, anyway, that was just another thing that I wanted to throw in, just some observations from everything you said. You said overall the mood’s pretty dour.

That’s like among Chinese, even more so among the Chinese individuals that I’ve interacted with over the past few years. And it’s a pretty consistent theme that I hear from people going in and out of China. But the question is, were there any sort of bright spots in the conversation you were having? Anything you’d point to that where people are hanging a little bit of hope on?

Dinny: Yeah, quite surprisingly, investment might be one. I know we did a whole podcast on this a couple of weeks ago about how weak investment was in the third quarter. It sort of contracted. It fell by 12% in October, 12% in November, 15%, almost 16% in December. Looking into the new year, it kind of looked like it was going to be more of the same. It’s because property investment has fallen so much. It was because infrastructure investment last year was shrunk, which is kind of unheard of, but it was less than 2024. And of course, on top of that was the anti-involution campaign that sort of efforts to rein in overcapacity had led to sort of a sudden freezing in investment in a lot of manufacturing facilities for a lot of industries. But there does seem to be an optimism that investment, certainly in some areas, could get a real boost because of exports.

So yeah, a lot of companies aren’t investing because of overcapacity, but some industries are operating at utilization levels that are well below their long-term averages. And export demand could drive investment this year. And I’m kind of stealing this thunder, but our colleague Joe has done a bunch of work on this, and he came up with three areas where this is pretty clear.

And the first is chemicals or specifically chemical fiber manufacturing. So industrial capacity utilization rates are at about 95%, 96%, which it’s higher than pre-pandemic levels, about three percentage point higher than pre-pandemic levels. And there’s been a real explosion in export orders. And so we’re kind of seeing instances so far of some firms in the space already having announced meaningful investment in new production facilities. We’re seeing it in electronic equipment manufacturing, and that’s sort of been supported by the sort of the surge in demand for the semiconductors. Again, same sort of thing, we’re seeing sort of big expansion of capacity by memory producers and in other chip makers in China. It’s all about expanding capacity. And then also with power generation equipment as well.

And what you kind of find, put aside the chemical fiber manufacturers, but when you’re kind of looking at you know electrical, the electric equipment manufacturers, the power generation manufacturers, that’s kind of tied into a couple of big global trends. And really at the heart here is AI because we’re getting massive global build out of, particularly in the United States, but in China as well, of data centers. And those data centers are massively power hungry. And so, they require additional power generation as well. At the same time, that’s not just the only thing driving this. I mean, Europe is going through its own power grid upgrades. China is sort of overhauling its own grid.

And so, there does seem to be some sort of underlying global trends that are supporting this. But I think a really interesting takeaway here is that, yes, we’ll potentially see meaningful investment in certain manufacturing industries in China this year, and that demand is primarily led by exports. And one of those big export themes is AI. So, as the world doubles down on investment in AI, China’s export machine has benefited directly from that. And also, I think the other thing that came up while I was in Beijing as well is that China stands to benefit from the global expansion of defense spending. Now, I think we’ve talked about before how certain economies around the world or developed economies with advanced manufacturing, they are increasingly finding their traditional markets and demand for their products being stripped away by Chinese firms having aggressively been able to move into the same space.

And so where does that leave advanced economies? Well, one of the things they can do is try and expand investment in industries in which they don’t have to compete with China. One of the very few areas where they can do that is defense. Now, of course, global defense spending is rising for a whole lot of reasons, and it might not be explicitly linked to industrial hollowing out or the industrial threat from China. But at the same time, we are seeing countries around the world spending more on defense, whether it be because the Trump administration is telling NATO to up their spending, whether it be because the Europeans are starting to invest because of their concerns about Russia, whether it be because of concerns about China itself. For whatever reason, countries are spending a lot more on defense. And China, Chinese manufacturers stand to benefit because Chinese firms play such an integral part of global supply chains, even for defense products.

So, yeah, that was kind of something that I found interesting because anyone who listened to our podcast from a couple of weeks ago, we were like, you know, the outlook for investment doesn’t look great. There are certain areas where Beijing is creating domestic demand, like State Grid has committed to a massive expansion in investment over the last five years. We had something in our dailies today about how Beijing wants to ensure 5G connectivity for the low-altitude economy. So, pretty much any drones or flying cars can be connected to Wi-Fi in China’s cities, whereas most Wi-Fi networks don’t sort of extend that high up.

So again, Beijing creating a new source of demand for infrastructure investment. So, we can kind of see Beijing doing that, creating new demand for investment. But then on top of this, this whole exports demand for Chinese manufacturers fueling exports further and supporting investment in certain industries that are already operating at the limits of the capacity, that wasn’t something that was on our radar. And it’s something that kind of came up for discussion while we were in Beijing. And when we came back, yeah, in some places, it certainly seems as though the numbers are bearing that out.

Andrew: I was just going to weigh in on a couple of things there, one of which I was going to say to your comments earlier, but you sparked the idea again, and that is the idea of average individuals not feeling the fruits of economic growth. You look at China news, a lot of the influencer stories, especially from Westerners who visit are like amazing manufacturing, build out robotics, all of this cool hot tech stuff. But individuals aren’t feeling it. So, I often look for parallels between sort of what’s happening in China’s economy and what’s happening in other economies, specifically the U.S. economy, just to try to sort of bring U.S. listeners at least bring it home a little bit more.

And obviously the economies are not in exactly the same place. China’s dealing with deflation. The U.S. has somewhat of inflationary pressure, not terrible as it was a few years ago. So, there’s no difference. But the idea that you kind of have this K-shaped economy where it’s very heavy, top heavy, and driven by massive bets and investments on innovation and specifically AI, right? So, that’s powering the economy ahead in the U.S. And yet you have a lot of people who are discontent with quality of life, with cost of living, the affordability crisis that people talk about. And it’s kind of the same in China, right? You’ve got huge bets, huge investments on manufacturing, on AI, on technological innovation, industrial innovation.

And yet it’s not sort of trickling down or it’s not being felt in people’s individual lives. I think that’s a challenge for both countries, right? In the U.S., it’s likely to manifest, or people are thinking it may manifest in the defeat of Republicans at the mid-term elections in 2026. What year are we in? In a few months. In China, it’ll be interesting to see how that discontent registers over time, right? How the party responds, how people’s frustrations are vented, and what kind of new realities it leads to. You talked about people recently keeping an eye on the stock market. I mean, that’s something that, you know, the Chinese government wants. It wants people to move away from property as a store of household wealth to the stock market.

So, as more and more people get invested in the stock market, maybe that starts to boost the wealth effect and offset some of the more negative aspects of what people are feeling. But anyway, that was just one observation. And the other observation was, I was just thinking, so you’re saying basically that global investment in AI and defense is driving global economy and propping up exports of industrial goods and manufactured goods from China. I feel like that could be the opening sentence in a book about the end of the world.

Dinny: Yeah, no, that’s not… I think I’ve read this book before. Yeah, that’s… when you put it like that.

Andrew: Yeah, so I just had to point that out because you were like, yeah, AI is doing great. Defense is doing great. I mean, those are what we have to hang our hat on globally. And there is an argument that it’s only going to boost demand for Chinese industrial products. I don’t know. I don’t know what the outcome, the long-term outcome of that is. But it’s something we’ll keep an eye on. I want to pivot, though, to the consumption side of things, unless was there something else you wanted to talk to on exports or?

Dinny: No, no, it pretty much covers it.

Andrew: So, we often focus on investment and consumption because the national income accounts are government spending, investment, consumption, and exports. Those are the big chunks of the economy for people who aren’t economists. That’s why we focus on them regularly. So, we’ve talked about the investment piece. What about consumption? What was the kind of narrative you were hearing, and how does that tie to kind of what we’re already thinking about consumption in China?

Dinny: Yeah, I think what really became clear to me, I mean, we’ve been talking for months now, even longer, that Beijing isn’t really doing anything in a meaningful sense to spark consumption, right? That would require significant wealth redistribution. There’s a bunch of reasons why they’re not doing it. I guess I hadn’t fully thought through what the implications of that were. And that realistically, any sort of pro-consumption policies that Beijing is likely to roll out this year, they’re not going to move the needle in a meaningful way. In fact, the only thing that is going to unleash the spending capacity of Chinese households is a recovery of the housing market.

That the market bottoms out, prices start rising, and people start buying homes again. Because housing is that kind of weird sort of thing where it’s both an investment and it’s a consumer good. Because when you buy a home, you’re investing in it. This is something that you’re holding for the long term and you’re hoping that the value will go up over time. But at the same time, it is also a purchase of steel, cement, pipes, wiring, lights, laminate floors, kitchen cabinets. I mean, the whole thing. You’re actually purchasing a whole lot of physical stuff. And so, if we think about housing for a moment, not as an investment good, but as a consumption good, that is the recovery of housing, or at least at the bare minimum, a bottoming out of the housing market.

It’s the only real thing that is going to get people consuming again, because it’s the only sort of thing which is big enough and for which there is such large scale demand. I mean, it’s the sort of thing that everybody needs somewhere to live. That if and when prices start rising and people start buying homes again, that is enough of a change in consumption habits or consumption trajectory to have a meaningful impact on the economy. And until that happens, then I don’t think we really can expect much of consumption at all. I mean, yeah, interesting story is consumer services. I think it’s a fascinating space, it’s growing a lot more stronger than people’s purchasing of like physical retail goods. Let’s keep an eye on it. Let’s see what Beijing does about it. It’s clearly a priority.

You’re trying to cultivate a whole lot of new service sectors, etc., but it’s not a game-changer. The only thing that really matters for the economy at a macro level is people to get back buying apartments. So yeah, I mean, that’s the thing to watch for. I mean, we kind of see what happened in the fourth quarter. Property investment declined 17% in 2025. In December, it dropped 35% month on month, which I think I’ve said before, is absolutely mind-blowing. Five years into a property crisis, and you’re still getting that kind of decline? It’s incredible. But the upside of having declines that sharp is it kind of makes you think, surely, surely it doesn’t have that much further to fall, right? I mean, I think, what, housing investment levels are now at 2013 levels? I mean, surely the bottom is within sight.

I don’t think it’s going to happen in the next six months. It might start to happen in the major cities in the next 12 months. But yeah, only once it happens, will I think consumers start making a meaningful contribution to the economy again, and expanding and growing. Of course, they already make a meaningful contribution, but in terms of an expanding contribution.

Andrew: Yeah, it’s a great point. And I think a couple of things. One is, like you said, once the property sector bottoms out, you’ll get growth off of a newer base. And it doesn’t matter if the base is lower. What matters is the growth rate from there on out.

Dinny: And it’s not even growth. If it just stops contracting.

Andrew: Yes, totally.

Dinny: I mean, the sheer fact of its contraction means that every month it is dragging the pace of economic activity lower than it otherwise would be. If it just stops contracting, the economic conditions will improve. And then, lo and behold, even if it just starts expanding a little bit, well, I mean, that would just be rainbows and unicorns.

Andrew: Well, I mean, almost by definition, you know, mathematically, at some point that will happen. Like you say, the stabilization has to happen first, and then an increase in year-on-year growth will happen because you can only contract so far until that contraction stops. So, that is going to happen at some point. And we’ve said this time after time. I think people are trying to make definitive projections and pronouncements about what China’s economy is going to look like in terms of pure economic growth rates two, three, five, 10 years out right now. It’s just like, it’s a fool’s errand because the property market’s such a wild card. We need to wrap up here soon, but I mean, this is something I think we’ve been guilty of, frankly, right? Is sort of being like, will they do a little bit more on consumption? Will they do a little bit more of consumption? Can consumption get up?

I mean, basically what you’re saying is you’re sort of just admitting or facing reality, like no tinkering around the edges on consumption or even a more aggressive consumer subsidy type policy is going to be able to offset this property market thing. And let’s just finally realize that now that we’re five years in, maybe we’re a little bit late, but we’re recognizing it. And then, so one question mark, is that what you’re saying? Two, you seem to indicate that this was sort of hit home by some of the conversations you had when you were on the ground there. Is that right? That seems to be the sense among people who actually own homes in China.

Dinny: Yeah, absolutely. Yeah, it was kind of just being faced with the reality of people dealing with pay cuts, people dealing with declining prices, with the erosion of wealth, with all of that. Beijing isn’t looking at doing anything on the scale that is going to materially change their consumption habits. Even a recovery in the stock market would be great, a sort of higher stock prices, greater wealth effects. But even then, that only affects what, 10% of the population that have got money and shares? Whereas the degree of home ownership in China is almost universal.

And so, everybody, to some degree, has been affected by the decline of their homes. And that’s kind of had ripple effects throughout the economy, not just prices, but also the decline of investment. And so, yeah, the only thing that is going to get people to really dip into those precautionary emergency savings, as they’ve been labeled, is for housing prices to start rising again. I think it just kind of came home to me. I sort of felt it viscerally when I was in Beijing.

Andrew: Well, Dinny, I think we can leave it there for today. Thanks for walking us through your sort of insights and tying the on-the-ground experience to sort of the macro themes that we obviously are continually investigating. I’m glad you had a great trip. For me, Beijing feels like a little bit like home. I spent all of my 30s there. Like, I grew up professionally there. And so going back always feels a little bit like going home in a way. And so, I’m excited to get back here in a few weeks. Just quickly for the listeners, obviously, this podcast was a little bit shorter than we’ve been doing recently. We wanted to keep this one tight. Next week, we’re going to be off for Chinese New Year. Then we’ll be off to the races and on the gala for the Year of the Horse. And we’ll have some few changes.

Dinny: Did you prepare that one in advance, or was that just off the cuff?

Andrew: No, that was on the fly.

Dinny: That was good, dude. That was good. God, you should write this stuff down.

Andrew: But then we’ll have some changes to the pod, I think some positive changes. We’ll still have plenty of Trivium content. Dinny will be on regularly, Trivium in-house people. But we’ll also be bringing on more external people with some sort of broader discussions on various China themes. So, we’re excited about that. Be on the lookout for that after China’s New Year, when we take a break next week. But Dinny, thanks again, man. Great to see you as always. Excellent insights as always.

Dinny: Thanks, mate. All right, until next time.

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

• First, a video call with Russian President Vladimir Putin to sketch out a new blueprint for strategic integration.

• Then, another call with US President Donald Trump, shoring up the trade truce ahead of Trump’s planned April visit.

Not bad for a day’s work.

Yet, for us, perhaps the most consequential signal of the week came with much less fanfare, in the form of the Party Central Committee’s first policy document of the year – the 2026 No. 1 Document.

It’s the 23rd straight year the Party’s first policy paper of the year has focused on agriculture, farmers, and rural development – to signal how highly the leadership prioritizes rural issues.

• So, business as usual, right?

• Nope.

This year’s doc reveals a massive rethink in the state’s approach to the rural economy.

• And the implications extend well beyond the countryside.

TL;DR: Simply put, food production – and thus food security – is being industrialized, while support for farmers is being socialized.

That needs some explaining to properly draw out – but we think the juice is worth the squeeze.

• So let’s get squeezing.

It’s no secret that Party policy documents like these can be hard to read – and this year’s No. 1 Doc is no exception.

• It rattles off 27 vague to-dos across six thematic areas, steeped in Party-speak.

• Plus, if you haven’t read the last few of them, it can be hard to decipher which agendas are new, which are evolving, and what are just routine box-ticking.

So what changed in this year’s version that piqued our interest?

For years, the No. 1 Doc has placed the topic of direct state support to farmers (like subsidies, crop insurance, and state-set price floors) in its very first section, which is – and this is crucial – focused on agricultural production.

• But in the 2026 version, all mention of these direct support measures has been moved to a different section, focused on raising farmers’ incomes.

We know. Crazy, right?

• No, seriously – it is.

Here’s the backstory: For decades, top leaders believed ensuring China’s food security required getting a massive number of tiny smallholder farmers to grow enough grain.

• To get there, Beijing relied on a combination of subsidized inputs, guaranteed prices, and subsidized insurance to absorb downside risk and entice farmers into planting staples.

• Top leaders viewed production as dependent on these incentives – and they were probably right, given the tiny farm sizes, low mechanization rates, lack of infrastructure, and frequent natural disasters that plagued the farming economy.

That’s why the shift in the 2026 No. 1 Doc matters.

• Moving these direct incentives from the “agricultural production” section to the “farmers’ income” section suggests the Party is decoupling its approach to food production from direct rural support.

This structural shift points to a new, more industrial vision of agricultural production, and by extension, food security:

• Agricultural production has been reframed as an industry like any other, shaped by capital, technology, and infrastructure, with a focus on increasing production capacity and efficiency.

• Direct support for farmers, meanwhile, has been reconceived as a tool for stabilizing farm income and achieving rural development outcomes, not the primary driver of agricultural output.

Just look at what the leaner, meaner “production” section (right at the top of the Doc – the top priority) is now focused on:

• Improving crop varieties

• Adopting modern farm equipment

• Upgrading irrigation systems and bolstering disaster resilience

• Improving the scale, standardization, quality, and efficiency of farming

Boom! That’s basically a call to raise total factor productivity (TFP) in the farming sector – right in line with the broader obsession with productivity (and NQPF) across national policy.

But this doesn’t mean that direct fiscal support to farmers and agribusinesses is about to evaporate.

• On the contrary, we expect subsidies, insurance, and targeted interventions in farm pricing to expand this year.

• (December’s Central Economic Work Conference made rural (and urban) income growth and avoiding food price deflation priorities for the year.)

But the reconceptualization of farming as an industry like any other will enable working-level officials to reshape how farms are operated in pursuit of Beijing’s 10-year goal of becoming an agricultural superpower.

• Doing so could reshape not just the rural economy, but national income and growth trajectories, and influence global commodity markets.

While we don’t have enough time to dig into all this here, we’ll leave you with a couple of optimistic takeaways.

First, food and agribusinesses operating in China should rejoice: By reframing agriculture as a critical industry, top leaders have given working-level officials more freedom to push for modernization, consolidation, and scale; to use subsidies to manage social stability rather than targeted output volumes; and – over the longer run – to reduce reliance on blunt price intervention.

• All of that should translate into substantial improvements in the business environment.

It’s also good news for global commodity interests: China is signaling that it wants markets to work, modernization and technology to drive supply, and the state to step in only when farmers’ incomes and social stability are under threat.

• That should translate into a more confident policy posture even when markets are volatile, with intervention primarily on the downside, creating more space for traders to operate.

If you want to dig deeper into this or any other part of China’s ag sector, please reach out.

• We’re one of very few advisory firms that watch this space, which is all but ignored in most analyses of where China’s economy is headed, despite being the Party’s long-stated and well-established top priority.

Even Pay, Director, Trivium China

What you missed

Econ and finance

Decades of “rush-to-the-city” urbanization have run their course, and the next phase of China’s urbanization will play out in its roughly 1,800 county towns (xiancheng) – built-up urban cores that sit between major cities and the rural countryside.

• Since 2022, officials have increasingly promoted county towns as an alternative pathway for rural migrants seeking urban residency.

• For many rural migrants, major cities no longer offer the same economic appeal as they once did, as job prospects disappear – especially in construction – even as living costs and residency barriers remain high.

• County towns – which are far cheaper to live in – are well positioned to absorb migrants leaving large cities.

On February 1, Qiushi – the Party’s flagship journal – published a commentary on China’s persistent deflationary pressures.

• The piece argues that China’s improving deflationary dynamics – including a recent uptick in consumer prices and a slowdown in producer price deflation – demonstrates: “The recent low price levels in China are temporary…there is no need for unwarranted concern.”

• The article makes clear that policymakers see inflation overshooting as a bigger risk than prolonged price weakness. For markets, this reinforces the view that policy easing will remain incremental – with any upside surprise in prices further reducing the odds of a near-term stimulus pivot.

Corporates

On January 30, Octopus Energy – the UK’s largest power utility – announced the formation of an electricity trading joint venture (JV) with Chinese distributed solar project developer PCG Power.

• The JV aims to combine Octopus’s industry-leading electricity trading software capabilities with PCG’s local market expertise to capitalize on investment opportunities in China’s increasingly liberalized power markets.

• On the same day, Schroders Greencoat – the renewables investment arm of asset management giant Schroders – signed a strategic MOU with battery heavyweight CATL.

• The two companies plan to jointly develop up to 10 GWh of battery energy storage projects across Europe in the coming years.

Tech

On Thursday, China’s cyberspace regulator (CAC) and 10 other government ministries jointly released guidelines on making China’s digital ecosystem easier for foreign visitors and residents to navigate, including:

• Ensuring that multi-lingual versions of important apps are available, particularly government services apps

• Making it easier for foreigners to get a local phone number

• Expanding support for more foreign digital wallets in China, and supporting foreign payment methods in transportation networks

On January 30, Reuters reported that DeepSeek has joined Alibaba, ByteDance, and Tencent in getting the green light to buy Nvidia’s H200 chips.

• The article states: “China has given its top AI startup DeepSeek approval to buy Nvidia’s H200 artificial intelligence chips.”

• But Nvidia CEO Jensen Huang said last week that the company hasn’t received any orders from Chinese customers, and that he hadn’t heard anything from Beijing regarding approvals yet.

Politics

On Tuesday, Taiwan Affairs Office Director Song Tao and KMT Deputy Chair Hsiao Hsu-tsen co-hosted the KMT-Chinese Communist Party (CCP) forum in Beijing – reviving the forum after a ten-year hiatus.

• Beijing launched the mechanism in 2006 as a vehicle to deepen engagement with the KMT and counterbalance the independence-leaning Democratic Progressive Party (DPP) government.

• It went dormant after 2016, when the DPP returned to power following a decade of KMT rule.

• At the forum, Hsiao emphasized a shared Chinese identity and the need to avoid confrontation: “The two sides of the Strait should cooperate rather than confront each other and allow other countries to exploit Taiwan.”

Foreign affairs

On Tuesday, the Hong Kong and Macao Affairs Office (HKMAO) denounced the Panama Supreme Court’s decision to void the contract of Panama Ports Company (PPC) – a subsidiary of Hong Kong-based conglomerate CK Hutchison – to operate the Balboa and Cristóbal ports on the Panama Canal.

• In a WeChat post, HKMAO labeled the ruling as “crude and heavy-handed,” framing it as a “shameful” surrender to foreign (read: US) pressure.

• It then warned that Panama would “pay a heavy political and economic price” if it fails to reverse course.

• According to a Reuters report on Wednesday, PPC has initiated international arbitration proceedings against Panama.

China’s commerce ministry (MofCom) is set to walk back steep provisional tariffs on European dairy products in its final ruling in the 18-month anti-subsidy probe.

• Sources at two European industry associations said they have been told final duties will top out at 11.7%, with “many” firms receiving a lower 9.5% rate (Reuters).

• If confirmed, it will be the third time Beijing has announced painful provisional tariffs on an EU product, only to offer relief in the final tariff schedule.

• MofCom followed the same playbook in probes into EU pork and brandy.

US-China

On Wednesday, Xi Jinping held a phone call with US President Donald Trump.

• Xi hailed recent progress: “In the new year, I hope to work with you to steer the giant ship of China-U.S. relations steadily forward…and accomplish more big things.”

• He also offered a (gentle) warning on Taiwan: “The Taiwan question is the most important issue in China-U.S. relations.”

• Trump was thrilled with the call, hinting at possible deals involving soybeans, oil, gas, and airplane engines.

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.