• There’s a reason for that, and we break it all down in today’s podcast.

On this episode, Andrew Polk sits down with Dinny McMahon (Head of Markets Research) to unpack:

• The five core arguments in MOFCOM’s new position paper on overcapacity, examining which ones hold up and which ones stretch too far

• Why Beijing dropped the word “overcapacity” for “involution” 18 months ago, and what that rhetorical swap is designed to do

• How China frames itself as both free trade’s champion and its victim, and why that framing leaves little room for compromise

• Why the US may have the least at stake here economically, and why Europe is where this fight actually gets decided

As always, we hope you enjoy the discussion – reach out and let us know any thoughts or feedback.

Transcript

Andrew Polk: Hi, everybody. Welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium Co-Founder, Andrew Polk. And today I’ve got with me Trivium’s Head of Markets Research, Dinny McMahon. Dinny, welcome back to the pod, man. How are you doing?

Dinny McMahon: Thanks, mate. I’m doing well.

Andrew: Good to have you on. I am having Dinny on today because we want to get into MOFCOM, the Ministry of Commerce’s official response to accusations of overcapacity from the West. This is the first time the Chinese government has really come out with a sort of meaty riposte to the idea that they have overcapacity. And specifically, it held a press briefing, released a big comprehensive position paper responding to these accusations about industrial overcapacity that have taken place over the past several years.

Pointedly, the paper was titled, China’s Position on the So-Called Excess Capacity Issue. You can just kind of feel the sass in that. So, we’re going to get into that. We’re going to get Dinny’s reactions to that, specifically as it impacts macroeconomics and trade. But before we do, we got to start with a customary vibe check. Dinny, how’s your vibe today, man?

Dinny: Mate, I’m living life on the edge. I’ve got two kids in the house, and I’m recording this podcast from my living room. So, if we can get through this without sort of a minor catastrophe, I should buy a lottery ticket.

Andrew: Yeah, that really is living life on the edge, man. That’ll keep your, not anxiety, your adrenaline up during the pod. So that’ll keep you focused. That’s good. Yeah, my vibe is chill. I’m about to go on another holiday for a week. Next week, I’m actually going to be down sort of near SU in North Carolina with the family, just chilling out in the mountains. So, ready to get out of D.C. again for a bit. It’s always nice to get out of D.C. But actually, before we do that, really looking forward to this conversation, which we will dive into in a second. But we also have to, of course, do the quick housekeeping.

Just a quick reminder, we’re not just a podcast here. Trivium China is a strategic advisory firm that helps businesses and investors navigate the China policy landscape. That, of course, includes domestic policy in China, a longer range of areas, a light range of issues: tech, macro, autos, minerals, you name it. And we’re going to talk about some of those policies, like industrial policy and policies that lead to overcapacity, or not, as the Chinese would say today.

But it also includes policy towards China out of Western capitals like D.C., London, Brussels, and others. So, if you need any help on that front, please reach out to us at hq@triviumchina.com. We’d love to have a conversation about how we can support your business or your fund. Otherwise, if you’re interested in more Trivium content, check out our website. Again, triviumchina.com. We’ve got a bunch of subscription options as well on the site that you can sign up for, again, focused on things like tech, macro, business environment. Check those out. You’ll definitely find the China policy intelligence option you need on our website.

And otherwise, please tell your friends and colleagues about Trivium. We really appreciate those word-of-mouth recommendations. They help us grow the business and grow the listenership. So, please do that. All right, Dinny, let’s get into it. We are going to talk about this MOFCOM Presser and this position paper. I think first, what we should probably do is lay out the key arguments that MOFCOM makes. I will note some of them are somewhat contradictory, shocking. But I’ll go through kind of the key arguments and then you can kind of lay out how you think they stand up.

So first, the paper argues that there’s no such thing as overcapacity, that no one- no economists, not the IMF, not the World Bank- can agree on a definition. I got to say, I have a little bit of sympathy for that. What exactly is overcapacity? You know, you always have a little bit more capacity than you’re going to use. Are you expected to use 100% of your capacity? Should you have zero exports? I don’t know. Okay, so but that’s argument one. Argument two says that these sorts of major shifts in industrial capacity have happened periodically throughout history.

So, you know, the bulk of industrial capacity moved from the UK to the US to Japan over time. And then that this shift now is part of a natural part of the global economic order. These shifts over time are part of that natural global economic order. Third, it spends most of the time rebutting the criticisms, of course, that have been against it, like that industrial subsidies, especially, have led to overcapacity. And it argues that everybody uses subsidies and that subsidies are WTO-compliant. So, you know, that it’s operating within the rules.

Fourth, it argues that, you know, other countries should stop griping about trade surpluses so much because many countries, it points to Germany, Japan, and the U.S. have historically run large surpluses without being accused of overcapacity. Of course, the U.S. doesn’t run a large surplus now, but historically it did. And then it also argues that the trade surplus is a result of U.S. debt in the EU underinvestment, not weak Chinese demand, which the paper says has been growing strongly, which is true- not as strong as in the past, but it is still growing at a decent clip- and that Chinese demand is an anchor of Chinese growth.

Again, I will say I have a little bit of sympathy for this as well. There are flip sides of the Chinese trade surplus, which is that many countries run deficits, most notably the U.S. Of course, I acknowledge that these are arguments that are defending the Chinese position. And they’re made partly disingenuously and partly out of legitimate analysis of how China fits in the global economy. But we’ll get into all this. And finally, the last piece, the fifth piece, there’s an argument that industrial growth has been driven by innovation and that China’s competitiveness stems from genuine technological progress.

This is not a subsidy story. This is not a margin story. This is not a scale story. This is a technological progression story. So those are the five major arguments, Dinny. What do you think about all of them? Just give us your broad thinking as to how these stand up.

Dinny: Yeah, well, on one level, it’d be easy for us to sort of sit here and go through each of those arguments and debate the merits or the economic rounding of them one by one. But that would kind of defeat the point because although this is framed as an economic rebuttal, at the end of the day, this is a political document. This exists because China is trying to do two things. One, it is trying to frame itself as a champion of free trade.

I mean, in this article, when it’s not defending itself against overcapacity criticisms, it’s talking about how it wants to see further trade liberalization, further liberalization of cross-border investment. It wants what it calls an open ecosystem of innovation. So, it sets itself up as both a champion of the prevailing global free trade regime, not just the status quo, but as the one who wants to push it further. So, that’s the first thing.

It’s setting itself up as the champion for the regime that we all say has benefited humanity incredibly over the last 50 years. And the other thing it’s saying, it’s trying to do, is frame itself as the victim. Because, even as it is the one that is steadfastly defending this system, it is the one that is sort of suffering the slings and arrows of the U.S. and the EU unilaterally imposing protectionism and putting up trade barriers.

And so, that ultimately is kind of what China is trying to achieve here. This is a framing for the current trade wars and the trade wars to come that try to position China as both champion and victim at the same time. And this is kind of something we’ve talked about before on the podcast, just how the West, sort of the broadly, the U.S., EU, maybe sort of the ecosystem nations around them, and China see free trade differently.

So, the West broadly sees free trade as a principle, and then they kind of built this sort of edifice of first GATT in the World Trade Organization, sort of edifice of rules around it to try and codify that principle into kind of some sort of working arrangement, imperfect as it may be. China, on the other hand, sees free trade as a set of rules. It came to the free trade world late, got accepted into WTO in the year 2000. And so, it sees the free trade as being the set of rules that exists to maintain this free trade regime.

And so, that’s a really big distinction because as far as the Chinese are concerned, compliance with those rules makes you pro-free trade, makes you a champion of free trade, makes you a party which is preserving the free trade regime. Whereas in the US and the EU, it’s a completely different outlook because you can kind of be adhering to those rules, but if those principles have kind of broken down, then, well, we don’t have free trade anymore.

Now, of course, when we’re talking about principle, the West has never been entirely pure in its commitment or even its defense of free trade. I mean, countries have run large, persistent trade surpluses for a long time. I mean, most notably Japan and Germany. Countries have used subsidies liberally. They’ve defended, they’ve pursued carve-outs for certain industries that are politically sensitive in their own economies.

Even when it comes to the principle, the free trade regime as it’s been built has never been kind of this, you know, pure thing. It’s been a real, just an effort to kind of build a scaffold around the principle. And so now China is-

Andrew: Yeah, let me just make a quick point there before you move on. Well, I’ll make the point that you made a great point, which is I think you’re fundamentally right that China does see these as rules to be followed, right? It doesn’t care about the principle of free trade so much. It’s like, hey, we’re operating within the system that you built. But I will say no one’s blameless here.

Kind of just like the U.S. and other Western countries, or at least used to, talk about free trade as a good in and of itself, but didn’t always adhere to the rules, China also understands that they’re not adhering to the spirit of free trade often, and so makes an argument that, while I think you’re right, that they fundamentally, they’re like, “Well, we truly are following the rules,” but they know that they’re following them while also bending them and not adhering to the spirit of the design.

And so, all that is to say everyone here is making arguments that are fully in their self-interest, and we’re aware of that, but we’re just going to kind of deconstruct what we think the merits are and I guess the non-merits, where these arguments fall flat. So, that may be a bit of a framing piece, but anyway, go on.

Dinny: Yeah, well, I mean, it’s a good point you make because I think just going back to what I was saying about subsidies and carve-outs and whatnot, China kind of pushes, sort of points to areas in the West, you know, where the Western nations haven’t kind of adhered to the principle and kind of go, “Look, you guys have never lived up to your own principles. Why are you pointing the finger at us?” And in the MOFCOM essay, they talk specifically about, look, you know, big Western countries have run persistent trade deficits. And I think here, there’s certainly a degree of cynicism involved in MOFCOM’s essay, because one of the examples they give is that, look, the United States in 1953 accounted for 44% of global manufacturing output.

And its point is like, look, we’re not even at that level. Although the United Nations, I think it was the UNIDO, has a well-published sized estimate or forecast that by 2030, if things continue the way they are, China will account for 45% of global manufacturing output. So, it’s interesting. Oh, that is the track that we’re on. MOFCOM saying, hey, the United States was in exactly the same position in 1953. Of course, the difference is the U.S. was in that position because we just had a world war which had completely destroyed the industrial stock of both Europe and East Asia.

And so, I mean, for China to kind of go, “Hey, we’ve been here before, you did it, why not us?” I mean, it is a little bit cynical. And there’s also an element of false equivalency as well in the way that the MOFCOM essay talks about subsidies as well. It’s the same argument. “Hey, look, you guys use subsidies all the time. We’re using subsidies. We’re compliant with the rules. Sort of back off.” But of course, the OECD recently published a report which said that China’s industrial subsidies are anywhere between three and eight times the level of any other country in the OECD.

So, yes, China does it. Yes, everybody does it. But China is doing it to a degree of magnitude far beyond what anybody else is pursuing. And I think that kind of comes back to sort of the principles of free trade again. It’s like, sure, Western countries have never purely adhered to the principles of free trade. But in some ways, there was kind of a dance or, you know, there were certain acceptable levels that everyone kind of sort of were willing to live within. And China, with the scale of its trade surplus and the scale of its subsidies, seem to have blown past those informal limits and is now going, “But there were never any limits. You do it. We’re doing it. What’s wrong with what we’re doing?” That’s why I kind of feel the essay is perhaps a little bit cynical.

Andrew: Yeah. I mean, it’s definitely very cynical. Both things can be true at the same time, but it makes some good points and is very cynical. It’s like having a political argument with someone on the other side. The points they may be making may be generally true, but they’re usually taken to such an extreme, no matter which side you’re on, that they become sort of cynical. I don’t what the right word is. They just become kind of disingenuous at a point. But anyway, so I think that’s what’s happening here.

But what the next question for you is, you’ve laid out kind of what the arguments are, what you think about them. You made the point that China is trying to play the victim. Why is it doing that?

Dinny: Yeah, I think it’s laying the groundwork for a protracted trade war. I think it’s trying to establish a theoretical foundation and justification for pushing the back against the EU and the United States. And I think it’s trying to frame it in a way whereby it can say it has the moral high ground and that it will champion a global free trade order and that gives it legitimacy for why it will not back down in the face of U.S., EU, anybody else’s efforts to try and reduce China’s trade surplus, to try and rebalance the imbalances.

Andrew: Well, that’s somewhat daunting and are definitely kind of pessimistic, but I think you’re probably right there. Let’s talk about some of the specific arguments. So, let’s start with the title itself. It’s about “so-called excess capacity.” First of all, there’s the ‘so-called.’ Secondly, it says ‘excess’ instead of overcapacity. That word choice is very specific to say, kind of, to reframe the argument and to basically say we don’t accept basically the overall framing that the West is using. So, sort of that whole, again, back to the political argument, you know, I disagree with the premise of your question, sir, kind of thing.

So, how significant do you think it is that Beijing is explicitly rejecting the framing outright rather than sort of just contesting the specifics?

Dinny: Well, at this point, I don’t think we should be surprised because Beijing does not talk about overcapacity, and it hasn’t for about 18 months. It talks about involution. Now, if I remember the milestones properly, it was in December 2024, that in the Central Economic Work Conference readout, the big end of the year to get together of all of China’s top economic policymakers. In the readout of that meeting, we saw mention of overcapacity.

One of the big challenges in the year ahead was we return to industrial overcapacity. And this was something that we hadn’t seen in government documents for at least a few years. I mean, overcapacity is a recurring theme in China’s economy. It goes in waves. It pops up. Beijing spends years dealing with it. You have a lull for a while, and then it comes back. And so, you know, end of December, all of a sudden it was back on the agenda. And that was kind of the first and the last we saw of it. And then in the new year, after a few months, it was replaced by this word, involution.

And I think that was a deliberate political choice, largely because when they used the word involution in December of 2024, the U.S., the EU, they all jumped on it. They were like, “See, see, you have overcapacity. We want to work with you to get rid of your overcapacity.” And Beijing was having none of that, and so it reframed the issue. Involution isn’t just another word for overcapacity. It reflects a very fundamental difference in understanding of what the problem is. So, overcapacity is used by the U.S. and EU to kind of look at Chinese industry and say, look, you’ve overbuilt. You have too many factories. You’re driving prices down. You’re driving out competition.

Our firm should be competitive, but because you have massively over-invested, we can’t compete on what should be a fair market basis. So, you need to close down your factories. So, China’s approach, though, is that the issue isn’t that there’s too much installed capacity, that the issue is one of pricing. The issue is of excess competition. And so, whereas foreigners talk about overcapacity as a way to get China to close down capacity, China talks about involution as a way to get Chinese firms to stop running each other into the ground, stop competing each other, stop their race to the bottom.

And so, it’s about stopping Chinese firms overly aggressively driving prices down. It’s about ultimately trying to restore Chinese firms to profitability by stopping them from cutting prices overly aggressively. And so that’s what involution is about. It’s about what they see as being excessive and detrimental and damaging competition. And they don’t see the root cause as being overinvestment really in anything. And so, of course, when you frame it like that, the solutions are different and the ultimate beneficiaries of success of policies to deal with those problems are different as well.

If China successfully deals with overcapacity, then the EU and the U.S. should expect to come out in front in some way. Where, if China can successfully deal with involution, then the winners here are Chinese firms that will see their profits rise and the Chinese state that will see an increase in tax revenue.

Andrew: This one isn’t on our list, but we find it at the top. So, I’ll just throw it in here. What do you think make of the argument about our trade surplus is just driven by the competitiveness of our firms, right? That we’re just better than yours. Because I feel like this an argument they’re making more and more directly that I’m hearing to European officials in particular, to a lot of companies even, to other officials. We heard it sort of at the CDF, the China Development Forum in the spring. You know, it’s another one where, like I said, I have a little bit of sympathy.

I actually do think the Chinese companies are really good, and the products are really good, especially when you think of the big core exports that are growing quickly, the renewable energy stuff, the clean tech stuff, the AI link stuff. These companies are good. Yeah. And the products are cheap. They’re cheap, but good. I talked with Cory yesterday about the battery tech, for example, is like world leading and will continue to be, and that pod will come out next week. And it’s the cheapest in the world. So, I don’t know. What do you think about that part of their argument?

Dinny: It’s complicated because it’s not just the quality of their innovation and the technology. I mean, the crucible that is competition in these cutting-edge industries in China at the moment is like nowhere else on earth. I mean, the sheer intensity of the competition is crazy. And yet, part of the problem here is that we all kind of pretend that we’re all operating or running on the same economic model. China is doing something completely different. I mean, we assume that when firms compete, they’re competing for profit. They’re competing to maximize returns to their shareholders.

Chinese firms might get to that point eventually, but at the startup stage, it’s all about competing for market share. I mean, that’s not unusual. You’ll see the same in Silicon Valley as well. It’s just that the ability of Chinese firms to survive far beyond when market forces should dictate that they collapse is something that’s fairly unique to the Chinese system. That’s why you had hundreds of auto companies, electric vehicle companies. That’s why you still have about 80 of them; that they managed to compete far beyond what their sales and their profit margins would typically allow them to do because they’re getting support from all sorts of different corners of the economy.

They might be getting explicit subsidies, cash subsidies, sure. They might be operating on cheap, free, or subsidized land. They might have their utilities subsidized. They might be getting direct capital injection from a local government. The local government may have secured for them contracts. For example, if you’re making cars locally for me in this area, then all taxis in this area have to be that brand of car. Local governments can put up trade barriers between other cities and other provinces.

There’s just all these mechanisms which allow Chinese firms, both at the cutting edge and even in traditional industries, whether it be steel or aluminum or whatever, to survive on non-market terms for far longer than would ever be possible elsewhere, which allows them to drive prices into the ground, which allows them to drive out other Chinese competitors. But once they go overseas, also allows them to sort of drive out foreign competitors as well.

So yeah, Chinese firms are innovative. Yes, the crucible of competition in China at the moment is second to none. Chinese efficiencies in the factory floor are fantastic. But the fact that it’s running a trillion-dollar annual trade surplus isn’t necessarily indicative of all of that. And putting aside everything I just said, and this kind of brings us, leading to the next issue I wanted to talk to you about — The other question then becomes, why is China incapable of producing so little of what it produces. And understandably, it doesn’t have to consume everything it makes.

That’s what exports are for. But even if it’s not consuming what it makes, why is it so incapable of importing from the rest of the world, to a comparable degree, the volume of what it’s exporting? And that’s kind of the issue here. It’s not about the quality or the innovation of what China produces. It is about why the domestic economy is so incapable of consuming far more than it actually does, such that you end up with this earth-shattering global economy redefining trade surplus.

Andrew: Yeah, that’s a good point, really good point, which we’ll pick up in a sec. Also a good point about all the companies. I just had a buddy who was down with his family in Costa Rica was telling me about all the Chinese EVs he saw there, and they were super cheap and pretty good. They weren’t always the high end, but he said a bunch of brands he’d never even heard of. And this guy follows this stuff pretty closely. And so, I do wonder what element of it is because of just the sheer number of companies and their ability to kind of compete on cost. It’s one I’ll have to think through.

I’m just thinking through it in real time. Because what I always say is like, actually, the worst thing in the world would be if like there were only two very dominant Chinese companies because they would just like run everyone else globally into the ground. So, maybe it’s actually good, like careful what you wish for kind of thing in terms of like saying, oh, you need to consolidate. Then you have two super profitable, super healthy companies and they just dominate. But that could be one problem. But then I also wonder how the number of companies plays into it.

Which one of those is worse? Which one would drive more of a surplus? Anyway, just kind of thinking out loud on that. But let’s get back to the consumption piece because the interesting part of that is, of course, this is something that the white paper that MOFCOM puts out, basically doesn’t even engage with this issue. And you kind of highlighted that when you wrote about this in our daily note. And this is the idea that relative to the size of the economy, Chinese households consume less than basically anyone else on earth, right?

And so, they talk about Chinese consumption growing quickly, which is also true, right? The economists talk about the consumption paradox. It’s so low as a percentage of GDP, but it’s also growing quite quickly at the same time. So, that’s a little bit of a paradox. But again, the paper doesn’t even really engage with that much at all. So, talk to us about what you mean by this. You know, just expound a little bit more on what you were just talking about in terms of weak consumption, the inability of the Chinese economy to absorb imports at all, etc.

Dinny: Yeah, so it’s interesting because, as you said, this MOFCOM essay was like, look, you know, Chinese households are spending more and more. It’s becoming a bigger share of our economy. Clearly, weak domestic demand isn’t contributing to overcapacity, which that is not the argument anybody’s making. The problem, the reason China’s trade surplus kind of exists is because Chinese households consume so much, not in absolute terms, because it’s the second biggest economy in the world.

China’s households are becoming more affluent, you know, compared to almost anywhere else in the world other than really the United States. Yeah, as a group, the Chinese consumer population consumes a huge amount, but that doesn’t matter when we’re talking about what that population is also producing. What matters is how much they are consuming relative to the size of their economy. Chinese households, in terms of end consumption, they consume far less than perhaps any other economy in the world. I think as a percentage of GDP, it’s about 45%, and most other countries, use about 65%, 70%.

So, it is a massive, massive shortfall. And this is where we kind of get into the territory of Michael Pettis’s arguments, and he probably explains it far better than I ever will. But he’s also not the only person who makes it as well. I mean, inside China as well, academics like Liu Shijin make this exact same argument that Chinese households do not consume anywhere near as much as anyone else does. And ultimately, they need to consume more to be able to create a sustainable source of demand. So, the issue here is that if the nation isn’t consuming, if households aren’t consuming, what it effectively means is that the national wealth isn’t going to households.

It’s being distributed in some other way. And that other way really is that the wealth is pooling in the hands of firms. Now, of course, firms can generate wealth, but then distribute it back to households, either as wages or bonuses or as dividends or even as taxes, which then get redistributed to households, right? But in China’s system, the national wealth disproportionately avoids household and pools with firms. And what has happened is that China has one of the highest savings rates in the world, something like I think 55% of GDP is saved, or maybe it’s 50% relative… I think the global average is something closer to 25%.

So, all those national savings, about half are being saved by households and the other half is being saved by companies, by corporations. So, what it means is when you’re saving, you’re not spending. And when you’re saving, savings, by definition, are being used for investment. So, the system by definition has been set up to provide a self-replenishing, cheap source of funds for firms to invest because the cheapest source of funds is retained profits for firms, right? They don’t have to go out and borrow. They don’t have to issue shares.

And so, having this system which kind of recycles money back into the firms, it creates all these resources that have to be invested. And, of course, you know, what are these mechanisms? Look, you look at the state sector, which accounts for a significant portion of economic activity. Sure, they pay dividends, but they pay dividends to the government. And in most cases, they then get handed straight back to the state sector as capital injections and as subsidies. You look at the Hukou system. The Hukou system is effectively the household registration system whereby people who move from the countryside to the cities, because they’re legally not really supposed to be there, it means that employers can pay them less.

It means employers avoid making their social security contributions because they don’t really have any political connections, political protections. And so, you’ve got a system, again, whereby the labor system is effectively set up in a way to provide an implicit subsidy to employers. The property system, although we look at it as a mechanism, as an engine for generating wealth for China’s middle class, that wealth was never realized. They were all paper gains. The property system was also a massive tool for extracting wealth from households by local governments through inflated land prices that then recycled the money back into construction companies for infrastructure investment.

I mean, it’s almost every layer of Chinese economy in some way or the other was tooled to either minimize the degree to which wealth was flowing into households or, in some ways, extracting wealth from households to support the corporate sector. And what that’s resulted in is these huge pools of savings, which, by definition, end up in investment. And those investments then result in greater industrial output, and somebody has to buy that output. But because Chinese households aren’t spending, because they get such a relatively small share of the national wealth, well, that output has to go somewhere else.

And it turns into exports. And so, this is kind of the recurring problem of China’s economy. All these arguments in the MOFCOM essay, so many of them are like, this is just the way things are. We have the great surplus…

Andrew: This is the way of the world.

Dinny: Exactly. This is the way of the world, right? It’s like other countries have big surpluses. Where now this is a period of technological innovation. Every industrial and technological revolution results in overcapacity because old plant gets superseded by new machines. We can get used to it. This is just the water we swim in. This is how the economy works. Whereas the reality is China runs such a big trade surplus because of this savings and consumption imbalance, and that’s a political decision.

That is a decision China made, really 40 years ago, and it was a decision made by so many other developing countries, particularly in East Asia, as a way to generate wealth, to supercharge domestic development. But we’re now at a stage where that sort of economy works really well when the sheer needs of the domestic economy demand large-scale investment. So, China needed that when the housing stock was absolutely lousy, which it was at the end of the 1990s.

And you need it when the population is rapidly expanding or migrating to the cities because they need housing, and they need infrastructure. And you need it when your economy is advancing because you need to upgrade infrastructure. There is legitimate reasons for a domestic economy to need to shortchange households in the interests of investment because everyone’s better off. But China’s not there anymore. China has a surfeit of housing. It doesn’t need to invest in infrastructure the way that it used to.

And yes, it has all these savings and an under-consuming household sector. So, you have this massive imbalance that’s getting worse and worse, and the adjustment costs are being forced on the rest of the world.

Andrew: Yeah, this is definitely the point where they lose me in terms of what I was saying before, you know, some of their arguments are grounded in reality. Some of them are legitimate. They just take them to the extreme. This one, just not engaging with this idea of underconsumption and the need to do some sort of rebalancing and just saying this is kind of the way of the world and how it works. It’s a bridge too far for me. And I think it really kind of undercuts the whole argument. But then, again, this is not really an economic argument they’re trying to win.

It’s more of a political thing, as you said. And so, this kind of brings us back to another one of the off-putting parts of this whole effort, which is this idea of China being a victim. And in particular, a victim, at the same time that is supposedly a champion of the global trade regime. I mean, the question is sort of how is the U.S. or EU even supposed to react to that? It’s not like they’re going to look at themselves and be like, “You know, actually, you’re right. China is playing by the rules that we set up, and we should just accept this and move on. And it is the natural order of things.”

I mean, that is just not happening. So, where does that leave us in terms of any kind of response that the U.S. or EU would make? I guess there’s not going to be a massive feel. They will not feel a need to respond, but also what does that tell us about this whole effort at all?

Dinny: Yeah. Look, the way that I see it is that this sort of framing from MOFCOM doesn’t really set the stage for compromise or for finding mutual ground.

Andrew: You don’t say!

Dinny: I mean, I think, if there was any ambiguity about that, I mean, you look at sort of how China has engaged with the trade wars over the past year, I mean, it’s become pretty clear that it’s built up an arsenal of tools which it can deploy quite successfully against the protectionist measures of other countries. And so, as much as anything, I think this essay signals Beijing will continue to do that. And what it’s signaling is that it has the high moral ground when it does deploy those tools. And so, I mean, as you were just saying, where does this leave everybody else? Because if we go back to first principles, the global free trade regime wasn’t supposed to look like this.

I mean, sure, plenty of countries have abused it over the years with all that stuff we talked about; persistent trade surpluses, subsidies, whatever. But the foundational principles of having a free trade regime in the first place was that everybody would be better off, right? So, sure, countries would see some of their industries suffer because you bring down the trade wars and the tariffs and the trade barriers, and other countries would do certain things better than you did, and so your domestic industries would suffer in some areas. But other domestic industries would do far, far better, and net-net as a nation everybody would be better off.

The idea was that by opening ourselves up to free trade, the benefits net-net would justify any adjustment costs, but that’s a mile away from what’s going on at the moment. And I think Europe is really the canary in all this, because they’re increasingly at a point where they’re going to have to decide whether they are willing to accept the cost of protecting their own domestic industries. And that’s kind of the first step. And then the second question becomes, well, if they do, what comes next? What is the trade regime that replaces what we currently have?

So, at the moment, it kind of feels like the inevitable direction on the path, that sort of feels like the path that we’re on, because China is arguing that the system is currently operating as it should. So, if that’s the case, then it’s no longer really in the interest of many countries to adhere to that system anymore. And the only thing keeping them in line and adhering to, at least paying lip service to the current order is the threat of Chinese repercussions. And I think, increasingly, that’s kind of where we’re at. I mean, I think we’re going to see a lot more deep thinking about what we replace the current water with.

Andrew: Yeah, I think you make a good point about Europe. I’ve always thought it was a little weird that the Americans are making the overcapacity argument or leaning into it because I don’t think Chinese overcapacity really impacts the U.S. economy all that much. It’s in the stuff that we tend to buy from China is a little low-value add. We have decided not to allow Chinese EVs into this country. I talked with Cory on this podcast that we’re going to release next week while on vacation, we talked about the battery sector, and I was just talking about how I don’t think it’s tenable to just shut down our economy, or not shut down our economy, shut out Chinese products from our economy, like with the robotics thing that happened this week and with the EV thing that’s happened before, and which may happen with batteries.

I think U.S. companies understand that this tech is really good and they want to license it. They basically want to work with Chinese companies. So, long term, I don’t think that’s a strategy from the U.S. side. And it doesn’t work long term to just kind of turn towards autarky or cut out China of the global trading system, say, “We’re not going to buy any of your products,” because, as you said, China will retaliate. And we want them to allow our companies to operate there. We do want them to buy some level of our exports. But all of that is to say the overcapacity, excess capacity, whatever, is a moot point, I think, in the U.S.-China relationship for the most part.

Europe’s where the rubber meets the road. And the EV thing obviously is the most kind of front and center, hollowing out the German car industry in particular, potentially the broader European auto sector; clean tech’s another area. And so, I do think it’s an interesting idea that China is ramping this up with the Europeans in mind and is ready to really play some hardball. And I think you’re right. The Europeans are going to have to decide. Do they want to take the path of the Americans and say, we’re just shutting this out? I don’t think that’s a viable option. Like I said, for the U.S., it’s more viable. But I don’t think that’s viable for the Europeans for a bunch of reasons, for political reasons, for economic reasons.

So, we’ll see. And then we’ll have to see, do the Europeans have the stomach to fight against China? Because you know that China, once gloves go off, they’re going to be nasty. So, I just don’t think, as I’m just talking this through, I guess somewhat concerning that MOFCOM is putting this out because it may be a sign that this Europe-China fight might get even nastier than it has been.

Dinny: Yeah. I mean, the way I see it is the way Europe works is everyone keeps talking until everyone arrives at a compromise. And I don’t think that can work in China-EU discussions at this point. To the extent that that may have happened in the past, I don’t think it’ll happen this time. And I look at an essay like this, and China is very much nailing its colors to the mast. It’s like, we are the victims here. We have become the champions of the trade regime that you built. It is not us to make compromises, and we will defend our position. That’s what’s… I was going to say, between the lines in this essay, but I’m just…

Andrew: Decide between the lines.

Dinny: It’s all the subtext.

Andrew: Totally. Well, I’ll just say, I’ve said this a few times before on the pod, and elsewhere, I think China’s increasingly saying the quiet part out loud. They’re basically saying, the model is the model, get used to it. We’re better than you because we’re more competitive and more innovative. And if that leads to exports, so be it. So, that to me is the kind of change that we’ve seen since, again, I first started hearing that message back in March this year. And I think that’s pretty telling because once they make it official, so to speak, like that, you know, it’s one thing when they kind of do it subtly and won’t kind of be that blunt about it and won’t negotiate, but then try to change things at the very end.

But they’re just kind of putting it out there and saying, “This is how it is and we’re not backing down.” Now, the whole adding — “Oh, and we’re the victim,” that’s the part of the Chinese system that drives me crazy, or of any authoritarian system where it’s like this brittle, like can’t deal with any criticism. Yeah, it just drives me nuts. So, I could do without that. But I just find this whole get used to it attitude concerning and interesting from an analytical standpoint. What are your thoughts on that?

Dinny: Yeah, I think interesting is the right word because China is in a position at the moment, given how weak domestic demand is, I mean, the economy is exports, right? I mean, their ability to sort of maintain growth, to sort of sustain this massive industrial investment that they’ve been pursuing over the last, what, six, seven years, I mean, it relies on the rest of the world buying more and more Chinese stuff. And so, on one level, that’s quite a vulnerable position to be in. But on another, I think Beijing feels like it holds all the cards.

I mean, you look at how they managed the U.S., sort of pushing back with rare earths and not, I think it feels like it’s an even stronger position in dealing with the Europeans. And so, even on one level, their economy is vulnerable to a decline in exports. I think they think they hold all the cards because no one’s going to sort of push back to a degree that would really result in a significant hit to the export machine.

Andrew: Yeah, that’s interesting. We have not seen China take that approach yet. And by that approach, I mean, if an economy like the U.S. has done restricts imports or tariffs something. So, I guess, obviously China used the rare earths vis-à-vis the U.S. on tariffs. But they haven’t done it specifically to say like if the U.S. or another country says we’re not going to buy X from you, they haven’t said, “Well, if you won’t buy X, then you can’t buy Y. You have to buy both.”

And that would be an interesting development of the Chinese lawfare toolkit, right?

Dinny: Absolutely.

Andrew: Well, on that very happy note, Dinny, it’s definitely depressing. It’ll be interesting, again, from an analytical standpoint. I always try not to use the word interesting because usually we’re talking to clients and they have a problem, I’m like, “Oh, that’s interesting.” And they’re like, “No, it’s a problem.” Anyway, from an analytical standpoint, we’ll be watching how all this plays out. I really appreciate you taking the time to walk through this. Pretty fascinating that they put this out, and I think worth dissecting and kind of going through kind of how they’re trying to frame this up. So, thanks for that, man.

Dinny: Yeah, no worries, mate.

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

In case you’ve been living under a rock: The economy has slowed sharply over the past few months – investment is collapsing, the property sector is in freefall, and household income growth has fallen to its lowest level on record.

• Calls for a stimulus package have been growing louder, and in previous cycles this is exactly the point where the government would reach for the fiscal fire hose – but not this time.

What looks from the outside like policy drift or stimulus timidity is, in our view, something far more deliberate: Beijing is quietly using the current moment to deleverage the economy.

Here’s why.

• China’s debt-to-GDP ratio hit 300% at the end of 2025 – higher than most major economies, and almost 50 percentage points higher than at the property market’s 2021 peak. Left unchecked, it would exceed 400% within a decade.

• That matters because healthcare and eldercare costs are set to explode as the working-age population shrinks.

• When that moment arrives, the government will need to borrow heavily to foot the bill. And the higher the starting debt burden, the less room it will have to do so.

Deleveraging, in other words, is preparation for a much bigger fight down the road.

The tricky part is that deleveraging usually requires either painful austerity or a prolonged period of below-target growth.

• Neither is politically palatable, but for the first time in years, Beijing thinks it has found a way to bring the debt burden down without triggering an outright recession – and it involves pulling three levers at once.

The first lever is inflation.

• Producer prices have finally turned positive after years of deflation, thanks partly to the Iran war’s energy shock, and partly to anti-involution efforts.

• Rising prices inflate nominal GDP – which in turn shrinks the debt-to-GDP ratio.

The second is exports.

• China’s AI and clean-energy export machine is booming, delivering the kind of nominal growth that doesn’t require domestic borrowing to sustain it.

• That’s a rare and valuable combination – growth without leverage – and Beijing is making the most of it.

The third is enforced fiscal discipline.

• Central state-owned enterprises are being forced to remit a larger share of their profits, gutting their capacity for new investment.

• Trade-in subsidies for consumer goods have been cut back.

• And the central government has drawn a hard line against bailing out cash-strapped local governments, forcing them to implement tough austerity measures.

This all has significant implications – the most immediate being that China’s domestic demand problems are unlikely to get better any time soon. If Beijing is serious about deleveraging, then the K-shaped divergence between a booming export sector and a struggling domestic economy is not a bug to be fixed – it’s a feature to be tolerated.

• Investors pricing in a stimulus rescue are misinterpreting China’s policy playbook.

The second implication is that stimulus, when it comes, will disappoint. We expect Beijing to add a modest supplementary bond allocation in the autumn – probably around RMB 500 billion, similar to last year. But that’s calibrated to keep the economy ticking over, not to reignite growth.

The open question is how long Beijing pursues this strategy. Chinese leaders have historically had little tolerance for prolonged economic pain, though Xi Jinping has shown more than most.

• Our base case is that the deleveraging drive runs through year-end at a minimum.

• Whether it extends into 2027 will depend on how much pain Beijing is willing to absorb – and how loud the calls for fiscal reinforcement become.

For now, though, the cavalry isn’t coming. And that, more than anything else, will be the story of China’s economy in the second half of 2026.

Dinny McMahon, Head of China Markets Research

What you missed

US-China

A commerce ministry (MofCom) spokesperson revealed for the first time that the US has committed to keeping tariffs on Chinese goods at or below 20%.

• By making the US commitment public, China is signalling clearly that it is fine with additional tariffs of up to 7.5% (after the latest 301 trade action from the US put them at 12.5%)

• It is also signaling that tariff increases above 7.5% will be met with countermeasures.

Foreign affairs

MofCom added 14 EU entities to its export control list on July 24, barring Chinese suppliers from selling them dual-use goods.

• Germany and France were hit hardest: Three firms from each country were added to MofCom’s list, including Germany’s largest defense company, Rheinmetall AG.

Brazilian President Luiz Inácio Lula da Silva called Xi Jinping on Monday.

• The call gave Lula the opportunity to showcase his positive relationship with China in the run-up to Brazil’s presidential election in October, in which he faces a close race against right-wing Senator Flávio Bolsonaro.

Econ and finance

Tax revenue registered strong growth in Q2, up 8.6% y/y, the fastest rate of expansion since Q3 2023.

• Individual income tax revenue grew 16.4% y/y, corporate income tax revenue increased 11.3% y/y, and value-added tax revenue also grew 7.4% y/y.

• Consumption tax was the only category to contract, down 2.0% y/y.

Regulators are trying to create a new channel for families to turn their homes into retirement income via trusts, but their efforts are hitting roadblocks.

• The biggest remaining constraint, according to experts, is an ill-suited tax regime that treats the creation of a housing trust as a taxable property transfer.

Tech

Moonshot released Kimi K3’s model weights, as promised.

• Anyone can now download and deploy the 2.8 trillion-parameter model.

MofCom made formal statements addressing US Treasury Secretary Scott Bessent’s recent remarks characterizing AI distillation as IP theft.

• MofCom stated there is no legal basis for tying distillation to IP theft, pointing out that many US firms distill Chinese models.

• They also noted that the timeline of Chinese model releases doesn’t square with accusations of theft.

Beijing’s science commission opened bidding on eight lab machines it wants companies to build for autonomous research laboratories.

• Many of these machines appear designed to do semiconductor research, raising an interesting question: Can robots running experiments rapidly beat decades of accumulated process knowledge?

Net zero

18 regulators – led by the environment ministry (MEE) – jointly released the 15th Five-Year Plan (FYP) for National Climate Change Response.

• The plan’s most notable feature is its emphasis on non-CO₂ greenhouse gases (GHGs) – including methane, nitrous oxide, and several fluorinated gases.

Politics

The monthly Politburo meeting on July 30 announced that the Central Committee’s Fifth Plenum will be held in October.

• The terse readout gave little hint as to what will actually be discussed at the Plenum, but did say: “Efforts must focus on improving the Party’s capacity for long-term governance, preserving its advanced nature and integrity, and maintaining its close ties with the people.”

• In this year’s July meeting, officials clearly signaled that more fiscal support is on the way, but only in modest amounts.

Note: This is our second short format episode – tighter, quick-turnaround reactions to the news as it breaks, alongside our regular weekly deep dives.

• Let us know what you think about the new format!

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

• How this July Politburo readout offered surprisingly clear language that more fiscal support is coming, and in what form

• What “fiscal-financial cooperation” means in practice, and why it’s really code for interest rate subsidies

• Why Beijing is likely to lean on accelerated special-purpose bond issuance – and a probable Q4 top-up, following last year’s playbook – rather than broad interest rate cuts

• Why none of this changes the underlying story: Beijing is deliberately riding out a long, painful real estate adjustment – and this is just a slight pick-me-up

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 are trying our second go at our quick turnaround, shorter format pods where we grab one of our analysts and get their unfiltered reaction to something that’s happening in the news.

Today, I’m talking to our Head of Markets Research, Dinny McMahon, about the July Politburo meeting that just took place overnight. So, we are reporting this on July 30th in the afternoon in the U.S. The Politburo meeting happened July 30th in China. The readout was released at the end of the day. So, we’re going to get into that quickly. But first, Danny, how are you doing, man?

Dinny McMahon: Good, mate. I’m all the better for seeing you.

Andrew: Yeah. Well, I appreciate you jumping on for this. We are going to do something that is totally different and skip the vibe check today because Dinny and I are going to do this pod and then immediately record our longer form weekly pod. So, I’ll get his vibe check then. So, we’re going to skip it for now. So, anyway, first of all, tell the people why the July Politburo is particularly important.

Dinny: All right. So, you know, the Politburo meets monthly, but about three times a year when it gets together, it’s all about the economy. And July is one of those meetings. And in some ways, it’s particularly important because we’ve just got the GDP data for the first half of the year. They’re kind of, you know, taking stock of what needs to be done in the back half of the year. And this is kind of their vibe check. You know, what does the Politburo make of the economy?

And what does it think it needs to be done from here on in? So, that’s why July is always… you know, why we’re always particularly interested in the July meeting.

Andrew: Yeah, well, it feels like July is always the stakes are high for the July meeting, almost always, but particularly this time. And why would you say the stakes were particularly high this time, or at least the expectations were raised?

Dinny: Yeah, because the economy is really in the doldrums. I mean, that’s a bit of an exaggeration because the exports sector is still going gangbusters, particularly anything related to energy or AI. But domestic demand is weak. It’s been chronically weak. I think it’s fair to call it chronically weak at this point. The last few weeks, the last few months have been particularly bad. But more broadly, I mean, it’s been three years at this point. It’s been really weak.

So, there’s been a sense of like, okay, given how poor the data has been for the last few months, what is Beijing going to do about it? And so, all eyes were on this meeting just to get a sense of, is Beijing going to roll out some sort of stimulus? And if it is, can we gauge how meaningful it’s going to be?

Andrew: Great. Well, tell us what we got. I think people were looking in particular for more economic support. I think at this stage, everybody realizes the days of big bang stimulus are over. So, that ship has sailed. But businesses, investors, everybody was hoping for a little bit more support, what do we end up getting in terms of, I would say, concrete policy? This isn’t really the place for concrete policy, but what specific sort of formulations do the policymakers use that would make us think they might be tinkering on various policy areas?

Dinny: Yeah, so the Politburo readouts can often be pretty cryptic. I mean, as you said, there are never specific policy measures. It always takes a few weeks or even a few months before the actual government agencies respond to what the Politburo has decided and we get sort of substantive specific policy measures. But even beyond that, sometimes these readouts can be incredibly cryptic. I mean, trying to read between the lines, trying to read the tea leaves of exactly what they mean can be quite the challenge. But this one’s a bit different. I mean, it’s pretty specific. From the moment it starts talking about the economy and fiscal issues, it’s pretty clear that it intends to roll out more support.

So, it has all the key words that you expect from a government that is about to provide additional fiscal support for the economy.

They said, we’re going to pursue a more active fiscal policy.

We will fully leverage the effectiveness of existing policies.

We will introduce incremental policies.

We will increase counter-cyclical adjustments.

We will intensify efforts to expand domestic demand.

It’s increased, intensified, fully leveraged. They even got a bit more specific sort of saying they’ll accelerate the pace of fiscal spending and the utilization of bonds. And they would promote domestic demand by coordinating fiscal and financial policies, and that they will use and adjust monetary policy tools as appropriate.

So, you put all that together and there is no ambiguity there whatsoever. There’s a sense that clearly more needs to be done to support the economy and specifically domestic demand. And that support is going to be fiscal, and probably around the edges is going to be a little bit monetary as well. So, all told, for what can often be a very cryptic meeting, a very cryptic readout, I think the signals here are incredibly clear.

Andrew: Well, you also had some thoughts specifically on monetary tools that they will use. Go through those. I mean, you’re not basically all front-running a little bit here. You’re not expecting interest rate cuts outright, but more structural tools. Talk to us about those. And then you also pointed out this idea of fiscal financial cooperation. You have a pretty good idea of what you think that means. Talk us through that as well.

Dinny: Yeah. So monetary policy, I don’t think we’re talking interest rate cuts or even reserve requirement cuts. I mean, in the past, when the government has signaled or is about to line up an interest rate cut, it will say something like, “We will cut interest rates in a timely manner.” So, if you’re kind of talking more abstractly about monetary policy, I think we’re probably looking more about what Beijing calls structural tools or relending quotas. And this is kind of the approach the PBOC has favored in recent years.

It’s about providing a dedicated quota of cheap funding to some aspect of the economy that they deem to be strategically important. So, they’ll provide a relending quota to innovative companies or to companies that are building aged care homes or something like that. They have had no qualms about upping and re-upping the quotas for those sorts of structural tools. So, I think it’s fair to say we’ll perhaps see more of that rather than kind of cut interest rates or reserve requirement ratios. And then on the cooperation of the sort of the fiscal and the financial world, I think that is really code for interest rate subsidies.

Now, this is something again that they’ve leaned into a fair bit over the last 18 months, whereby the Ministry of Finance provides fiscal support for the central bank to effectively… Actually, I’m not quite sure the degree in which the central bank is involved, but it’s a way to bring down borrowing costs for certain firms by subsidizing their interest payment. So, it’s not explicitly reducing the interest they pay. It’s just the Ministry of Finance stepping in and helping subsidize those interest payments. So, yeah, I think we might see a little bit more of that as well.

Andrew: Okay. Well, what about on the fiscal side? There was some specific language around, let me pull this up, fully leveraging the effectiveness of existing policies when it comes to fiscal policy, introducing incremental policies. So, effectively saying we’re going to ramp things up at least to a degree. Increasing counter-cyclical adjustments and intensifying efforts to expand domestic demand and optimize supply. Final one, accelerate the pace of fiscal spending and the utilization of bonds. That’s the main one I was actually going for. What does that all mean?

Dinny: Yeah, it’s pretty bland language, mate. I can see you, after a 17-mile run, it’s not doing much to get you awake.

Andrew: Yeah.

Dinny: Yeah, I mean, what we think is here, so anyone who’s been listening to the podcast knows we think Beijing is trying to de-leverage, right? So, it is trying to take advantage of this particular moment in time where exports are strong, inflation is rising, credit demand is weak to sort of bring down China’s debt to GDP ratio, which has just been rising so aggressively over the last four years. So, we think Beijing, when it comes to providing some sort of support for the economy, has that at the back of its mind. It has no intention of ramping up, borrowing to provide fiscal support, certainly not any meaningful way.

So, what we think is really going to happen is kind of a replay of what we certainly saw last year, I think we saw it the year before that as well, is when authorities start worrying about the state of the economy, they get local governments to accelerate their issuance of special purpose bonds. Okay, so those are the tools. They are the tool which traditionally has been most responsible for funding infrastructure investment. Now, so firstly, we think they’ll accelerate that. And second, we think the focus of those funds will concentrate far more on infrastructure.

So, as I said, this is the tool for funding infrastructure. But over the last few years, these special purpose bonds have turned into a bit of a Swiss army knife. Every priority Beijing now has that requires some sort of funding, they go, “Oh, okay, we’ll get the special purpose bonds to fund it.” So, these days, they’re used for land buybacks to kind of help support developers and local government finance vehicles. They’re used to sort of pay down hidden debt. So, this quota was used for a whole bunch of other stuff other than infrastructure these days. So, what we expect in the second half of the year is firstly, issuance will accelerate, which, you know, it got off to a very slow start.

So, they’ve got a bit of runway. Certainly, we saw it accelerate in June. So, we think that that pace will remain elevated. And the second thing, we think that the funds raised from these bonds will focus more on infrastructure, less will go back into land buybacks and to paying down hidden debt. So, that’s the first step. It will take what they’ve already promised, that sort of local government debt, central government bonds, whatever, and they’ll accelerate their deployment.

And then when we get to the fourth quarter of this year, Beijing will come out and they’ll make an additional allocation of debt, borrowing that some level of government, whether it be the central government itself or the local governments, they’ll be allowed to borrow more and use that to sort of prop up the economy. We saw that last year. I think it was in October, local governments got an additional allocation of 500 billion worth of special purpose bonds on top of the original quota of 4.4 trillion. So that extra 500 billion, 200 went into infrastructure. The remaining 300 went to support local government budgets and dealing with some hidden debt.

So, we think given Beijing’s focus on deleveraging, we think it’s fair that they’ll do the same thing probably on a similar scale. An extra $500 billion worth of borrowing in the fourth quarter to kind of keep investment elevated and tide the economy through to the end of the year when the funding cycle will start again.

Andrew: All right, man. So that’s a good wrap up of the main themes that we saw in there. But let’s take it home. What do you think this means going forward overall for the economy? I think you explained what it means for policy, but what does that mean for the economy? More of the same or what?

Dinny: I think the short answer is ‘not much’ in the sense that this isn’t the sort of silver bullet that will revive domestic demand. I think Beijing has now got to a point where it realizes that it’s not interested in throwing good money after bad. It’s not interested in ramping up its consumer trading program because it realizes stuff like that only works as a band-aid to tide the economy over until demand recovers of its own volition. It doesn’t want to sort of massively ramp up infrastructure.

In fact, the focus of infrastructure investment under the next five-year plan, what they’re calling the six networks, is a lot more focused on pursuing infrastructure that delivers productivity gains as opposed to infrastructure as sort of ballast for economic growth. So, I think there’s a sense of like, look, if we’re going to borrow money and we’re going to deploy it in the economy, we want to get bang for our buck. We just don’t want to be sort of borrowing more and more just to sort of reach arbitrary targets.

So, I think what this means is we’ll probably see more robust domestic demand in the second half of the year. There’ll be more money going into infrastructure. I think there’ll be more central government spending as well. I mean, what we saw in the first half of the year is that tax revenue was rising, which makes for a nice change from the last few years where it’s been really weak. But government expenditure has been pretty weak. In some months, it’s actually been contracting. So, given that, we think maybe the government’s been sort of keeping its power to dry.

It might have some sort of tax revenue at its back pocket that it can pump into the economy in the second half of the year. We also saw second quarter was particularly weak because state grid, its investment really slowed down really aggressively. If that picks up again in the second half of the year, then we’ll have an extra shot in the arm for investment. So, I think there’s enough here to suggest, okay, the second half will be more robust for the domestic economy. The second half will be more robust than the first half.

But this is not the sort of stimulus package that’s going to get the economy out of the woods, that’s going to sort of radically change or radically fix this chronically weak domestic demand we’ve seen for years now. All those underlying forces are still going to stay in effect. This is just a little bit of a pick-me-up that’ll help the economy get through to the end of the year and help Beijing realize its GDP target of 4.5 to 5% growth.

Andrew: Yeah. I’ll just end on two quick things from my perspective. One is, I always say, you know, we watch these Politburo meetings to understand policymakers’ reaction function, and everyone’s talking about how terrible the Chinese economy is, and it’s true. Well, you know, it’s bifurcated, right? It’s the K-shaped economy that Joe P. has written about, and others have written about. Export’s doing great, high-tech part of the economy, anything linked to AI doing great. Everything else, doing terrible, right? Particularly consumption, the overall domestic demand picture. Part of that domestic demand picture is also weak infrastructure investment.

They’ll try to adjust that piece. But policymakers are not panicking. Maybe this is a bad decision, but they are riding it out. I don’t know why that tells us. To me, it tells us maybe things aren’t as bad as we think from the outside. They obviously aren’t panicking, at least they have not deemed the level of domestic weakness to be bad enough to warrant more aggressive action. That’s something we can say. Now, why that is, I think, is because people forget that we’re still in the process of this massive real estate realignment, and the economy is weaning itself off of real estate. That’s what officials want. It’s painful.

It’s going to take a long time. And they’ve just decided we are going to ride this out. And the real estate adjustment is a lot of what’s driving, not solely, but a lot of what’s driving weak consumption. And so, I think they’re just saying it’s pretty simple diagnosis from their point of view. Like, we’re realigning the property market. That means domestic demand is going to be weak for a while. Doesn’t mean they don’t wish it was stronger and they need to tinker here or there, but they’re riding this puppy out. So, I think what you see is largely what you get. Although I think you’re right. We probably will see a little bit of a fill up to the economy there at the end. So, that’s my two cents. Tell me why I’m wrong or are you okay with that assessment?

Dinny: No, no, that sounds about right to me, mate.

Andrew: And then just finally, quickly for people, there was one other element of the Politburo meeting. I won’t ask Dinny to weigh in on this, but it did also announce the Central Committee’s 5th Plenum will be held in October. There’s an annual plenum for the Party. Sometimes there’s more than one they have to have, I believe, are Party rules at least one each year. But the 5th Plenum is important because it’s going to set the stage for the leadership turnover that will take place in 2027, which is only about nine months away, I believe, because a lot of that will happen in March.

And then there will be further additional moves at the actual, what is it, 21st party Congress in the fall. And so, this plenum is a lot about setting the stage for that. And it is all about internal party governance, improving the party, further rooting out corruption, which again, you’d think would make sense to do ahead of a big turnover at the top leadership. So, we’ll leave any further analysis on that to the nerds in our politics practice at Trivium, but wanted to at least flag that for people who may be interested. All right, that’s going to do it. Dinny, thanks for this quick React pod. This was super helpful. Hope people found it useful. Thanks, man.

Dinny: Cheers, mate.

Andrew: All right. Bye, everybody.

• Xi expressed full-throated support for AI development, while indicating that regulation is moving up Beijing’s priority list.

Read together, the message was that China intends to compete hard on AI, but on its own terms, with stability ranked ahead of any near-term gains.

The bit that attracted the most attention was Xi’s reaffirmation of China’s commitment to open-source AI.

• There has been growing speculation that AI safety concerns may force Chinese regulators to disallow ongoing release of open-source models.

• But Xi’s message was that China isn’t going to walk away from open source.

That’s likely because the global popularity of Chinese open-source tools is a once-in-a-generation opportunity to bring the international community onto China’s AI stack – particularly in the absence of cheap, open US alternatives.

• Beijing intends to press that advantage for as long as it can.

Running alongside the open-source pitch, however, was a notable elevation of regulation, ethics, and governance in Xi’s remarks.

• The speech raised deep questions about practical and existential AI risk and called for new laws and risk-monitoring systems.

• Beijing was already an early and fast mover on AI regulation, but Xi’s talk indicated that China will double down on AI safety, potentially placing stronger controls on both the release of new open-source models and the distribution of open model weights.

Then there was the announcement of the World Artificial Intelligence Cooperation Organization, formally launched on the eve of the conference last week.

• This represents Beijing’s bid to compete with the US on global AI governance and offer the Global South an alternative to Western-led bodies.

• Whether it gains traction is an open question – China’s track record on tech governance organizations is patchy at best, and the recent past is littered with abandoned Chinese-led cooperative platforms.

Zoom out from the individual announcements, though, and a bigger picture emerges: Xi believes that while AI is deeply important and transformative, it should never become so all-consuming that policymakers lose sight of what really matters.

• Technology is not an end unto itself – instead, AI should serve social development and stability.

The implications of that framing are far-reaching. Beijing is prioritizing AI’s long-term development over a sprint race to build the most advanced frontier model.

• Viewed through that lens, the tighter regulations, willingness to slow model releases, and the hard line on NVIDIA chip imports all begin to make a lot more sense.

The bottom line: The AI race won’t be decided this year – it is a decade-long play for who owns the AI stack that the developing world runs on, who sets the rules of global AI governance, and ultimately, whose industries make the best use of these tools for economic gain.

Kendra Schaefer, Partner and Head of Tech Policy Research, Trivium China

What you missed

US-China

The Trump administration imposed tariffs of between 10% and 12.5% on 60 countries, including China, alleging that they hadn’t done enough to prevent the import of products made with forced labor.

• The fact that China wasn’t singled out and that the new duties merely aim to re-establish Washington’s previous tariff rate mean Beijing is highly unlikely to retaliate.

Xi Jinping looks headed to DC in September – at least for now.

• Trump has downplayed his July 16 comments claiming that China interfered in the 2020 US election, saying: “Well, we’re going to talk to them about it. It took place a long time ago.”

• On Monday, US Secretary of State Marco Rubio said, “we anticipate that the trip is happening in September,” while China’s foreign ministry says the two sides have “kept in communication on head-of-state interactions.”

Foreign affairs

Top diplomat Wang Yi met a delegation from the European Parliament’s Committee on Foreign Affairs visiting Beijing on Tuesday.

• Wang told the delegation: “China and Europe should…refrain from politicizing economic and trade issues and overstretching the concept of security in exchanges, and work for an upward and dynamic balance of trade from a long-term perspective.”

Econ and finance

Five of China’s largest state-backed insurers – China Life, PICC, Ping An, China Pacific, and New China Life – issued separate statements expressing confidence in A-shares.

• A-share valuations have collapsed over the past month, with the CSI 300 Index down more than 9% between its June 22 peak and July 17.

Total fiscal expenditure fell 11.9% y/y in June, widening from the 3.9% decline in May – but the scale of the decline is deceiving.

• Government-managed fund expenditure – which accounts for about 30% of total spending – was the main drag in June, plunging 43.7% y/y, largely due to base effects.

Commodities

China added 72.1 GW of new solar capacity in H1, a massive 66% y/y decline.

• Installation growth is all but certain to pick up in H2 as utilities rush to meet year-end grid connection deadlines. However, the structural bottlenecks constraining growth are unlikely to be resolved anytime soon.

Business environment

The finance ministry (MoF) has announced that, starting September 1, lithium-ion batteries – a core input for new energy vehicles (NEV) – will be subject to a 2% consumption tax.

• Innovative, early-stage battery products that have yet to reach mass-scale commercialization – including sodium-ion batteries and fuel cells – will be exempt from the tax until the end of 2028.

Tech

Chinese regulators, led by the commerce ministry (MofCom), are consulting domestic AI and chip firms on tightening export controls over advanced technologies.

• Regulators are also discussing ways to prevent offshore chip firms from fabricating chips designed by Huawei, Alibaba, or ByteDance.

Net zero

The macro planner (NDRC) and energy regulator (NEA) jointly released the 15th Five-Year Plan for renewable energy.

• The plan targets an increase in annual renewables output to 6,000 TWh by 2030 – a 50% increase from 2025 and roughly 35% higher than the US’s 2025 annual power output.

Zhang Xiliang – the chief architect of China’s national carbon market (ETS) – says regulators will tighten the screws on ETS compliance over the 15th Five-Year Plan (FYP) period.

• Zhang also hinted that policymakers are considering a carbon tax for energy-intensive industries not yet covered by the ETS.

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.

• Same standoff, squeezing from opposite ends of the pipeline.

Quick note: This episode is the first of a new, more frequent style of podcast we’re rolling out – shorter, faster-turnaround conversations to react to the news as it breaks, alongside our regular weekly deep dives.

• Look for more of these in your feed soon.

On this episode, Andrew Polk sits down with Kendra Schaefer (Head of Tech Policy Research) to unpack:

• Why MOFCOM’s reported talks with Alibaba, ByteDance, and Zhipu on export controls could reshape how Chinese model weights get released

• The three priorities Beijing is trying to balance: model competitiveness, security risk, and controllability

• How Kimi K3’s release has intensified US anxiety, with Treasury Secretary Scott Bessent floating possible sanctions over model distillation

• What Xi’s WAIC speech signals about China staying committed to open source while tightening the regulatory leash

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

Transcript

Andrew Polk: Hi, everybody. Welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium Co-Founder, Andrew Polk, and I’m joined today once again by our Head of Tech Policy Research, Kendra Schaefer. Kendra, how are you doing?

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

Andrew: Yeah, glad to have you back on so quickly, which it’s a rare treat to get such a quick turnaround. I’ll talk about this a little bit in the housekeeping piece, but just for listeners — we’re doing a little bit of experimentation with putting out content more frequently, which means some of it will be shorter. I’ll talk through some of that in more of it in just a minute. But the reason specifically that I had Kendra on was there were some big developments, even since we talked last, in, of course, the China AI space.

The big news is sort of that Chinese regulators led by MOFCOM are reportedly in talks with some of the big hyperscalers — Alibaba, ByteDance, Zhepu, about potentially tightening export controls on AI models and chips going out of China, potentially even limiting overseas transfer of training data and model weights. And so, this is like a big deal in terms of potential restrictions from China’s side, but also we’re seeing potential restrictions from the U.S. side, which we talked about two weeks ago when I talked to Kendra.

And that has even ramped up further with the release of Kimi 3, Moonshot’s latest release, with now U.S. policymakers really worried. So, there’s like this very narrowing space where the U.S. looks like it’s going to increasingly restrict the Chinese models and China’s going to restrict Chinese models from going abroad. We’re going to talk a little bit about that, and then also add the context of Xi Jinping giving a big keynote speech at the WAIC. What does that stand for, Kendra? World AI Conference?

Kendra: Yes.

Andrew: Okay. Where he kind of doubled down on China’s commitment to open-source AI. A lot of just related topics. I want to get Kendra’s quick take on while it was top of mind for folks. But of course, we’ll do this quick. Got to do the quick vibe check. How’s your vibe today, Kendra?

Kendra: Well, I’m a little under the weather, actually, but I really wanted to do this podcast. So I’m all hopped up on DayQuil and ibuprofen. So I don’t know if overmedicated is a vibe, but if so, that is my vibe.

Andrew: It’s definitely a vibe. I love it. Well, this will be a trip then. I’m looking forward to it. My vibe is excited to kind of experiment with some of this more frequent, quick-hit content. So, excited about that. We will do a little bit of quick housekeeping reminder to anyone listening: if you’ve just got this or if this was forwarded to you, Trivium is not just a podcast. We are a strategic advisory firm and we work with businesses and funds to figure out China. So, we are a strategic advisory that helps businesses and investors navigate the China policy landscape.

That includes policy in China across a range of areas, but also policy towards China out of Western capitals like DC, London, Brussels, and others. So, if you need any help on that front, please do reach out to us at hq@riviumchina.com. Otherwise, listeners, please do leave us ratings and reviews on your favorite podcast apps. It really helps expand our reach and grow our business.

All right. The other housekeeping piece quickly. So, we are going to experiment with more frequent podcasts, more frequent content. It’ll be shorter, many of them. We’ll still kind of have our weekly anchor podcast kind of talking about bigger themes, but I just want to get more Trivium voices on, talk about stuff that’s really top of mind that people may be wondering about in the news. And so please look for us in your feeds more regularly. This isn’t just going to be just suddenly you see three or four Trivian pods. In a couple of weeks, we should be in your feed on a more regular basis.

So, make sure you subscribe to the podcast on whatever platform you use. All right, let’s get into it, Kendra. So, we’ll start with the MOFCOM piece. So, The FT in particular reported that Chinese regulators, led by MOFCOM, the Ministry of Commerce, are in talks with the hyperscalers about tightening export controls on AI models and chips. We’re talking again about potential overseas transfer of training data and model weights, and apparently even some discussion of preventing offshore firms from fabricating Huawei, Alibaba, and ByteDance design chips.

This all matters because, as we’ve talked about on the pod before, the whole reason that Chinese models like DeepSeek and Moonshot’s models have gotten global traction is precisely because they’re open weight, and anyone can download them and run them locally. So, if Beijing starts clamping down on that, it’s a huge deal. Why don’t you talk us through kind of, I know you’ve got a big picture understanding of what’s going on here and also kind of the different priorities that policymakers might be balancing when they’re thinking through this stuff.

Kendra: Yeah, totally. So we don’t know exactly what MOFCOM is going to do or specifically how they’re going to approach this. I’ll come back to my hypothesis on what tools they might use maybe later in the podcast. But we do know what considerations Beijing is trying to balance right now. It’s trying to balance three considerations. First, the competitiveness of models. Second, these sort of big, scary cybersecurity questions around models. And then on top of that, controllability.

And so, it’s probably helpful to paint a little bit of a picture in terms of what the state is thinking on each of those three aspects. So in terms of competitiveness, I mean, I think most of our listeners know that there’s been hope in China for 15 years that the country could sort of develop an alternative tech stack to the U.S. tech stack that would gain international traction. But prior to LLMs, you know, the platform economy and sort of cross-border e-commerce represented China’s best hope to do that.

TikTok was kind of the first big Chinese platform that American users loved and that really got a lot of traction in the U.S. And also, you’ve got some minor stuff like Temu and Shein with a mixed reception, but still relatively popular in the United States. But TikTok, Temu and Shein face direct competition from bigger, better established, better funded U.S. competitors. Temu and Shein have to go head to head with Amazon. TikTok has to compete with Meta and X. But look at what’s happening now in AI.

It’s crazy. Companies all over the world, including all these big companies and a lot of small firms like us in the U.S., want cheap AI technology that they can control. But there’s a huge demand for that. And right now there’s really only viable Chinese supply. There are like very few competitive U.S. models that meet that demand. U.S. models meet the demand for high-quality, very secure, bleeding-edge AI. There’s no great Chinese competitor in that space. And of course, there’s a huge market for that as well.

But they don’t meet the demand for cheap, controllable AI. Right? Chinese firms do. So, this is a once-in-a-lifetime opportunity for China. Even though Chinese tech firms have a sort of fraction of the resources that U.S. firms do, because they’re really the only viable players on the field in that particular segment of the AI market right now, they’re getting a ton of traction. My personal opinion is this isn’t even actually a U.S.-China issue. It’s just a supply and demand problem. And then China has this sort of additional incentive of, you know, it’s not just about can our firms gain market share in the U.S. or EU.

You know, Chinese tools also have actually probably much more long term durable prospects in the global south. Startups and government institutions and companies in countries where the startups don’t have that much money, where you know they’re scrappy, where there’s a lot of R&D firms that don’t have funding, of course, they’re going to want to use a model that’s cheaper, that’s easier to access, there’s lower barriers to entry, there’s not so much sort of subscription control or geofencing or any of that sort of stuff.

So, as you said if Beijing were to ban the export of Chinese open source models on a permanent basis that would essentially amount to ceding the most momentum China has ever gained due to risk aversion. So it would be a huge deal. So that’s one piece of the puzzle. And Beijing is certainly weighing that piece.

Andrew: That’s the competitiveness piece I’m talking about.

Kendra: That’s the competitiveness piece, exactly.

Andrew: So you said competitiveness, security, controllability. Okay, talk us through security then.

Kendra: We’re trying to do a faster pod here, so I’ll try to keep these shorter. But for safety...

Andrew: No, no, people will love it. It doesn’t have to be short.

Kendra: Okay. So, I think the safety concerns are becoming pretty clear to everyone.

I don’t know if you also saw the news just yesterday that this OpenAI was running some tests on new agentic system, and it lowered the guardrails on the system. My God, it was so terrifying. They lowered the guardrails on the system and basically told this tool to like do its worst, essentially, just to see what it could do. And it broke out of its box and went to Hugging Face, launched a cyberattack against the Hugging Face website, totally autonomously, right?

Andrew: Insane.

Kendra: Anyway, there was a big kerfuffle over this. OpenAI and Hugging Face have since cooperated to sort out the issue. But obviously, every week there’s some other terrifying headline about the cybersecurity risks of these models. You know, they’re doing things that humans didn’t expect them to do, etc. So, these safety concerns are very, very real. And open source tools have an even bigger safety problem than closed source tools, which is that if it’s a closed source tool and it is discovered to be hackable or breakable or the guardrails can come off or there’s something seriously wrong with it, the company that manages it can pull it off the market today.

But if you release an open source tool onto the market, you release open weights onto the market, it’s gone. It’s out of your control. That’s the end. And so, the risks for China to be the source of such a tool, let’s say a Chinese company releases a tool like that onto the domestic market. And suddenly there’s a bunch of attacks against Chinese critical infrastructure, even by domestic actors, even, right? Or by foreign state-sponsored actors, that is a direct risk for China, built by China to China.

But similar problem, even if those tools aren’t even used to attack China. I mean, the amount of geopolitical tension that would arise if a bad actor took a Chinese tool and then was using that to attack other countries and China was seen as this irresponsible global actor after they have, you know, talked up safety, etc. And then on top of all of that, It’s like Chinese regulators are some of the most risk-averse humans on the planet.

Andrew: Yeah. I was just quickly going to say, are you saying it’s like some sort of disruptive element escaped to the borders of China and caused a global issue? Have we seen something like that recently? That everyone would blame China for it? Yeah, I think we have. Yeah, well, so I’m sure. Yeah, absolutely. It caused a huge issue. But before you go to the controllability piece, just quickly, our team noted that Hugging Face use open source Chinese models to do the security postmortem to try to figure out what went wrong and fix it. Anything to take away from that?

Kendra: Yeah, that’s a whole nother rabbit hole. It’s like essentially what happened was Hugging Face tried to use in their own blog post when they were reporting on the incident, they essentially said we tried to use commercially available U.S. tools. Presumably, they’re talking about, you know, Anthropics tools or OpenAI’s tools. They tried to use the sort of leading edge commercial tools, and the guardrails on those tools couldn’t distinguish between a company trying to defend itself from a cyberattack and a cyberattacker.

And so those guardrails were triggered and they prevented them from using that tool. And so what happened was Hugging Face reached instead for Zhipu’s GLM 5.2 to do it because the guardrails were not preventative. So, I mean, need I enumerate all the different ways in which that’s scary? It’s also actually a really good argument for, again, China doesn’t really have anything to do with this argument. It’s just like people need, they want controllability. The market wants controllability over their tools, partially for this reason.

Partially because they don’t want, there are situations in which it doesn’t actually make sense or it’s actually unsafe or there’s a security risk to having a middleman tell you what you can and can’t do with the tools that you have access to. So, that’s a real tension, right? It’s the biggest tension, obviously, in the AI ecosystem at the moment.

Andrew: Thanks for that. Sorry for the quick detour, but okay, now let’s talk about the controllability piece, which you were about to go to.

Kendra: Yeah, so you and I have been talking about this for a while. A couple of months ago, we talked about the Meta-Manus deal. And around that time, we flagged for our clients that the Meta-Manus deal caused a shift in the way that China thinks about technology, right? Chinese regulators at the time hadn’t really had to consider the possibility that now that China’s making some bleeding-edge technology, that China needs the regulatory tools to control the outflow of that technology, right? That’s what the Meta-Manus deal sort of revealed to regulators.

And we flagged for clients at the time, this is actually going to be a major theme over the next couple of years, is that regulators are going to start giving themselves opportunities and options for saying no to specific deals, to saying no to a lot of different technology exports, to saying no to the transfer of our IP to foreign companies. And so, we expected to see that as well. And so now you have this interesting situation where Chinese models are starting to, with the release of Kimi, for example, walk up closer to the frontier.

I still think they’re relatively far behind the leading edge, but walk up close enough to the frontier that it starts to become a question of, well, these models are open weight. They don’t have a lot of restrictions on their use. There’s no framework for restrictions on their use. Does that mean a foreign company can just take those models and modify… what technology can be squeezed out of them that China doesn’t want to lose? Regulators don’t really know. That’s not really something they have considered before.

So, I think all three of those things are weighing on the state, are weighing on top leaders, and are weighing on MOFCOM as they consider what to do about open source Chinese models.

Andrew: All right. Well, thanks for laying that out. We’ll come back to how that may be impacting what they do next. But with that sort of context of where are the key priorities that policymakers are trying to balance, let’s now bring in Xi Jinping’s speech at the WAIC conference. It’s a lot to unpack. The headline really is that Xi Jinping recommitted or reiterated China’s commitment to open source, even though there’s been this reporting that China might be considering kind of putting on some restrictions. So, why don’t you just talk to us about the key themes that you saw from Xi Jinping and how this plays into what you just said about policymakers competing priorities.

Kendra: I think Xi’s speech was a perfect summary of all of the issues that China is currently dealing with that I just outlined, plus a bunch of stuff about international AI cooperation also at the end. But, you know, he basically said both, right? He said both things. He painted AI as a new industrial revolution, blah, blah, blah. We’ve heard that from… kind of most policymakers agree on that point. But he also really underscored some of the major risks that AI was presenting for China and for humanity. I’m actually going to read those questions here because I think they’re kind of interesting. He said, “When machines begin to think, how should humans coexist with them? When algorithms take part in decision-making, how can safety be guaranteed? When technology challenges ethics, how can governance keep pace? And when the divide keeps widening, how can inclusive benefits be achieved?”

And so, then he gets into his kind of proposals about how China may answer those questions. And his first proposal was that China should stay committed to openness. And again, I’m going to read out what he said because the devil’s in the details. He said, “Artificial intelligence is a new engine of global economic growth and an accelerator of the shift from old to new drivers of growth. It’s moving from the digital world into the physical world.”

In other words, robots are starting to be powered by AI. And he says, “We should seize this rare historic opportunity, encourage open source development and cooperative sharing,” there’s the money line, “and comprehensively promote AI innovation,” blah, blah, blah. So, he says straight up that the number one principle, right, and often these principles get listed in order of importance and priority. Right up front, he says, “We’re going to stay committed to open source and cooperative sharing.”

In other words, we’re reading that as China has no intention of taking a step back from open source technology. We still think that’s a great tool, and we intend to share Chinese open source models with the world, with other countries as well. But then he comes in from the other side. He pivots to addressing the safety risks. He said, “Second, we should strengthen risk awareness to ensure that AI remains safe and controllable. Artificial intelligence should be a trustworthy tool for humanity.

We must attach great importance to the various inherent and derivative risks that AI gives rise to and work to build systems of laws and regulations, technical monitoring, risk early warning, and emergency response so as to establish a firm safety baseline, guard against misuse and malicious use, and ensure that AI always remains under human control.” And then he kind of gets into some global cooperation stuff on how China will partner with the global south, etc. So, what matters there is they say they’re going to keep supporting open source, but they’re also going to put much more stringent safeguards in place relative to AI technologies.

Later in the speech, he reiterates that, and he says, “We’re going to continuously improve relevant laws and regulations, policies and institutions, norms and ethical guidelines to ensure that AI is safe, reliable and controllable so that this,” love this part, “so that this galloping steed of artificial intelligence runs both fast and steady.” I know. And then he goes on to say, “The more rapidly AI technology advances, the more firmly its direction towards goodness and the benefit of humanity must be anchored, the more precisely the measure of regulation and governance must be calibrated.” Blah, blah, blah.

So, all of this is centered around a clear message that there’s going to be a very sharp uptick in Chinese domestic regulation on AI and China’s efforts to control, likely control the pace of model releases. There’s no question in our mind that Beijing is seeking to do this. So, the question just becomes, right? the question just becomes, what is the tool they use to do it? They’re obviously going to do it. They’re obviously going to try to control probably some kind of technology exports or the release of models in some way or, or, or…

But the question is, what level of ban is that? How much regulatory involvement will that have? You know, we have some clues, but we’re not exactly sure yet.

Andrew: Well, can you talk us through the clues? Like what forms you think they might take?

Kendra: I think that when interests conflict in technology regulation, China almost always tries to kind of thread the needle. And I think, this is just my guess, I think this is just my hypothesis, but I think the best way to thread the needle in this case would be to sort of create a lag between the availability of an open model and the release of the weights. So, in other words, maybe you can access a model online through a provider right away. If you want to ping a hosted version of a new frontier model now or a new open model now, great.

But if you want to download the weights, the model has to go through some kind of very stringent security assessment or some kind of licensing or approval process before those weights actually become available online. And so that’s the really interesting piece. You said in the beginning that, and this is what we’re watching really closely, and I think I’m on the edge of my seat on this one, you know, there have been multiple reports that MOFCOM is leading the discussions on exactly how that might happen.

And if MOFCOM is leading the discussions, that tells us quite a lot because MOFCOM only has a couple of tools available to them. So, if they are the regulator that is going to move forward with controlling model releases, that tells us those releases may be controlled with the tools that MOFCOM already has. Most notably, MOFCOM handles China’s export control regime, right? And they do that through the same export control regime they’re using for rare earths. They do that through this regulation called Regulations on Export Control of Dual Use Items, which basically creates this centralized dual-use control list.

When MOFCOM puts something on that list, exporters have to apply for a license in order to export it, just like what’s happening with rare earths now. Something goes on the list, you’ve got to go to MOFCOM, get a license to export it. And there’s a few different kinds of licenses you can get. You can get a license to send it to just one company. That wouldn’t make a ton of sense here. You can get a license to provide it to a larger audience, etc. But that list has never been used to control something like this.

So, it would actually be super interesting if MOFCOM decides to use the export control regime because it opens a question, is posting model weights online an export? And I guess it could be considered an export under this regime. They also have this other tool called the Catalog of Technologies Prohibited or Restricted from Export. Basically, that’s not a dual-use issue. That catalog is managed by MOFCOM and the Ministry of Science and Technology together. I think, if I recall correctly, it’s under the foreign trade law, not under the export control regime.

And this is the list that China used to control or to kind of prevent the unapproved outbound transfer of TikTok under the TikTok divestiture kerfuffle. And that list too, if I recall correctly, has two sections. It’s got a prohibited section, like this is definitely banned from export under any circumstances, and then a restricted section, like you got to get a license if you’re going to export this. So, functionally speaking, MOFCOM has a couple of lists that they could use to stick model weights on.

Some of the language related to some of these lists, or at least the second one, could already be considered to apply to model weights. But I think they could just go ahead and make it very explicit, add model weights to maybe the export control list. And what that would do would be to give China a very granular pathway for controlling releases on a model-by-model basis. It’s a bit clunky, and I actually think it’s a terrible pathway because there are a hundred ways it could go wrong.

Andrew: Yeah. So I want to pick up on two last pieces then. One is what you see as potential unintended consequences. How can things go wrong? And then I want to circle back to the U.S., what the U.S.

is doing because we’re talking about the Chinese restrictions as China trying to restrict technology outflow and U.S. is trying to restrict Chinese technology inflow. So we’ll get to that piece in a second. But first, how could things go…? No, surely nothing could go wrong here. Nothing could go wrong.

Kendra: Sucks to be a Chinese frontier lab right now. Everybody’s gunning for you. So the first thing that’s on the top of mind is that MOFCOM doesn’t exactly have a history of granting export approvals in a timely manner. I mean, they are just terrible at granting export approvals under this particular regime in any sort of streamlined way. I mean, I think a lot of our listeners are probably watching the whole rare earths saga, even when top leadership, when MOFCOM itself, when the receiving party, when the selling party, in other words, even when every single party involved in a licensed transaction wanted that to happen smoothly, it did not.

That regime was beset by delays. That is one thing when you’re talking about a commodity. It is a very different thing when you are talking about a market that is moving so quickly that every two months, the entire shape of the market has changed. And it’s actually not just MOFCOM. I mean, every single export control regime I can think of, even those not controlled by MOFCOM, like cross-border data exports approved by the CAC was a snarl for two and a half years to the point where EU regulators were bringing it up with Xi Jinping at meetings saying, “Hey, we can’t get data, we can’t get access to data.”

So, I think that’s a potential where, in fact, I would almost guarantee it that if MOFCOM steps into the room, model releases will not be approved rapidly and there is going to be some kind of problem with the speed of exports. So that’s issue number one. The second problem is that MOFCOM doesn’t know anything about safe AI. In other words, at what point does MOFCOM issue an approval on what basis? It has to be the basis of some other kind of security test run by somebody else, right?

And those security tests, what constitutes safe artificial intelligence is still very much an open question globally. I mean, the U.S. is working with our… you know, we’re working with our best tech company as USG is working with, you know, sort of top AI companies to figure that out. And they’re going to be figuring that out for a couple of years. And so, if you put a bureaucrat in the room and you say, “This is exactly what happened with data exports,” you say, “Only allow people to export safe data, but then you didn’t tell them what safe data is.” It’s exactly what happened with data exports.

And regulators just stopped approving anything because they didn’t have a good definition and they couldn’t save their own butts. They couldn’t justify why they allowed something. Nobody wanted to be the one that rubber-stamped a major security risk.

Andrew: Yes.

Kendra: So I think that is the second problem. The third problem is I think China could definitely get too wrapped up in its own narrative about technology outflow too soon. We’ve already seen a couple of examples where the state made an ideological decision, ideological-ish bet that did not make sense from a purely tech competitive perspective. And here I’m talking about Beijing refusing to immediately allow the purchase of as many NVIDIA chips as its companies wanted as soon as the U.S. approved those exports, approved those sales. China sided on delayed for a while and focused primarily on self-sufficiency and said, “Look, we’re going to allow a couple of these.”

And meanwhile, a lot of the AI firms are going, “Please, please, please, we need as many chips as we can get. We’ll get them from anywhere. We’ll take them from anywhere.” So, it wouldn’t be unusual or strange to me if the state essentially talked itself into this idea where, look, we can’t allow too much technology outflow. We can allow foreign companies to access Chinese hosted models, but we can’t just freely and openly allow model weights to be distributed anywhere willy-nilly. We’re going to keep model weights domestic. We’re only going to da, da, da, da, da, which would absolutely destroy the one market advantage that China really has, which is that you can get the model weights…

I think China could just make a bad decision about over-securitization and talk itself into something dumb. And then finally, I think this is true for probably the U.S. and China. There could definitely be some kind of black swan event, where some, you know, we’re already seeing hints of that, just like this sort of OpenAI issue. Luckily, nothing terrible has happened yet. But there could definitely be some major security intrusion or breach or event that sends both China and the U.S. scuttling back into a crab shell, going, “Absolutely not, lock it all down. Nothing is released without approval.” And China being particularly risk averse, I imagine that we could see some serious sort of knee jerk security backlash to something like that.

Those are the four things that I think could derail any efforts by China to institute reasonable, rational safeguards, which are desperately needed, by the way, you know, on open-source model releases.

Andrew: Yeah. Like I was alluding to with the pandemic, don’t want to get into the hole; did China do this on purpose or not? I don’t want to go down those rabbit holes. But if there were an accident and some open-source model released from China started causing problems in the cybersecurity world globally, there would, of course, be an assumption that the CCP did it on purpose, right? And then that, I mean, you talked about geopolitical tension, I mean, that’s a war, I think, you know, waiting to happen.

Kendra: Yeah, 100 percent, 100 percent. I mean, China will avoid that at all costs. So, I don’t think it, but I’ve heard some of this chatter on X or whatever that people think China’s in control of every aspect of this. I mean, we are watching regulators in real time respond to like new catastrophes or new sort of angles on this question. Every week, there’s some other thing nobody thought of that has to be addressed and that regulators aren’t prepared for.

Andrew: Everyone’s flying or building the airplane while they’re flying it. Everyone everywhere, right?

Kendra: Exactly. Yeah.

Andrew: And the companies are trying to stay ahead of the regulators as is happening in the U.S., that’s a whole nother podcast. But let’s now turn to what’s happening in the U.S. So, already the U.S. was making a bunch of noise about potentially restricting access. I think we touched on it maybe in our last pod, potentially restricting access to Chinese models because a bunch of companies in the U.S. are increasingly using these models because of everything you said, because they’re cheaper. And a lot of times you just need kind of bread-and-butter type AI usages, right? You don’t need the bleeding edge models. That was before the release of Kimi 3, which caused a lot of waves.

We won’t go into the details, but basically it was much closer to the frontier of models that many people thought China was. And now, I mean, even today, Scott Bessent, maybe it was yesterday, the U.S. Treasury Secretary saying, “Oh, you know, we think there was a ton of distillation to train these models. We might sanction or entity list Chinese companies that are using mass distillation. So, talk about what you think of the U.S. discussion around restrictions on Chinese models. And then we’ll end by just talking about how there’s very clearly a pincer on both sides, China trying to restrict outbound access, U.S. trying to restrict inbound access, and what that might mean for the future.

Kendra: I mean, I think there’s a lot of angst, but I don’t think there’s a real strategy. And what Bessent said was, we’re going to take a look at whether or not, I mean, how I heard that was, we’re going to take a look at whether or not… I mean, how I heard that was we’re going to take a look at whether or not we can paint distillation as a major IP theft problem and go after Chinese models on that basis, because we’re not sure what basis to go after them on. We need some reason to go after Chinese models. We’re just not sure what that is. I mean, look, five years ago, D.C. was thinking about China’s digital technology space the same way that we think about Russia’s digital technology space.

And it’s helpful to look back on where people’s brains were at five years ago. The idea was like if China developed a digital technology that people liked, it was a massive fluke. It was an accident. And if you wanted to kill it, all you had to do...

Andrew: Or it must have cheated.

Kendra: Or they must have cheated, right? And so, China can’t innovate, they only steal and cheat. And so, all you have to do is sort of kill the international expansion of that one product or ban that one product and that one thing dies. And in some case, we’re always kind of fighting the last war. Against most countries, that has worked just fine. I mean, in 2024, I don’t know if you remember this, there was this Russian cybersecurity software made by like Kaspersky, which Russian cybersecurity.

Russia’s good at cybersecurity. And so, they created this really good software. It got some traction in the U.S. Commerce came in and said, “Absolutely not. We’re banning Kaspersky products in the United States due to national security reasons.” And not a peep before or since from any major Russian producer of software that the United States is clamoring to have. And that has been true for most countries, for most of Internet history. And it is no longer true relative to China.

When TikTok came out, we said it. We said this is not going to be the last digital technology that China develops that people want to use. They have a very strong digital technology ecosystem now. And so, we don’t have anything else except ban it, sanction it, whack-a-mole it, you know, kill it. Let’s find some way to kill it. And I don’t think that strategy is going to be effective here. But more than that, I think the problem is that without a U.S. alternative, again, it’s just a supply and demand problem. It’s just a supply and demand problem. We said this on the last podcast. I do not care at all if it’s a Chinese model or not.

I do not care at all. When we are deciding what model to use, we want one that’s cheap and we want one that’s controllable and good enough. That’s it.

Andrew: And sorry to interrupt you, but maybe also worth touching quickly, like it’s not that easy to ban these models. Like, once they’re on the Internet, that’s the whole point of open source, right? Like, if we were going to try to ban it, what do you think would be the…?

Kendra: I mean, there’s been a lot of very controversial conversation on that in the last couple of days. There’s been some arguments that all the U.S. needs to do is sort of create enough risk, create enough perceived risk. Like they don’t even have to ban it. They just have to create enough perceived risks for corporations, right? For major corporations to touch the models that they will sort of back away from them and won’t use them at all. That they don’t necessarily have to sanction or they have to take the worst step, but just try to create some kind of churn.

I actually don’t know if that will work considering this, again, just considering the supply and demand problem. You have a massive consumer base that desperately wants this technology and, you know, not a ton of alternatives. So, yeah, I mean, I think that’s really the critical issue.

Andrew: All right. We meant to do a short one, but there’s just so much to unpack here that I think… I mean, I’m glad we went a little bit longer and I’m sure listeners will have enjoyed it. I’ve certainly learned a lot. But last piece, like, I don’t know, we talked about, you know, this pincer, this like short or like narrowing space for Chinese models. It seems, at least in the U.S., used by U.S. users, if not more globally. Any thoughts on how to think about that or what that might portend to going forward to wrap this up?

Kendra: I mean, the last thing I’ll say just as a summary is I think that what is going to define the space of AI development going forward is the gap between Chinese regulations and how they choose to control their own model releases and then how the United States decides to approach disincentivizing U.S. firms from using Chinese models. But I also just I think I would be remiss if I didn’t say this. One lesson I’ve learned during my career trying to analyze technology and the direction technology is going to go is that very often the shape of our conversation turns out to be wrong.

That the actual issues that we’re dealing with turn out to be like something comes out of left field that we didn’t consider that we go, “Oh, that changes the entire shape of the conversation.” I’ll give you one example before we sign off. There was a massive panic over the 5G race. Right? But for the average consumer, the move from 4G to 5G didn’t end up being that impactful at all. And actually, where a lot of the impact was, was on the sort of enterprise side of 5G. But we talked a lot about what it was going to mean for China to have access to 5G technology before the United States and what it would mean for their ecosystem and what it would mean for ICDs.

And we worried that China had more base stations than we did and their rural population had more access to 5G than we did. I was giving a talk at a classroom a couple of weeks ago, and it was a college classroom, and I asked people to put their hands up if they knew what the 5G race was. You know how many people put their hands up? Zero. Zero people. Zero people under the age of 22 had ever even heard of that. And it was the only thing anybody was talking about for a long time. Other considerations entered that. We defined that conversation as a race between the U.S. and China on a couple of really narrow points.

None of those things ended up being that big of a deal. And then other considerations actually did end up being a really big deal that nobody was talking about. I suspect we will find something similar here. For example, I think there’s a possibility that the shape of this argument changes in a year. Here’s one hypothesis. The bleeding edge of artificial intelligence is going to keep moving forward for the foreseeable future. But most consumers probably aren’t going to need a bleeding-edge model starting quite soon.

What do we do with AI at our company? We do document processing en masse. That doesn’t require a very smart model. It requires a pretty good model. So, imagine a world a year and a half from now, I’m not saying this is definitely going to happen, but imagine a world a year and a half from now in which it doesn’t actually matter if a Chinese regulator takes six months to release an open-weight model because people don’t switch models anymore every month.

The frontier is moving forward, but most people just pick a model and stick with it for a couple of years because it does what they need it to do and that’s just fine. And so, none of the concerns about who’s approving faster or regulatory capture, you know, or where the frontier is, that becomes a cybersecurity and critical infrastructure problem and stays in that space. And the actual competitive consumer landscape for how companies are using AI is about cost, is about whatever stack you picked up two years ago, becomes a little bit more, kind of becomes boring, essentially.

Andrew: Totally. It does make sense.

Kendra: This whole conversation could change in two years, right? And it could just be about something completely different. So I’m just aware of that as we move ahead.

Andrew: I’m like so tempted to press on that point, because I think it’s a great point. And I think we could expound on that. But we’ll save it for another pod. I’m excited to get you on more regularly for some of these quick reaction discussions. The listeners need more Kendra Schaefer in their life. That’s like my constant feedback that I’m getting.

Kendra: I mean, if only I could shut up faster, we could get more quick reactions.

Andrew: This has been amazing. Amazing, amazing. So, thank you for the knowledge bombs. And yeah, we’ll look forward to seeing you again soon. Hope you feel better.

Kendra: All right. Thanks. Talk to you later.

Andrew: Thanks. Bye, everybody.

• Coincidence? We don’t think so.

On this week’s Trivium China Podcast, Andrew Polk sits down with Dinny McMahon (Head of Markets Research) and Joe Peissel (Lead Macro Analyst) to unpack:

• Why the “national team” bought A-shares after last month’s selloff, and why this intervention was smaller than last year’s

• What SAFE’s move to regularize QDII quotas signals about RMB internationalization

• The quiet PBOC move to curb bankers’ acceptances, and what it tells us about Beijing’s deleveraging playbook

• What the latest GDP and trade data say about China’s widening “K-shaped” economy

Tune in for the full breakdown.
And while you’re at it, make sure to check out Dinny’s latest note on the pivot to deleveraging here. You won’t regret it!

Transcript

Andrew Polk: Hi, everybody, and welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium Co-Founder, Andrew Polk, and I am joined today by two guests. First, our head of markets research, Dinny McMahon, and Trivium’s Lead Macro Econ Analyst, Joe Peissel.

Joe, how are you doing today, man?

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

Andrew: Yeah, great to have you on, as always. Dinny, how about yourself, man? How are you doing over there?

Dinny McMahon: I’m doing good, mate. Doing good.

Andrew: Sorry, we’re laughing because Dinny was having some technical difficulties and getting quite frustrated. But we’re here now.

Dinny: Frustrating to me. I mean, it seemed to have made your day.

Andrew: Yeah, I was delighted by all of it. But we’re here now. We’re here now. And what we are going to talk about are some of the biggest developments in terms of the macro picture, as usual with these two guys. This is our monthly pod where we talk about the macro data, but we’re also going to throw in a couple of other things, which is why I also wanted to have Dinny on, also kind of have kind of a three-way conversation, a little bit more conversational than just me purely interviewing Joe.

But we’ll get to the macro data at the end with Joe really taking the lead there. We are going to start, though, with the deployment of the “national team” by Beijing to prop up A shares after last month’s tech-led share sell-off. Then we’ll get into the moves by SAFE, which is the foreign exchange regulator in China, to regularize the QDII quota, which is the outbound quota for foreign investment by Chinese institutional investors. And so, we’ll talk about what that means for outbound investment.

And then we will talk about the latest reports that the central bank, the PBOC, has told banks to raise the minimum discount rate on bankers’ acceptances. That’s a wonky thing, but basically, it’s a quiet but meaningful move on the deleveraging front, which we talked about in my last pot with Tiffany, so we thought it’d be a good thing to bring up. And then, of course, like I said, we’ll get into the macro data, talking about the K-shaped divergence running through China’s economy, which Joe has highlighted in some of our recent writing that our subscribers will have seen.

But of course, before we do that, we got to start with the customary vibe check. I’m already smiling, Dinny. How’s your vibe over there?

Dinny: Oh, mate, it was great. So, about 15 minutes ago, when I started to set up my camera and microphone and all that sort of stuff. Yeah, it was a beautiful morning. The birds, the sun is shining, the birds are singing. And then, you know, I had a workshop last night with Claude, exactly how I was going to set up my [inaudible 00:02:44] set up. And I don’t know, one of us clearly got it wrong, so I’m a little bit more on the irritated side of frustrated this week.

Andrew: Well, we’re glad to have you. Even an irritated Dinny is a good Dinny to have, and so hopefully we can push past it. Glad that you finally got everything set up. I can attest that technology issues, especially when it comes to sound, first happen way more than you would expect as a regular podcaster. It seems like the setup’s always changing. There’s always some sound bug. And secondly, they are incredibly frustrating when they do happen. So, you have my sympathies. Although I’m still going to laugh. Joe, how was your vibe, man?

Joe: My vibes are good. Thanks, Andrew. Although I’m, to be frank, I’m still smarting from the World Cup, from the Football World Cup from last week.

Andrew: Oh, right.

Joe: England’s depressing performance against Argentina.

Andrew: Yeah, we haven’t had a chance to discuss that.

Dinny: Yeah, France too.

Joe: Yeah, well…

Andrew: Well, it was bittersweet that was also a weird game. We won’t get into it; this isn’t a World Cup podcast, but that third-place game was a funny one. But yeah, sorry, sorry to all our British listeners out there. I watched that game. Sorry, yeah.

Joe: Well, English in particular. I think Scottish and Welsch listeners will probably be thrilled at the result, yeah.

Andrew: Yeah, fair enough. Fair enough. Yeah, good point. Well, my vibe, it’s 9.30 in the morning on Wednesday, July 22nd. I’m in a great mood. And watching Dinny’s foibles has sort of given me a little bit of a pickup further. So, I’m going to be carrying the good vibes into this podcast today. But we should probably get into it because that was kind of an extended vibe check. Although we also do have to do the quick housekeeping.

Just quickly, a reminder, 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 domestic policy in China around a range of issues, whether that be tech, markets, etc. But it also includes policy towards China out of Western capitals like D.C., London, Brussels, and others. So, if you need any help on that front, please do reach out to us at hq@triviumchina.com. We would love to have a conversation about how we can support your business or your fund.

Otherwise, if you want more Trivium content, check out our website, again, www.triviumchina.com, where you can find the China policy intel option that you’ll need. We, again, have markets, tech, anything that you might need is there on the site as well. So, check that out. And while you’re at it, please leave us a rating or comment on the podcast and tell your friends and colleagues about Trivium. We always really appreciate the word-of-mouth recommendations. They really help us to grow our business. So with that out of the way, let’s get into it. Dinny, Joe, you guys ready?

Joe: For sure. Yep, let’s do it.

Dinny: Yep, let’s do it.

Andrew: All right. So we’re going to start with the stock market, the latest intervention on the stock market on July 19th. So that was just, I guess, on Sunday, a couple of days ago, basically. Two central government-owned investment firms, China Reform Holdings and China Chengtong, announced they’d increase their holdings of Chinese equities. These big state-owned investment firms coming in is what we refer to as the “national team.”

And that investment announcement came after a pretty rough month for A shares, the kind of benchmark CSI 300. Stock index is down more than 9% since its June 22nd peak. And the STAR market or the STAR50 dropped 17% just last week. So those two firms stepped in. And then even more recently, we had China’s biggest state-backed insurers, including China Life, Ping An Insurance, and China Pacific, all issuing statements pledging confidence in A-shares and committing to more equity investment as alongside 40 listed companies announcing buyback plans, stock buyback plans to support share prices.

So, Dinny, let me toss this to you first. What’s your read on the scale of this intervention, especially compared to previous interventions that we’ve seen. I think the most recent one was back in April 2025. So, talk us through kind of the scale of this thing and what to think about it.

Dinny: Yeah well so far it’s been pretty small. So when the Liberation Day tariffs hit, those two same state-owned firms deployed, well, they said they deployed 180 billion renminbi to buying ETFs and buying stocks. Whereas this time the numbers they’ve given us are only 70 billion. So, the scale of the intervention is much smaller. But I think the more sort of telling thing is that in the past, when Beijing is sort of really being worried about the stock market having fallen and it’s trying to get things back up again, its sort of modus operandi was to throw a whole lot of administrative measures at things.

So, typically, their go-to playbook would be they’d impose more a moratorium on all new IPOs so that you weren’t diluting liquidity among more stocks. Or you’d change margin trading rules so that it was easier to borrow to invest in stocks, or that you tighten up, make it harder for people to short sell off, stuff like that. But I think it’s quite telling that the two things that they’ve done this time in response to a pretty precipitous sell-off in certain stocks is one they’ve deployed the national team on a relatively modest scale.

And secondly, they’ve deployed the state-owned insurers not to buy stocks, at least not immediately, but to kind of jawbone the market up that kind of as a team they got together and said, “Look we’re all in this we’re buying more shares than we used to. We see value in the A-share market over the long term. We’re committed to this market as long patient capital.” And so, Beijing’s approach to this has fundamentally changed. It’s no longer about sort of trying to engineer a short-term bump to the market, but, as we’ve been arguing for a long time, kind of lay the foundations to a sort of a cultural change that can translate into what Beijing refers to as a slow bull market.

And so, I think that’s what we’re seeing here. To the extent that the national team is deploying capital this time around, it’s about putting a cushion under the market. It’s not about trying to reflate prices. It’s just trying to soften the fall, limit the degree to which stocks fall, and then try and rebuild confidence, genuine confidence, as opposed to just trying to engineer a rebound with various tricks and measures.

Andrew: Joe, let me bring you in here. What are your thoughts on this intervention? Do you think, well, first of all, I was going to say, do you think it’s going to work? But then I guess the question is sort of what defines success here in Beijing’s mind. Dinny just made the argument, they’re not really trying to throw everything at the stock market simply to pump up prices, but want to achieve this more of a slow bull market. So, will it be successful and what defines success in your view of Beijing’s view?

Joe: Yeah, so I think success is really about trying to attain this slow bull market. So, that there hasn’t been this aggressive knee-jerk reaction from Beijing like there has been in the past, I think it’s actually a positive thing. And they’re not really putting a floor on prices, right? It’s almost like they’re trying to put a floor in a panic. So, if stock prices drop too much, there’s these kind of these modest incremental measures, but nothing really aggressive, nothing really knee-jerk.

That’s consistent with trying to achieve this slow bull run of the market. What I think is quite interesting is that markets have stabilized. They’ve actually picked up very slightly. I mean, really modest. But I think the key takeaway here is markets have stabilized. The fall has stopped despite using two and a half times less fiscal firepower than they did this time last year, which, to me, suggests, or potentially suggests that maybe Beijing is building up credibility in its ability to put a backstop onto a market slide.

Andrew: Yeah, that’s a good point. Dinny, what do you think about that? I mean, I look at these interventions, and it just feels like we get one every 12 to 18 months now. So, what is your take on Beijing’s credibility here with the market that Joe pointed out?

Dinny: Yeah, I think the market’s starting to give it a better sense of what to expect from Beijing. I think it now knows that when Beijing intervenes, it’s not trying to reflate the market, but it’s trying to put a net under it. And I think that’s a very different set of expectations that for the state to intervene and try and engineer a bull market, which it has done in the past, the public has kind of lost faith in Beijing’s ability to do that.

But if it’s just the state intervening to go, we’re just going to limit the degree to which it falls, maybe even stop it falling. I mean, that’s a very different benchmark. It’s certainly something that the state is far more equipped to handle and so is conceivably something that the public is more willing to accept as something that the state can feasibly do and so sort of moderate their expectations.

Andrew: With that kind of context in mind, Joe, first to you, then over to Deneen, we’ll wrap this part of it up, should we expect more moves out of regulators and out of state-linked market participants on this front? I mean, it seems like in the past, there’s sort of been, I don’t know, usually like three, four weeks of kind of incremental moves that kind of add up to a package. But if they’re not really trying to pump prices, they’re just trying to create a net under them, maybe they don’t need a spate of moves. I don’t know. What do you think, Joe?

Joe: I expect regulators will respond to equity prices. So, markets have stabilized for now. I think if that stabilization prolongs for a period of time, then there won’t be any further moves. If the market fully resumes, then I expect there would be more intervention. Again, I don’t really think regulators are trying to put a floor under prices per se, but they do want to stop any sort of irrational market panic. Dinny, do you think that’s right? Do you agree?

Dinny: Yeah, absolutely. We absolutely watch the market there. I don’t think regulators are going in with a preconceived set of or a checklist of measures they’re going to roll out. They’re going to see how the market responds, and then they’ll adapt accordingly.

Andrew: Yeah. Well, we will obviously see in the coming days kind of how the market continues to react. This podcast is not investment advice. We have to say that, but it does strike me that there’s not an obvious signal. This is not the kind of situation where especially foreign entities would jump in and try to ride what looks to be an upward surge or a wave of price increases in A-share markets because that is not what they’re trying to do, according to you guys, which I agree with. But we will continue to monitor this and see how effective these moves are and if Beijing is becoming more effective.

So, I’m sure there will be plenty of opportunities to talk more about it in the coming weeks. I want to pivot now, though, to the second topic, which is about currency and capital flows. So last week, July 17th, SAFE, again, the FX regulator said it would start issuing QDII quotas, Qualified Domestic Institutional Investor quotas is I believe what QDII stands for. They will start issuing them on a regular basis going forward rather than ad hoc basis, which we’ve seen in the past, sometimes years apart, where the batches of quotas will just kind of be dormant for an extended period.

Walk us through why this matters, Dinny, what’s happening. Our super in the weeds listeners will know kind of what all this is, but just lay the groundwork for those who might not be experts in the space.

Dinny: So we were expecting something like this to happen, that Beijing would liberalize or open up the channels through which people could invest, the Chinese people in the mainland could invest in overseas capital markets. We thought this was happening, partly because there’s been a real push towards renminbi internationalization over the past year. Beijing kind of sees what’s happening globally with the role of the U.S. in the global economy, sort of shifting sentiments about the role of the U.S. dollar in the global economy.

And they kind of think, look, this might be a unique opportunity, a unique moment in time to promote sort of the internationalization of the Chinese renminbi. But on top of that, we thought something like this was sort of on the cards because a few months ago, Beijing cracked down on three Hong Kong-based brokerages, Futu, Tiger, and Longbridge. And what it was cracking down on is these three securities companies were kind of operating in a bit of a legal grey area. China’s people are allowed to move overseas $50,000 worth of cash, capital, however you like to put it, each year.

And they can do that year in, year out. And so, what these securities companies were doing is they were signing up people in mainland China, signing them up to brokerage accounts, having them move their money over to Hong Kong or somewhere, and then from there, putting the money into overseas brokerage accounts and allowing them to invest overseas. And Beijing doesn’t like that because it likes being able to control the channels through which money moves from the mainland into overseas equity markets, called capital markets. And so, you’ve got these formalized, I guess, these formalized channels through which capital flows.

You’ve got things like the Stock Connect, you’ve got Bond Connect, you’ve got various other programs, including things like the QDII program, which differs with what the Hong Kong brokerages were doing in the sense that people would put their money into a sort of a fund management company in mainland China. That fund management company was then able to convert funds into dollars, take the money overseas and invest in overseas capital markets. And that gives Beijing a degree control over where money is going relative to people doing it off their own bat. Now, of course, Beijing hasn’t completely crackdown on people being able to invest overseas based on their own discretion.

I mean, if you turn up in Hong Kong and bring your money over with you, you can set up an account in Hong Kong and invest overseas like that. You can invest in overseas insurance products in Hong Kong like that as well, and Beijing allows that door to remain open. But it didn’t like what Futu and Tiger and Longbridge were doing, and so they shut it down and there was a lot of bad questions at the time was, well, is this kind of like what Beijing did a few years ago with the tech sector, what it did with the education sector?

It kind of cracked down on a handful of firms, and it signaled a broader crackdown. So the question was by going after this small handful of firms, did it signal a broader crackdown on outward capital flows? And we did not think that was the case. We thought, given all the signals we’ve been given about renminbi internationalization, literally the opposite was true. That Beijing was cleaning up a gray area, a loophole that it didn’t like and had sort of put up with for too long.

But in doing so, it would then have the confidence to further broaden out and embrace, sort of broaden out those channels which it itself had sort of set up and which it had more confidence in. And that’s exactly what we’re seeing now. The State Administration of Foreign Exchange is saying that it will now regularize the issuance of new QDII quotas. Now, we don’t know how much each additional quota will be. We don’t know how regular or regularized actually is.

But the signal here is that we’re going to get these new quotas for outward investment on a more regular basis, which is one of the reasons why we think they were cleaning up the sort of grey channel conduits earlier in the year.

Andrew: Thanks for that, Dinny. Great explanation. Joe, let me bring you in. So now seems like a pretty good time for a move like this because there is pretty significant capital inflow, right? They try to avoid liberalizing in any way of the capital account when there is depreciation pressure, capital outflow pressure from China. So, we saw in the first half of the year net non-bank inflows, so inflows from basically corporates and households, hit USD $247 billion. That nearly matched all of the 2025 inflow of $300 billion.

You think that kind of inflow strength gives safe sort of room here to do a little bit more capital account opening? Or do they need to be careful if kind of the dynamics go into reverse? I mean, I think, yeah, China’s export juggernaut and relatively weak dollar driving appreciation pressure that the PBOC is kind of fighting against. So, I think it creates a moment, but I don’t know, give us some context on how you think about this.

Joe: Yeah, for sure. I mean, I agree. I think it gives regulators, it gives Beijing confidence that they can pursue these policies now. Dinny touched on this a minute ago. We’ve been tracking really closely all of these policy measures aimed at RMB internationalization. And a prerequisite for that is to liberalize your capital accounts to an extent. And so, this is what we’re seeing. This is what the regularization of QDII quotas does. I think there’s kind of two important signals from this. So, the first is, and I’m really just kind of repeating what Dinny said, I think the timing makes perfect sense, right?

They crack down on some of this illegal or grey market capital outflow channels. And at the same time, they enlarge or liberate these legal controllable channels. So, the timing is really important. It signals that no, Beijing isn’t trying to crack down on capital outflow per se. I think it wants to crack down on those channels that it can’t control. The second thing is, is it normalizes capital outflow as a policy, which is really important. It’s something we haven’t really seen before because previously QDI quotas have always been issued on an ad hoc basis.

So, moving to this routine schedule, even though we don’t know the dollar amount at the moment, I actually just think the regularization per se is more important than the dollar figure here because as I say, it’s going to create routine and regularity in terms of capital outflow policy.

Andrew: Yeah, we actually had a client for years asking us to track the QDII changes, kind of trying to stay on top of this and see what it meant for capital account liberalization. And they were so irregular, we had to check it every day. But like I said at the top of this section, they often wouldn’t change for eight, 12 months or longer. So, I think people poo-poo the whole notion of renminbi internationalization.

Dinny: Who are these people?

Andrew: Yeah. Well, basically anyone in Washington, DC, right? No one will ever displace the dollar. China is never going to internationalize. And I mean, I kind of get it, right? People have been saying that China is going to open its capital account or liberalize capital flows since probably like the early 2000s, right? Definitely since I’ve been watching China starting in the mid-2010s or I guess late aughts. I don’t know. Last point here, Dinny, that they do seem to think this is a true moment of opportunity, right?

With kind of a lot of countries, especially that are not geopolitically aligned with the U.S., kind of looking for alternatives over time. Not that China’s trying to displace the dollar as a reserve currency anytime soon, but just to like create a somewhat more viable option at this sort of moment where people are looking at the dollar a little bit more askance. I mean, is that what’s happening?

Dinny: Yeah, absolutely. I think there’s a number of ways to look at the renminbi internationalization thing. I mean, even if you think that China will never be able to rival the dollar, or even rival the euro in terms of usage rates, the point is Beijing at the moment thinks it is something that it can push forward. It sees some value in it and it thinks it is in a unique moment in time where it can push that agenda. And so, the significance of that is we are seeing a lot of micro reform. And those micro reforms have knock-on effects which have unexpected consequences.

And so, I think it’s really worth watching what Beijing is doing, given Beijing thinks at least something is feasible. And so, it’s moving in that direction. And so, keeping an eye on what it’s actually doing is really quite important. And I think the other thing to keep in mind is with renminbi internationalization, I don’t think Beijing’s goal is to just displace the dollar. It looks at the United States and it says, “Look, if to have a global reserve currency is to lose control of our money supply,” because half of the dollars created in the world are created in the eurodollar market outside of the control of the Federal Reserve.

Given that the way that the U.S. ensures that there’s a sufficient supply of dollars globally is by running a massive trade deficit, Beijing looks at those conditions and goes, “We’re not particularly interested in that.” It sees that it can push renminbi internationalization, push the supply of renminbi globally through running a financial surplus, which is kind of a bit of an experiment they’re pursuing at the moment. But the goal here isn’t to displace the dollar or even to replicate what the U.S. has created to the extent that they want to internationalize the renminbi, they’re trying to come up with a way of doing it that suits their own domestic economic concerns and considerations.

Whether they pull it off or not, it’s a different question, but it’s certainly watching them do it and seeing the measures they pursue is going to have unintended consequences.

Andrew: Yeah, all those are great points. I think I 100% agree that China is not trying to replicate what the U.S. has done. And I just also, as you were saying that, just thought about the irony of people who, again, poo-poo RMB internationalization. “Oh, it’s never going to happen. They can never do it.” Their kind of implicit argument is because they’ll never run a trade deficit like we do. Meanwhile, they turn around and are like, “I hate your trade surplus, which I understand.” But I don’t know, it seems a little bit inconsistent logically. But anyway, we’ll leave that. There will be plenty more on that.

This is an issue where we do follow it very, very closely because we think that there is some action here. And so, these little micro moves add up over time. And we think, like Beijing, that kind of now is a moment where this is getting a little bit more traction than it has any time in the recent past. So, we’ll stay on top of that as well. And then the last thing I want to talk about before we dig into the macro data is particularly wonky.

But this went over to Dinny because it plays right into the deleveraging thesis, as I said, that you laid out in the pot a couple of weeks ago. So, Caixin, the Chinese financial media outlet, is reporting that in June, the PBOC told banks to raise their minimum discount rates on bankers’ acceptances to somewhere between 0.35% and 0.5%, depending on the bank. So, for listeners who may not know what those are, bankers’ acceptances are sort of IOUs that firms can use to pay suppliers. And then when those firms get the IOUs, they’re usually for a certain period of time.

But if you need cash, you can cash one in early at the bank. And that gets recorded on the bank’s books as basically a loan. But banks have been reportedly cutting the discount rates towards zero to juice their loan counts because credit demand has been so weak. And the PBOC is saying, “Stop doing that.” Dinny, before you get into the specifics of exactly what’s happening, why don’t you just take a minute and give a little bit more context around bankers’ acceptances, discount rates, give it to us in layman’s terms.

Dinny: Okay. Well, firstly, the reason we’re talking about this is because of what you said about deleveraging. When I was last on the podcast, I was talking about deleveraging in terms of the slowdown in credit growth, the government sort of peering back, it’s spending on certain stuff and pursuing policies that are resulting in less borrowing. And then I saw this was happening with the PBOC and I felt particularly vindicated because what’s happening with bankers’ acceptances is a way for the PBOC to reduce credit growth in a way that doesn’t necessarily impact the economy.

And I think that’s very important because it’s kind of almost like an administrative change that tweaks the numbers without having any real consequences. And this is kind of what we saw with the deep leveraging campaign back in 2016. Beijing was able to wring a lot of credit out of the financial system without it having much of an impact on economic growth because credit was being used in various sort of creative ways. Layers and layers of credit were being used to disguise what a central loan was being used for. But those layers of credit didn’t actually add any economic activity. They were just a kind of a wrapper or a disguise that allowed shadow banking to sort of exist beyond regulatory control.

And this in some ways is the same. Now, what bankers’ acceptances are, as you said, they’re IOUs. They’re a type of trade finance, almost like a trade receivable, an account receivable. So, let’s say I sell you something, and rather than you paying me in front of cash, you say, “Okay I’m going to pay you in six month’s time.” And I’m like, “Mate, I don’t trust you to pay me in six month’s time.” So, you say, “Look, I will pay you with a banker’s acceptance. So you don’t have to trust me. You can trust my bank.” So, you go to your bank, and you tell the bank, “Look, I’m going to pay this guy, Dinny, $100 in six month’s time. So I’ll need you to write the IOU and you give that to Dinny. And so, in six month’s time, he will be able to present that IOU to you or any bank, frankly, and you will give him the $100 that I owe him because I will pay you, the bank.” So, everything’s fine.

So that’s basically how it works. But if I, Dinny, am holding your IOU and I’m like, I need cash before the six months is up. I’ve got people to pay. I’ve got suppliers to pay. I can’t wait six months. So, I take your IOU and I take it to a bank and I present it. I say, “Look, I want my cash now.” And the bank says, “Yeah, we’ll give it to you, but we’re not going to give you the full face value. We’ll give it to you at a discount.” And that discount rate might be 4% annualized, might be 3%. But depending on what credit demand is, how hot the economy is running, that discount rate could really be anything.

But the point is, I present it, I need cash, and you don’t give me the full amount. You take a cut. And that’s the discount rate. Now, what’s been happening recently is that the discount rate has been next to zero. So effectively, I could turn up before the IOU matures, the bankers’ acceptance matures. I present it to the bank after a month, after two months, and the bank gives me the full amount or close to the full amount. So, the bank is really making no money on this whatsoever. And so, it begs the question, why are the banks doing it? And the banks are doing it because these bankers’ acceptance are recorded as corporate loans.

And so, when you look at their loan book at the end of the month, unless you’re looking at the details, all you see is a higher credit figure. And that’s kind of how the banks have worked for years and years, that there’s always been this prioritization of volume, that they’re all striving to generate robust credit growth every month. And the PBOC is sick of it. It’s been saying this for over a year at this point. It’s like, you know, size doesn’t matter anymore. We don’t want you to be pursuing credit growth just for its own sake. We want quality. And yet it hasn’t really been able to stop the practice.

And this year, it’s been particularly acute. I mean, over the last few months, there’s been months where credit growth would have contracted year-on-year, were it not for a surge in this discount in the bankers’ acceptances.

Andrew: Sorry, just quickly on that one, just a point to clarify. Correct me if I’m wrong, but the banker’s acceptances only show up as a loan at the bank after they are discounted, right?

Dinny: That’s right.

Andrew: Right. So, that’s why the banks would want to increase or lower the discount rate, increase the overall number of discounted acceptances, because when they’re not discounted, they’re just kind of off the balance sheet. And once they are discounted, then a bank can show it as a loan.

Dinny: That’s exactly right. That is exactly what’s happening here. And so when credit growth has been so weak with all other parts of the economy, companies aren’t borrowing as much, households aren’t borrowing as much. And so, banks are still in this mindset of like, well, we need to show credit growth. They are turning to discounting bankers’ acceptances, even though they’re making next to no money off these things. And so, the Caixin story was quite telling because it’s the PBOC now saying, look, you can’t cut this discount rate to zero. You’ve got to keep it at least 0.35 or 4% or 0.5%. And that’s kind of saying, firstly, you’ve got to make money off these things.

And secondly, there needs to be real economic incentive or reason for doing these sorts of transactions. And when we saw the story in Caixin, that kind of started ringing alarm bells for us because it started to make sense of comments that Pan Gongsheng had made at his Lujiazui speech in June. And Pan has really made a big deal of his speeches at Lujiazui. I mean, I think this is the third he’s given. Last year, it was all about women being internationalization. It really kicked off this sort of changing approach that Beijing has sort of been taking towards it.

The year before that, he kicked off a wave of interest rate reform with his speech. This year, there didn’t really seem to be a strong theme to kind of draw on. But now we’re starting to think maybe there was, and it just wasn’t immediately obvious. And it’s this idea of cleaning up credit, of improving the quality of the loans being made the system of not doing wasteful credit generation like meaningless discounted bankers’ acceptances.

He didn’t talk about bankers’ acceptances explicitly in his speech, but he was talking about raising the quality of credit growth and not pursuing credit growth for its own sake. All of the issues that sort of touch on what’s sort of going on here. So, we’re feeling a little bit validated because reducing the amount of bankers’ acceptances being discounted would be a way to reduce credit growth and kind of achieve that deleveraging goal that we were talking about without an overly detrimental impact on the economy.

Andrew: Yeah, let me bring in Joe here. That’s all great. Joe, you were going to jump in.

Joe: I want to jump in with a question for Dinny, if I may. So Dinny, my initial thoughts on this are, and I accept that bankers’ acceptances are inflated and the PBOC wants to crack down on that. Is there an argument to be made that they’re going to inadvertently crack down to the extent where banks actually pull back, offering bankers’ acceptances in cases where they’re actually useful, not just in the gimmicky cases, and in doing so squeeze working capital for smaller suppliers who rely on them? Is there a risk there, do you think?

Dinny: No. I think, if anything, smaller suppliers are already feeling screwed by this preponderance of trade finance that has been imposed upon them in ever-increasing volumes over the last few years. So, at the moment, it’s not just bankers’ acceptances. It’s commercial acceptances where large corporations are effectively issuing their own IOUs without the backing of a bank, which have really increased in huge volumes in recent years. I think at the beginning of this year or end of last year, BYD in particular was forced by the government to massively scale back the volume of corporate acceptance drafts.

Its own IOUs that it was issuing to its suppliers because its suppliers were barely seeing any cash. They were just seeing the scripts being issued by BYD. And then on top of that, you’ve seen sort of an expansion of accounts receivable, just normal trade receivables. And on top of that, you kind of have the pressures of local governments not paying their trade receivables or even their banker’s acceptances on time. So, I think there is a whole problem attached to the issue of suppliers and contractors being forced to accept some form of alternative payment other than cash because it’s just proliferated over recent years.

And it’s a way of firms, large firms, local government financing vehicles of large SOEs to push their own financial stress onto the supply chain because these sorts of dealings are effectively zero-interest-rate loans.

So, I think there’s a problem really with the proliferation of this sort of stuff. So, if the banks themselves stop discounting them in such large volumes, maybe you’ll find some firms are frustrated by the fact that they can’t cash in their IOUs, their acceptances earlier at lower discount rates. I’m sure some firms will find that frustrating. But it sort of belies a much bigger problem here where these sorts of arrangements have become just so ubiquitous in recent years to the detriment of smaller firms.

Andrew: Yeah, great question, Joe. Good answer. And I just wanted to follow up with you. I was actually thinking the exact same thing, right? Like, you know, isn’t this just hurting companies that need to get paid? But I guess there is a broader effort that obviously the three of us and others in Trivium have covered that to reduce the payment times for suppliers throughout the economy, reduce accounts receivable.

But more generally on the deleveraging piece, you come at this from a couple of different angles. One is you just edited Dinny’s client notes, going to go out here soon on this topic. And secondly, you are, of the three of us, probably the purest macro economist in terms of your thinking and analysis.

Joe: I’m anything but pure, Andrew.

Andrew: So, what do you make of Dinny’s overall kind of deleveraging argument here and how banker’s acceptances play into it?

Joe: Yeah, I feel like you’re tearing me up to make a shameless plug for Dinny’s piece. The client note is phenomenal. It’s phenomenal. I finished editing it this morning, and I’m serious, it’s so novel and insightful, this piece of work that Dinny’s worked on. And I know you talked about it in last week’s pod. But no, I think it makes sense. The policy signals that Dinny’s picked up on, it makes clear sense to me. I’m not convinced it’s going to work from Beijing’s perspective. I think a deleveraging sounds great in principle. It’s very hard to implement.

One of the main reasons is credit growth juices the economy in one way or another, even with decreasing efficiency over time. The minute you try and pare back credit growth, you’re actually going to impact GDP growth as well. So kind of unwittingly, your debt-to-GDP ratio can still end up rising. And there’s loads of case studies of this empirically. UK is a great example. So, I forgot your question, Andrew.

Andrew: Oh, just what do you make of the argument and how do bankers’ acceptances feed into it?

Joe: Okay, yeah. I got so excited talking about Dinny’s piece. Yeah, so again, yeah, I think the argument makes sense. I think it’s going to be really interesting to look at TSF versus nominal GDP growth in the coming year and see if the policymakers can effectively deleverage. Again, I suspect they’ll be unsuccessful, but there’s no doubt they’re trying to do it as Dinny has picked up on. And yes, banker’s acceptances are a small part of the puzzle.

I think how Dinny responded to my question actually makes a lot of sense that this is very much a low-hanging fruit. I asked just a minute ago, is there going to be pain for smaller suppliers? Is Beijing going to create a working capital problem for small suppliers? But I think Dinny convincingly argues no in most cases. And therefore, it’s a low-hanging fruit for policymakers. This seems like a very pain-free way to lower credit growth.

Of course, what comes later down the line necessitates more painful ways to lower credit growth. And I think that’s where we might start to see it filter into lower GDP numbers through things like lower infrastructure investment, less loans for consumer spending, things like this.

Dinny: If I could just jump in for a sec, because the whole idea of potentially hurting smaller firms, it’s quite interesting because at various times, particularly at the NPC, right? where delegates write documents making proposals for what they want to see policy-wise in the year ahead, a common theme of the NPC for the last few years is that somebody advocates for getting rid of bankers’ acceptances entirely because they hurt small firms so much.

So, regardless of what the discount rate is, they’re small firms hate bankers’ acceptances because they must prefer them than a straight-up trade receivable, right? it must be because trade receivable, nothing backs it except the goodwill of the company that you’ve sold something to. Bankers’ acceptances are better because they’re backed by a bank, you know you’re ultimately going to get paid. But no one really likes them because...

Andrew: You know what they like even more? Actual cash. Actually just getting paid.

Dinny: They see bankers’ acceptances as almost kind of like as an excuse to not get paid in cash, right? It’s like, well, if you’ve got an option, well, we could give you a trade receivable and pay you in six months, or we could not pay you in cash. Or we could give you a banker’s acceptance. It’s like, well, you know, okay, we’ll take the banker’s acceptance. So, no one actually likes these things. And you’re right, in an environment where the discount rate is zero, firms are probably a lot better off than they ever were in the past.

But it’s not necessarily translating sort of firms’ relationship or enthusiasm for getting paid with bankers’ acceptances.

Andrew: Yeah.

Joe: Andrew, can we add a link to Dinny’s client note in the podcast notes?

Andrew: Absolutely. We will do that for sure.

Joe: Again, I mean, segues into another shameless plug. A lot of listeners won’t be able to read it because it’s only available to paying subscribers. But I think it’s worth putting the link there for subscribers that listen to this podcast, then they can read Dinny’s report. Again, it is fascinating.

Andrew: Yeah, we’ll make sure to highlight that, and everybody should be on the lookout for that piece. I mean, I would love to actually just talk about this deleveraging piece more and more. I think there’s a lot here. We need to get onto the macro data, but I’ll just finish this up by saying, Joe, you partially sort of anticipated what would have been my next question, which we can now generally skip about whether or not there’s really a cost ultimately here to the economy of the deleveraging.

I will just say, again, we don’t want to get too much into it. The same argument was made in 2016, 2017, when Beijing started deleveraging the banking system. And the argument at the time was, “Well, we’re actually just unwinding some of the most speculative financial activity in the interbank market, where it’s really just been financialization, financial firms lending to each other, which has been running up credit growth, and it didn’t create any economic activity on the way up. And so, it’s not going to hurt economic activity on the way down.” And that actually what ended up being true for a period, right?

The low-calorie interbank loans that were really just about banks kind of betting on each other and kind of creating new financial instruments didn’t hurt economic growth when they were unwound. And I guess the thinking at the PBOC would be banker’s acceptances might be similar. Now, ultimately, that reduction in credit growth did have unintended consequences, which meant it was harder for private sector, especially small firms, to get actual credit that they needed. And they kind of got crowded out. And ultimately, a couple of years on, it really did impact private sector credit and overall economic growth.

So, I think your point stands, Joe, although also Beijing, I think could argue or regulators in Beijing could argue it was partially successful. The last time we tried something like this was at least partially successful in slowing credit growth without hurting economic activity. But we will see.

Joe: By the way, think about the property downturn that started in 2021. That was triggered by the three red lines, which was an attempt to deleverage the property sector.

Andrew: Exactly right. Yes. And there are definitely people who argue like the deleveraging then kind of tipped the first… it was a domino effect that got out of control and regulators couldn’t really control it. First, it went into the shadow banking sector that then reduced credit to the private sector, which then reduced basically credit to property developers, which then reduced credit and resources to local governments. And that none of this really was in the government’s control. So, that’s another way to argue it. So, that’s a good point, Joe. We will, again, definitely be debating this and following it, I think, for a while yet to come.

But it’s actually a great point to pivot to the current state of the economy, right? So, we’re talking about sort of the more contextual piece or the credit and financial environment within which this deleveraging effort is happening. And there’s no good time to deleverage. And Dinny has argued that actually part of the reason that they think they can do it now is because exports are so strong and inflation is up. But certainly, the rest of the domestic economy is not doing well. And you have, as we teased at the top, called this a K-shaped economy, and said that the Q2 data really puts that on display with GDP just growing 4.3% year over year, the slowest quarterly growth rate in three years.

Give us the lay of the land and the latest data in terms of what we’re looking at for China’s economy right now, Joe?

Joe: Yeah. So, I mean, it’s not… K-shaped, it’s not just me who’s calling it a K-shaped economy.

Andrew: Yeah, yeah.

Joe: It’s a pretty mainstream term. It’s quite satisfying to put the main economic indicators onto a graph because there really is a K there. And so, kind of the upward arm of the K is really China’s export sector. And this is driven by predominantly tech and clean energy exports. So, think of things like NEVs and batteries, solar. And that’s feeding into the manufacturing of tech and clean energy as well. And those parts of the economy are booming. They’re on fire. They’re doing really well.

But then the downward part of the K, the downward leg, is domestic demand. Both household consumption and general aggregate investment across the economy, whether that’s investment from government, from the private sector, from property developers, that’s all declining. And so, there’s this divergence. There’s one part of the economy that’s booming, quite a small subset of economic sectors really that are doing well. The rest of the economy not doing so well.

The consequence is, even when exports are at a record high, and China has this emerging clean tech and high tech, the emergence of this booming clean tech and high tech industries, GDP growth is still kind of stumbling along in the low fours, 4.3% in Q2. And that’s because despite parts of the economy doing really well, other parts of the economy are struggling big time.

Andrew: Well, talk to us about the parts of the economy that are struggling big time. I mean, I think we can pretty much guess them. But what’s the downward leg of that K look like?

Joe: Yeah, I think consumption is probably the most interesting thing to talk about because we got new data in the Q2 release. We got data from the Stats Bureau’s quarterly household survey, expenditure survey. So we can see what households are spending their money on. And they also report their income. So, we get estimates for income growth. So, throughout H1, so the first half of the year, income growth has hit a record low. It’s in the low fours, 4.something percent.

And outside of COVID, I should add, outside of COVID, that’s the lowest level on record. So, their income growth is slowing. They’re also spending less of their income. So, the propensity to consume, which is just the percentage of their income that they spend, that’s also hit a record low. Again, outside of COVID, kind of excluding those three COVID years where there’s lots of lockdowns. So, we’re talking about the lowest income growth on record and the lowest propensity to consume on record.

And as a consequence, consumption metrics are doing pretty badly. So, retail sales grew 1% year on year in June. That was following a 0.6% decline in May. So, it’s just a pretty dire picture on the consumption front.

Andrew: Is there anything that can turn consumption around at this point? I mean, they’ve been talking about it for years. We, and other analysts, have been highlighting the challenge for years. They just put out a five-year plan on consumption, which seemed to have no new ideas and didn’t seem to create much positivity among the analytical community. What can they do? What should they do? Is there anything to be done?

Joe: There’s no obvious near-term catalyst to boost consumption. And that’s because it’s a structural issue. It’s not just a cyclical downturn. And I think that it’s a structural issue. It’s caused by two things predominantly. There’s probably a bunch of other factors, but one is the overhang from the property sector downturn. So, household wealth is down, I don’t know, about 30% from this 2021 peak. Households just feel less wealthy. They have less money to spend.

And the second thing is a slow in income growth. As I say, income growth, lowest rate on record. That’s crazy. These are structural factors. This isn’t a cyclical downturn that is suddenly going to pick up in Q3. So no, in answer to your question, Andrew, there’s no obvious short-term policy fix, which is going to cause a sustainable increase in consumption. It’s structural issues, which means it’s going to take a long time to fix.

Andrew: And you’ve been highlighting this supply-demand mismatch for quite a while now. Others have as well, but you were definitely early on that. And now we’re seeing the structural divergence and kind of the AI versus the non-AI parts of the economy for a quick shorthand. But the PBOC, the China Central Bank, at its meeting earlier this month, actually named ‘structural divergence’ as a challenge for the first time as far as we have seen. Does the acknowledgement of that issue as a problem tell us anything about what the PBOC or any other policymakers might actually do here?

I mean, there’s admiring the problem, there’s fixing the problem. Where are we on that front?

Joe: Yeah, we’re very much with the former as opposed to the latter. Symbolically, it’s important. Symbolically, it’s notable. But in the past, senior policymakers have publicly acknowledged weak domestic demand as a challenge. It doesn’t mean they address it. So yeah, to recognize it symbolically, maybe that’s important. But a week after that meeting, the State Council released its five-year plan for boosting consumption. And there was very little in terms of demand-side support, very much still thinking about how they can allocate resources towards supply-side solutions.

So, this explicit acknowledgement of structural divergence appeared in a PBOC report. I mean, that’s pretty consistent with this long-standing preference of policymakers to acknowledge the problem. They know what the problem is, but still prefer to invest in these supply-side levers to try and deal with it.

Andrew: Yeah. Dinny, any thoughts on where we are in the current economic environment and how that might fit in? I mean, we’ve been talking about the deleveraging piece. It’s hard to deleverage when your economy is struggling. And then, if the deleveraging further depresses GDP growth, as Joe argued, could end up backfiring. What are your thoughts on how the growth picture fits into all this?

Dinny: You know, I think when foreigners in particular talk about maybe it’s China’s consumption problem, it’s all about they need to throw more money at it. You know, they need to fund welfare or they need stimulus or something like that. We’ve talked about why Beijing won’t fund welfare out of debt before, but I think in terms of the stimulus side of things, Beijing’s increasingly at a position where it’s not willing to throw good money up at bad anymore. And it’s being a lot more realistic in its assessment as to what constitutes bad money.

And I think that’s what we saw with the peering back of subsidies for the consumer trading program this year. I mean, we’ve talked about this before how the consumer trading program had 300 billion reminiscences worth of central government funding last year. And it was incredibly successful. I mean, it was for to support purchases of big-ticket consumer items like cars, furniture, white goods, and household personal electronics. Did wonderful things for purchases of those goods. But the very nature of the program meant that you were always bringing forward future demand, right?

It was you were bringing forward next year’s demand and the year after that’s demand and so on and so forth. And so, to keep going on that path, to maintain last year’s sales, you needed to increase this year’s subsidies. So, it’s not even a question about growing the program. Just to kind of keep it at last year’s levels, you needed higher levels of subsidies this year. And instead, Beijing made the decision to reduce the subsidies. So, this year, the subsidies are 250 billion renminbi. When they did that, they clearly went in with their eyes open. There was never going to be any doubt that sales would fall.

And that’s what we’ve seen. I mean, Joe, I’m not sure if you have the numbers on your fingertips, but what… auto sales are certainly down. White goods, what? Furniture down 7% so far this year?

Joe: Yeah, something like that, yeah. And I think home appliances, white goods are like close to double digits.

Dinny: And so this is despite having put aside 250 billion RMBs worth of subsidies. But the thing is, Beijing is weaning itself off this program because it realizes exactly what Joe was saying, that the problem with consumption is structural. These sorts of programs are fantastic if they’re a band-aid, if it’s cyclical. If you go, “Well, consumption’s weak this year and it’s probably going to be weak this year, but we can get through it with this sort of temporary subsidy program.”

But we’ve had the program now for, what? I think we’re already at two years and there’s no end in sight. And there’s a realization that to keep this program, contributing the economy in the same way it has, It has to keep getting bigger and bigger. And so they’re now like, we’re not willing to throw good money up the bad. And I think that the increasing of profit remittances, centrally owned SOEs to the government, is kind of indicative of that as well.

Joe did fantastic work kind of trying to estimate just the impact of these increased remittances would have on fixed asset investment this year. And what was it, Joe, that it reduced FAI by about 2.3 percentage points, give or take?

Joe: Yeah, 2.3% is points of FAI growth from this policy. Yeah.

Dinny: Which is wild. But for Beijing to make that decision at the end of last year, at a time where investment across manufacturing and infrastructure and the property sector were all weak, to make a decision like that to prioritize fiscal revenue over investment kind of showed how Beijing’s priorities were shifting as well. So, I think that’s kind of where we are at. Beijing is like, “Look, maintaining investment for its own sake, it’s not really worth it anymore. Maintaining consumer subsidy programs just to maintain an arbitrary high level of consumption, it’s just not worth it anymore.”

And I think that’s kind of where we are. It’s almost a recognition that, yes, these problems are structural and these short-term fixes we’re deploying, they’re not sustainable anymore. I think that’s where we are.

Andrew: Yeah, that’s pretty dire picture. Joe, why don’t you take us home here? I mean, we’ve got the July Politburo coming up probably in about eight, nine days at the end of this month. And it will focus on the economy as it always does and kind of lay out economic priorities for the second half of the year and kind of last best chance to sort of make an adjustment to policy on the fly.

What do you think going forward in terms of what economic policy looks like and the economic trajectory? Are we going to see any change or is this K-shape what we’re in for, for the next six to nine months?

Joe: I’m not expecting any change to be announced at the July meeting, the end of July. Dinny wrote about this in his client note. We are expecting a modest infrastructure stimulus, sort of late Q3, early Q4, but that’s not going to be a game changer in and of itself. It’s going to be about trying to ensure that government spending on infrastructure at least remains equal to the level of last year. So that’s really about trying to prop up the economy as opposed to turbo boost it. Now, things we can look out for that would signal there’s a step change and Beijing is more inclined to try and boost domestic demand.

With the caveat, I’m not expecting any of this, but these are the sort of signals we might expect to see would be an expansion in the consumer trade and subsidies or potentially expanding it to cover new products or services. Large increases in infrastructure investment, a large policy push on the property sector to try and put a floor under prices. Again, not expecting any of this stuff, not expecting any of these moves to happen, but that will give us an indication that perhaps there is a step change in Beijing’s approach. Most likely outcome is really more of the same with a modest infrastructure stimulus towards the end of the year.

Andrew: Well, we will have our answer soon enough when it comes to the Politburo meeting, and we’ll talk about it on the back side of that. Until then, our listeners will have plenty to mull over. I say this pretty much every podcast, but we truly covered a lot of ground today, guys. I really appreciate a lot of expertise here, a lot of different topics, all of which are important. So, really appreciate both of your time. Joe, great to have you on as always, man.

Joe: Yeah, thanks, Andrew. And just one more reminder, let’s put a link to Dinny’s piece in the podcast notes.

Andrew: Absolutely. Yeah, will definitely happen. Thanks for that.

Joe: Sweet. All right.

Andrew: And Dinny, glad to see you got through the technical troubles to drop some knowledge bombs on us today. Appreciate the time, man.

Dinny: No worries. How many listeners do you think we lost at banker’s acceptances?

Andrew: Oh, no, no, no, that’s where they jump back on. That’s where they start sharing the pod. “Grandma’s got to know about this one. My wife’s got to know about this one. My uncle’s got to know about this one.” So, yeah, I’m expecting listener numbers to skyrocket. I love it, guys. Really appreciate the time. Great conversation. And of course, thanks, everybody, for listening as always. We’ll see you next time.

Bye, everybody.

For years now, we have highlighted the structural imbalances at the heart of China’s economy – weak consumption, over-reliance on exports, and a persistent supply-demand mismatch.

• In recent months, those imbalances have well and truly come to a head – welcome to the K-shaped economy.

The upper arm of the K is powered by AI and clean-energy exports. Semiconductor exports more than doubled year-on-year in June and computer hardware shipments grew by more than half.

• The manufacturing sectors plugged into global AI demand are humming – capacity is expanding, orders are strong, and profits are up sharply.

The lower arm tells a very different story. Domestic demand is barely holding on – retail sales of goods grew just 1.0% y/y in June, and household incomes are rising at their slowest pace on record, outside of the pandemic.

And with demand this weak, manufacturers without exposure to the AI export boom are pulling back sharply on investment:

• Auto manufacturing fixed asset investment collapsed in June, while investment in manufacturing facilities for furniture, footwear, and paper products also shrank.

The message from the domestic economy is unmistakable – firms simply don’t see any reason to build capacity.

The result is that Q2 real GDP grew just 4.3% y/y – the slowest reading in over three years – despite an export boom that would ordinarily have carried the economy to a strong quarter.

• The AI and exports story is real – it just isn’t enough to offset what’s happening at home.

Beijing, to its credit, has taken note.

• At its July meeting, the central bank (PBoC) formally named “structural divergence” as a challenge facing the economy for the first time.

• Separately, at an economic symposium, Premier Li Qiang pledged to “increase counter-cyclical adjustments” and boost consumption.

• And on July 13, the State Council published a five-year plan on expanding consumption, promising to “better leverage consumption’s foundational role in economic development.”

That all sounds encouraging – but read the fine print, and our enthusiasm quickly fades.

• The consumption five-year plan contains virtually no new demand-side policy support. Its central bet is on so-called latent demand – the idea that Chinese households want to spend more, but are held back by an inadequate supply of high-quality services and a lack of trust in domestic products.

• The prescriptions accordingly focus on supply-side fixes – enforcing product standards, expanding healthcare and education options, and building better consumption infrastructure.

• Fix the shelves, in other words, and the shoppers will come.

Herein lies the crux of the problem: Beijing continues prescribing a supply-side cure for what is fundamentally a demand-side ailment.

• Until Chinese households have more money in their pockets and stronger safety nets to fall back on, no amount of supply-side support is going to loosen consumer wallets.

So where do we go from here? Policymakers will have an opportunity to signal whether a more forceful policy response is on the way at the late-July Politburo meeting, which sets the economic policy tone for the second half of the year.

• We’ll be looking for any sign that Beijing is prepared to move beyond incremental measures and confront the demand-side weakness head-on.

But on the evidence of the past week, the smart money is on continuity – recognition of China’s structural divergence, without the decisive action needed to reverse it.

• For now, that leaves the K-shape – and all the vulnerabilities that come with it – set to define the rest of 2026.

Joe Peissel, Senior Macroeconomic Analyst, Trivium China

What you missed

US-China

In a July 16 address, US President Donald Trump accused China of carrying out the “largest compromise of election data in history,” alleging that Beijing obtained records on 220 million US voters during the 2020 election cycle.

• China’s embassy in Washington flatly denied the allegations, saying China “has never and will never interfere” ​in US presidential elections.

Foreign affairs

On July 10 and 11, respectively, Xi Jinping and Premier Li Qiang met with North Korean Premier Pak Thae Song.

• Notably absent from either meeting readout was mention of North Korean denuclearization.

Econ and finance

In Q2, China’s real GDP grew 4.3% y/y, down from 5.0% in Q1 and the slowest reading in over three years.

• Nominal growth – which incorporates price effects – accelerated to 5.9%, the fastest rate since early 2023.

• The divergence is driven entirely by cost-push inflation from the Iran war, with higher input prices artificially inflating the value of economic activity rather than reflecting stronger volumes or demand.

In a July 16 video interview with Qiushi – the Party’s leading theoretical journal – influential policy advisor Yin Yanlin pushed back against what he sees as a misreading of China’s weak demand.

• His message: Aggregate policy should be more decisive and forceful – and structural or long-term reform agendas shouldn’t dilute short-term countercyclical stimulus.

Commodities

The commerce ministry (MofCom) imposed a “temporary export ban” on helium, effective immediately and with no stated end date.

• With helium prices sky-high since March, and the reignited Middle East conflict threatening further disruption, Beijing is ensuring opportunistic distributors cannot export for profit at the expense of domestic supply security.

Tech

Xi Jinping delivered the keynote address at the World AI Conference (WAIC) in Shanghai.

• Xi championed AI’s benefits, backing open-source collaboration and calling for more innovation and wider real-world application.

• But he also leaned unusually hard into the risks, asking “as algorithms make decisions, how is safety ensured?”

China and 28 other countries signed an agreement establishing a new intergovernmental body – the World AI Cooperation Organization (WAICO) – in Shanghai.

• Founding members include Brazil, Indonesia, Malaysia, Cambodia, Kazakhstan, Pakistan, Russia, Serbia, Belarus, Cuba, Venezuela, South Africa, and others.

Politics

Xinhua published the official charge sheet against former Xinjiang Party secretary Ma Xingrui.

• Notably, the notice didn’t include any hint that Ma is in trouble for anything other than graft.

• By comparison, the only other two sitting non-military Politburo members purged since 2012, Bo Xilai in 2012 and Sun Zhengcai in 2017, were painted as political threats.

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 while US policymakers tend to view data primarily through a national security lens, Beijing is pursuing a much broader strategy aimed at unlocking data’s economic value.

On this week’s Trivium China Podcast, host Andrew Polk is joined by Trivium’s Head of Tech Policy Research Kendra Schaefer to explore why China has formally designated data as a “factor of production” – and how that idea is reshaping the country’s technology and economic policies.

The two discuss:

• Why low-cost Chinese open-source AI models are increasingly attractive to Western companies

• How restricting access to those models could undermine US competitiveness

• What Beijing means when it describes data as the economy’s fifth factor of production

• China’s efforts to make data easier to find, price, trade, and use as collateral

• Why Beijing views data security rules as necessary guardrails for a functioning data market

• How China’s approach could strengthen its AI ecosystem by increasing the supply of high-quality data

Andrew and Kendra also examine the absence of a coherent, pro-growth US data strategy – and why Washington’s overwhelming focus on security risks may be leaving significant economic gains on the table.

Overall, the discussion reveals that China’s seemingly disparate data policies are part of a much larger project: building the infrastructure needed to turn data into a more productive and widely traded economic asset.

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 am joined today once again by a pod favorite, or a pod fan favorite, Trivium’s Head of Tech Policy Research, Kendra Schaefer.

Kendra, how are you doing?

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

Andrew: Oh, yeah, I can’t complain. I’m excited for this discussion. Always good to get back in a rhythm with the pod after being off for a couple of weeks. So, I got to talk to Dine last week, get to talk to you this week. So. I’m excited about it. Thanks for coming on.

Kendra: Of course.

Andrew: I am going to talk to Kendra today about some of the research she’s been doing kind of on an ongoing basis for a while now, specifically around how Chinese regulators and Chinese policymakers think about data and how to sort of use data in the economy, how to govern data, all of that stuff. The framework is data as a factor of production. We’ll get into what exactly that means.

So, we’re going to do a deep dive on that. It’ll be wonky, but super unique research that Kendra has been doing that I’m excited to get into. Before we do that, though, we are going to talk a little bit about some of the latest developments in the kind of China tech space around AI, specifically around what’s happening with open-source models and more Western firms opting to use open-source models for cost purposes and potential restrictions coming both from the Chinese and U.S. side on those models.

So, we’ll touch on that briefly before we get into Kendra’s research. But before we do that, of course, we have to start with the customary vibe check. So, Kendra, how’s your vibe today?

Kendra: My vibe is actually really mellow. Nothing catastrophic has happened in the China space in the last 48 hours. And I’m pretty excited. I’m going to Taiwan. I think I mentioned the last time I was on the pod, I had an Asia trip coming up, and now it is imminent. I’m going in a couple of weeks to Taipei with the Brookings Institution delegation. So, I am pumped.

Andrew: Yeah, that’s exciting. Good to get back over to the Asia time zone. I know it’s been a minute since you’ve been over there. It’s always nice to get back on the ground and hear what people are saying. I know that’ll be a great trip. Very cool that Brookings is having you along for that. So excited for you. My vibe, similarly mellow. I feel like we’re sort of in the dog days of summer.

You know, it’s like you said, nothing catastrophic has happened. Our clients, in a good way, seem like they’re not having any fires they need to put out. And so, we don’t have people blowing up our email inboxes first thing in the morning. Oh my gosh, we need to figure this out, figure that out. So, I’m just kind of leaning into the casual summer vibe. So, we’ll bring that mellow vibe to the podcast today.

Kendra: I don’t know if I can promise that based on what we’re going to talk about.

Andrew: Well, I was going to say, Kendra Mello is sort of calm before the storm by definition. So, it actually makes me more nervous when you’re like, “Oh yeah, mellow.” I’m like, uh-oh, something’s coming. But no, we will channel your energy into the discussion today. So, that’d be great.

Kendra: Okay.

Andrew: Of course, before we get into the content, though, we also have to do the quick housekeeping up top. So, a quick reminder, we’re not just a podcast here. Trivium China is a strategic advisory firm that helps businesses and investors navigate the China policy landscape. That, of course, includes domestic policy in China, much of which we’ll talk about around tech and data factors today. But it also includes policy towards China out of Western capitals like D.C., London, Brussels, and others.

So, if you need any help on that front, on any of those fronts, please reach out to us at hq@triviumchina.com. We’d love to have a conversation about how we can support your business or your fund. Or if you just have comments on the pod content, reach out to us. We always love to hear feedback from our listeners. I mean, we prefer positive feedback, but we also will take constructive criticism.

Kendra: We’ll make fun of you in the office.

Andrew: Yeah. Behind your back, and then we’ll respond. No, we don’t do that. We never do that. Secondly, if you’re interested in receiving more Trivium content, check out our website, triviumchina.com, where we have a bunch of subscription products, both free and paid. They’re all sort of focused around Chinese policy intelligence. So, we’ve got a bunch of different options. Kendra’s team produces a daily tech policy update. We’ve got updates on policy impacting markets and impacting sort of the business landscape.

So, check out the site. You’ll definitely find the China policy intel option you need. And then, finally, please do tell your friends and colleagues about Trivium, both about the business and about the podcast. It really helps us grow the company. And I say it every week, but we truly, truly, truly appreciate the word-of-mouth recommendations. They mean a lot to us. And a word-of-mouth recommendation is so much more powerful than someone finding us randomly through a quote in the newspaper or whatever. So, we appreciate folks for spreading the word about Trivium.

While you’re at it, leave us a rating on your favorite podcast platform. That also helps us grow the visibility of the podcast. So, with that out of the way, let’s get into it. You ready, Kendra?

Kendra: I’m ready. Let’s go.

Andrew: Well, so like I said, I think I want to start just with some of the recent developments in the tech space. The number one theme or narrative I’ve kind of been looking at in this space for the past few weeks is companies increasingly thinking about or questioning the cost of AI investment, of building AI processes into their internal systems, partly because everyone thought, oh, well, we’ll be able to replace humans more cheaply with automated systems and AI.

But it turns out that it actually is quite expensive. And a lot of companies are finding out that their investments are actually having lower ROI than investing in humans. I think Alex Karp, the CEO of Palantir, had an interview, I believe it was on TV, where he talked about kind of the weak ROI and how it’s making companies rethink how they are approaching the issue. And his, I think, suggestion was that AI companies rethink their enterprise model.

I don’t know if that will happen. But that, I think, is also related to this idea and increasing reporting that a bunch of Western tech companies and startups in particular, partly because of this cost issue, are really basing much of their tech build out on the open source AI models, because they’re either close to the cutting edge or they’re good enough and miles cheaper that it makes sense from a cost perspective for them to rely on the Chinese models.

So, I just wanted to throw that over to you, Kendra. What do you think is happening here? How do you see the state of play in terms of these cost differentials and the dynamics of more and more Western companies taking a look at potentially employing Chinese models to a greater and greater degree?

Kendra: Well, this is an issue, as you know, that’s near and dear to my heart because I not only run our tech practice, like our tech analysis practice at Trivium, I also sit over our IT department. And of course, we are working with models internally. Have we talked about, you know, model cost on the pod before? Remind me.

Andrew: I don’t think so, actually. Yeah, let’s get into it. I mean, this is another one where it’s wonky and this is pretty inside baseball, but I think what we’re doing is actually quite illustrative of this bigger issue. So yeah, let’s talk about it.

Kendra: I mean, I think what we’re doing is the issue and it is sort of half the issue. So I think many of our listeners probably will have already used an LLM programmatically. They will have tried to interact with an LLM. They are coders themselves or are vibe coding apps and stuff like that. But there’s also a large subsegment of listeners, I think, who probably haven’t done that and don’t really understand what the cost issue is. We have had a sort of intimate experience with understanding where Chinese models are kind of winning the day and where they aren’t.

So, I want to not make that such a squishy conversation, but give a very specific example. So, for illustration’s sake, so we use LLMs for processing massive amounts of policy documents. So, just for illustration’s sake, and this isn’t exactly what we’re doing, but let’s just say we need to take a million policy documents and flag, you know, it would take a human countless hours to read all of those and figure out whether or not they’re related to a specific sector, autos, semiconductors, whatever it is, or if they have a subsidy amount in them and what that subsidy amount is, right?

But we can take that giant pile of documents, and we can pass it through an LLM and ask it to do that analysis and then maybe sell that output to a client or use that output in our research or whatever it is, or create a data product with that output. Processing a bunch of policy documents is a low-stakes, low-security use case. It doesn’t matter if the model is Chinese or just parsing boring open-source documents. There’s no client data going across that channel. There’s nothing, you know, even remotely sensitive that is sort of passing across those queries.

And we’ve tried these processes internally with both U.S. models and with Chinese models. And the bottom line is that the U.S. models are two to 10 times more expensive. And I think for one project that we ran some R&D on, it was like 20 times more expensive. That cost differential decides whether or not our product is profitable. Can we even build this? Should we even do this? That’s a huge difference.

It’s the difference between it costs us $100,000 a year to run this service, or it costs us a million dollars a year to run the service, and clients won’t pay for it. So, it’s really kind of that cost is a real make-or-break thing. There was one tech CEO, I think that was quoted, I think we quoted him in the Daily a couple of weeks ago, I think it was the CEO of Lindy, which is like an office productivity platform who announced on their blog that they’re using Chinese models for some of their features. And he just said, “I don’t need God to write my emails. I don’t need God to write my emails,” which is true for so many use cases, right?

And so that’s not a U.S.-China thing. It’s just a cost thing. There really isn’t a US alternative where the model’s pretty good. It’s good enough to handle those kinds of things. And then, in addition to that, the cost of it is cheap. So, there’s a thousand reasons that a company would choose cost over quality. R&D, you know, you’re just like testing a theory, you’re making a prototype, you don’t want to use the best equipment, you just want your proof of concept so that you can get to a place where maybe you switch to a U.S. model after that when you want a better quality, you know, or you’re kind of looking for top dollar.

Andrew: Yeah, that actually raises a point that I just want to throw in quickly, which is probably, I mean, is an obvious point to everyone like you who’s using these LLMs and to a lot of companies who are trying to figure this out, but maybe not to some people, which is there’s no perfect solution typically with this kind of thing. You’re constantly toggling or adjusting the dials between speed, costs, and quality, right? Quality of output. And so, at various times, you’re optimizing for different ones. Obviously, every company wants the highest quality, the fastest speed at the lowest cost, but sometimes you have to trade off on some of those things, and the Chinese models give you a different trade-off at times.

I guess one other question for you, if you can talk about a little bit is, you know, for what we do in terms of kind of looking at Chinese policy documents and other things in that area, are the Chinese models better with working with Chinese language material, or is that not right?

Kendra: Oh, a thousand percent. I mean, but our use case is so niche, it almost doesn’t matter. Maybe our listeners care. Definitely, the Chinese models are better at Chinese policy documents than the foreign models. But I think for most people, that’s probably not really that big of a consideration. But it’s like, I do think that for most companies, unless you are a coding firm, unless you are a bleeding edge tech firm, there is a lot that companies can do with LLMs.

I mean, and we’ve only started to scratch the surface of adoption, right? Corporate adoption really hasn’t filtered out. And we work with lots of companies who don’t use AI at all yet, right? So, it’s just there’s this huge space where you’re going to have companies who want to use all kinds of models for all kinds of purposes. It’s not like we use four different models in our work, and we just use the right tool for the right job. But if the only tool available is the top-of-the-line, most expensive tool off the top shelf, that is very problematic for our economics.

Andrew: Yeah. We can talk more about this on later pods. I’m sure folks would be interested in how these models inform our work and what some of the behind-the-scenes stuff is. I mean, I think it’s interesting. I think people think it’s interesting. But today, I don’t want to spend too much time because I want to get to the data factors piece. But before we do that, the additional piece of this is since there’s been sort of more reporting about how U.S. companies in particular are using more and more Chinese models, the U.S. government, of course, has taken interest in this issue.

And over the past week or so, there’s been rumors, particularly flying around on X and things like that in the policy space where people are saying the White House, in particular, the U.S. government is considering trying to restrict access to Chinese open source models. And there was a suggestion that an executive order to some effect on this might be coming out, but the White House has denied that. But anyway, I just wanted to get your thoughts on, you know, what you think about that as an issue, you know, whether or not the U.S. government should do that.

I can guess what your answer is to that, but also how that would kind of work and just, I don’t know, provide some context to us about that latest reporting.

Kendra: Well, yeah, I’m sure you can guess how I feel about it. Basically, unless there is a really also not just one good U.S. alternative that is a low cost and good enough alternative, but a robust ecosystem of competitive U.S. alternatives, it is a real bad idea to restrict access to the models that allow innovation to happen in small businesses, in the laboratory, right? All of those kinds of things. There are other reasons besides cost to choose an open source model.

That includes being able to download it and install it on your own machine at home or more likely in your own private corporate data center, which you can’t really do with U.S. models. So, the U.S. just simply doesn’t have a great alternative. And I think you said something to me earlier, which really rang true, which is like if the U.S. decides to try to ban access to Chinese models, and I’ll talk about how I think they might be able to do that in a second, but if they go that route, I mean, it’s basically the same route as saying, “Hey, we can’t manufacture a good NEV either. China’s got cheaper, better NEVs now, but we’re just not going to allow them into the market.”

Did you see the, I think the CEO of Ford a couple of days ago, you know, it was like one of the New York Times headline essentially said, “Look, we support the U.S. in blocking Chinese cars from coming into the market for now, but you absolutely aren’t going to be able to keep them out forever. And we have to be able. in the long term, to compete on a playing field with Chinese manufacturers.” And it’s the same thing here. It’s like, okay, well, you can ring fence the United States for a little while and let everybody else use cheaper open weight models. But the economics get real wonky the longer you hold that line if we don’t have a good alternative and we simply cannot be competitive.

So, I think that has to be addressed. If they want to do a ban, all right. But man, we better have a good alternative and a plan for how we’re going to offer cheap processing to domestic companies or I think it’s stupid.

Andrew: Yeah, well, and I hate the reaction being, the knee-jerk reaction to being we want to win XYZ part of the tech race. And so, we are just going to keep China out of our market. Like, it just strikes me as such sort of simplistic thinking, like we want to win. So, we’ll just kind of block them. And like the way you win is be the most competitive.

Kendra: Right. That’s what I mean. You don’t tie your opponent’s shoes together. That only gets you so far. You know, you might win a couple rounds doing that. But I just don’t think, over the long term, that’s not a sustainable strategy. We can’t just keep saying, “Well, okay, then you just can’t sell. You may not have a better one. You can’t sell that here.” I mean, it just isn’t…

Andrew: Well, and that doesn’t even account for, you know, what does that do for the global landscape? Like, you do reduce your competitiveness globally. And now, oh, great. Well, all U.S. companies run on really expensive U.S. models while the rest of the world works on just as good or nearly as good, very cheap Chinese models. Like, that’s not a positive outcome.

One quick thing before we finally pivot is you also, I said we weren’t going to get into this too much, but you’re unclear exactly whether or not the U.S. government can keep open-source models out of… how do you even enact a ban like that?

Kendra: So, I think from what I understand, there’s a couple of options under discussion. The first one and the most obvious one, although this has already been done to some extent, I think, is federal procurement bans, basically, right? Which is what they did with TikTok is the very first step the federal government took was that you can’t put this on a government device, which is just that’s very low-hanging fruit. But they could also say any government supplier can’t put it on, you know, can’t use it either, or you can’t be a government supplier. So, there’s those kind of that could extend in that way, or you cannot use this tool on a government contract, basically. So, they could go that route.

I think the main concern is that the Commerce Department is going to use the ICTS, like sort of supply chain restrictions toolkit that they’ve got. Basically, the USG has a rule that essentially says if a tech product or service comes from a foreign adversary and could be used to spy on Americans or sort of threaten U.S. national security in some way, then commerce can kind of ban it from the U.S. market or force changes to how that is used.

The problem is that this rule regulates transactions. So, it’s kind of awkward to try to characterize downloading open-source models as a transaction. So, the question is, which touchpoint would they go for? They could maybe go to cloud companies and say, “No U.S. cloud provider can host these models, which is mostly how people are using that.” It’s a large, not everything, but it’s a large chunk of how U.S. companies are using those models. They’re going through Amazon. So, you could do it that way.

They could try to go to like Hugging Face, which is where models are listed, where a lot of these open-weight models are listed and try to ban them from listing it in some fashion, which would make it difficult to download. People wouldn’t know where to go to get it.

Or it would be, I’m sure in two minutes, somebody would put up another website and just like post it.

Andrew: Yeah.

Kendra: So this is difficult to enforce.

Andrew: Our colleagues didn’t think my joke was funny, but obviously it’s just going to be on the dark web, which is where I’m most proficient.

Kendra: It’s where you hang out.

Andrew: Yeah, yeah, exactly.

Kendra: That’s where you hang out all the time. I mean, okay, and so there’s that. And they could also, I think, use the, what is it, the emergency powers, IEEPA, right? They could kind of declare it an emergency and go for it that way. So, there are things that they could essentially do. I very much hope that policymakers are weighing what it would mean for U.S. firms to not have access to that kind of technology. And what I would love to see is if the U.S. government focuses on how to incentivize the development and release of a cheap open-source U.S. model, all this goes away.

I don’t care if I’m using a Chinese model, to be perfectly honest. I’ll deal with like a slightly crappier… you know, if I don’t have to deal with any U.S. government problems, I don’t care if I’m using a Chinese model or U.S. model. I care if it’s cheap and good enough. That’s all I care about, right, as a developer. So, why don’t we just focus on figuring out some policy incentives to make sure we have one of those? I don’t understand why that’s not the primary topic of discussion. Or maybe I’m just not in those rooms, and maybe it is. But anyway, yeah, that’s my thinking on that.

Andrew: Yeah, well, we’ll leave that on the to-do list, figuring out a policy agenda to advance U.S. open source or U.S. developed open source models. I’m sure someone somewhere is having that conversation. But that’s all super helpful, very interesting stuff. We’ll, of course, stay on top of all of that as it develops because it’ll be an important part of not only what we do, but very important for our clients as well. I want to pivot now to your research. We’re going to get into your work on data factors or data as a factor of production.

And this is kind of evolving thinking in the Chinese side around how the government treats data, how everything from taxing data to, you know, data ownership, all that stuff. So, you’ve been doing this research for a long time. How long, you’ve been doing this? What? For like six years now?

Kendra: Yeah, I started in 2020. It’s been six years. I have been cornering people at parties about this and torturing them for six entire years.

Andrew: Well, that sounds like a fun party. Remind me not to go to any of your parties. So, the topic overall is what? How China thinks about data. Is that not something that sort of we already know the answer to? I mean, it seems like it should be relatively straightforward, but maybe I’m wrong.

Kendra: Yeah, no, you’re right. I mean, I think that’s a perfect place to start, because if you ask anybody in D.C., what’s the big U.S.-China data issue or how does China think about data, you’ll probably get something to the effect of China’s primary goal is to steal sensitive data from American citizens or the United States, and the U.S. has to prevent that from happening, right? That’s the vast majority of the D.C. conversation on U.S.-China data.

Andrew: Yeah, that’s a little mind-numbing for sure. I have had that conversation many times in Washington, but what’s the conversation more if you talk to people about this outside of the D.C. bubble? How are people thinking about this that aren’t so focused national security and policy and that kind of thing?

Kendra: I mean, I think the other group of people that we talk to about this is foreign companies that operate in China. They’re not obviously as worried about data exfiltration, but they’ll kind of tell you the biggest issue is cross-border data flow, right? China’s got one of the strictest cross-border data regimes in the world. And for the last five years, I think multinationals kind of been tearing their hair out trying to get their own information out of China. And so that’s basically what corporates are talking about.

So, DC is talking about China’s trying to steal our data. Corporates are talking about how do we get our data out of China and how do we comply with Chinese data laws without screwing up our R&D processes and stuff like that. But as far as I’m concerned, both of those views or both those conversations really only look at a teeny, teeny, teeny, tiny corner of the conversation that is happening inside of China about data. In China, the government has been having a very broad conversation.

They’ve essentially developed a sort of part theory, part national strategy about what role data plays in the economy, how to activate the economic power of data, how to use data to boost GDP and make gains, and how to kind of bolster technological competitiveness by increasing the supply of data. So, we saw this start kind of six years ago, and then we’ve just been watching that theory evolve over time. And it’s now driving this huge wave of Chinese tech policy.

And I think that wave is sort of flying under the radar a bit in the U.S. You don’t often hear people talk about how the Chinese government thinks about data.

Andrew: Why do you think it is so under the radar? I mean, if this is like the fundamental thrust behind the conversation in China, why isn’t it on, you know, more people’s agenda here?

Kendra: Well, that’s a good question. I mean, I think two reasons. One, you know, all of the data policies we’re going to talk about today, individually, if you look at them by themselves, they’re just deeply unsexy. It seems very uninteresting. They’re really interesting in aggregate, but they’re very uninteresting by themselves. And so, unless you can see what they mean in aggregate, looking at one particular piece of it, isn’t that fun?

And then, two, I think the way that China’s looking at this is so different. I mean, deeply different from how the U.S. talks about data that it kind of doesn’t even register. It doesn’t pattern match to anything in the U.S. policy conversations. We don’t see it.

Andrew: Well, that, I mean, I think is exactly why you and I wanted to have this conversation, right, is to start highlighting this. But why do you in particular think it’s so important at this moment that we, yes, the U.S. policy community start to see it for what it is now?

Kendra: I mean, I think the answer is pretty easy, right? Data supply is now a core input to AI development. The AI competition that everyone’s obsessed with is in part a data competition. So what we’re going to talk about today is a very heady idea, right? How the Chinese state views data. What is the long-term strategy? You know, what’s the big idea underneath these little policies, and what that means for the U.S.?

But that’s also now very intimate. Like five years ago when we started looking into this, that was a very squishy concept. But now it has this immediate economic impact because of how important it is or because of how critical and central data is to artificial intelligence.

Andrew: Yeah, good point. All right. Well, let’s get into some of the details here. Where do you want to start in terms of diving in?

Kendra: Okay, awesome. So this is me cornering you at a party now.

Andrew: Oh, no. Look at the time.

Kendra: All right. So this is kind of going to sound like a bait and switch, but I want to start this conversation with a concept that doesn’t seem to have anything to do with data at all, because getting into how China sees data sort of hinges on understanding the sort of econ 101 concept, which is what is a factor of production. And I think a lot of our listeners probably remember this from school, but I don’t know, you’re an economist, do you want to give us the 30-second refresher, remind everyone what is a factor of production?

Andrew: Yeah, I mean, I think I can do it in less than 30 seconds. I mean, traditionally, factors of production are land, labor, and capital, right? So think about the agricultural economy, you’d need land, labor, of course, humans, the people who’d do the work, and then capital being both money and equipment. So equipment, of course, matters in agriculture, but also in manufacturing.

So, basically, the fundamental inputs that you need to produce economic activity is what we think of as factors of production.

Kendra: Right. So, a factor of production is the input necessary for businesses or whoever to create economic value. And if they don’t have those things, they cannot create output. And there are typically, I think in traditional economics, there’s four, you said land, labor, capital, and then China calls the fourth one technology. I think the U.S. calls it entrepreneurship, but basically like IP know-how, you know, like...

Andrew: Yeah. Well, I would call it sort of productivity. Doesn’t matter. I won’t be potentially on that, but it’s really how those things interplay. Like, basically, productivity is how well humans use capital and land.

Kendra: Right, right, right.

Andrew: That’s like a little bit, but anyway, yeah.

Kendra: Right. So, if you’re going to do business, you need somewhere to operate. You need people to do the work. You need money to fund it. You need to know how to put it all together, right? So that idea of those are the inputs to the creation of economic value, that idea has essentially been stable for about a century, right? It’s the sort of periodic table of economics and nobody messes with it.

Andrew: Yes. And I feel like there’s a but coming here in the China context.

Kendra: But in 2020, China did actually mess with that idea. So this is a kind of interesting part. So, in 2020, the State Council released this high-level macroeconomic policy. And buried in that policy was something quite remarkable, right? The policy basically designated data as the fifth factor of production. So now, according to the sort of canon of socialist economic theory that China runs on, and remember, that’s like the foundational theory that the entire state apparatus uses to make policy, right? We’ve decided that this is the sort of economic theory. And based on this theory, we’re going to make some rules and we’re going to make some policy incentives.

There are five factors of production — land, labor, capital, technology or whatever, and data.

Andrew: Mm-hmm. And what’s the point of adding data? I think it’s somewhat obvious based on what we have talked about so far, like pretty obvious input. What do you think the point is of China to elevate data to that level in the canon, so to speak?

Kendra: Well, I think by doing that, what the state is formally saying is in a digitized economy, companies need data to produce economic value, right? As you said, in the agricultural economy, let’s say 300 years ago, if you wanted to create value, you need a plot of land and you need a dude to farm that land. So you need land and labor.

Andrew: Dude.

Kendra: But in the digital economy… a dude, a dude. But now, in the digital economy in the modern age, you need data as an input, or your company needs data as an input in the same way that they need financing. And so that sounds abstract, but it actually has these enormous practical implications because like, think about what that means. It means the state is taking responsibility. If the state names something a factor of production, they’re basically saying the state is responsible for making sure that companies can get this thing.

Andrew: Yeah, that does make sense. And I mean, in a way, with agriculture being such an important part of kind of how Chinese policymakers think of the economy, they would never actually drop land as a factor of production. But you can see for most modern economies, land is sort of less and less an important one. So, it’s almost like you could add data and take away land. Like, for our business, we don’t need land, but we do need data. But that’s just a quick point. But more like, what do you mean like in terms of people or companies getting data? What do you mean by getting it?

Kendra: Well, so, okay. So, it’s the state’s job to create a market environment where businesses can access the inputs they need to grow and contribute to GDP, right? So, if companies need labor, that’s fine. It’s on the state, then to kind of build an education system that produces the right workers or to write employment laws that like balance the needs of employers and employees so that talent can flow smoothly between firms and hiring and firing can happen while balancing everybody’s needs. So, it’s kind of on the state to create the background, the environment in which labor can get to companies, where they can acquire it and use it well.

And then if companies need land to build a factory, it’s kind of the same thing, right? It’s on the state to run zoning, to run deeds and titles, to write property and ownership laws. Those are things that we take completely for granted. It’s like invisible infrastructure of the market. We never even think of it. But those systems are basically what keeps factors of production moving throughout the economy and keeps them flowing into…

Andrew: Companies and enterprises. Yeah, that makes sense. So you’re saying basically that this same logic, at least in the Chinese context, now applies to data. The state is taking a role in making sure there’s an ecosystem that sort of curates and feeds data into companies, broadly speaking. Is that right? Do I have it right or is it different than that?

Kendra: Yeah, yeah, exactly. Exactly. The state’s saying, “Look, there’s already a capital market. There’s already markets for land and natural resources. There’s a labor market. And now it’s on us to build a data market, the systems, the regulations, the standards that basically govern how data gets bought and sold and traded so that it can sort of circulate through the economy and so that businesses can get our hands on it.” And in order to describe that idea, the state has basically formulated or coined this term data factors, meaning data when we view it as a factor of production, data as an economic input.

Andrew: Okay. Yeah, that makes sense. I guess the question then for me is when you talk about “building a data market,” you know, strikes me that data gets bought and sold all the time without the intervention of the state, right? And there are data brokers, there are entire industries already existing around this, both in China and elsewhere. So, why does the state need to build anything? Like, what specifically does it need to build?

Kendra: I mean, actually, that’s such a great question because I think there actually is a big open question about whether or not the state needs to do anything or needs to take an interventionist approach to this at all. But I think if you asked Beijing what the issue was, they’d say that for every other factor of production, humans have been trading it for, in some cases, hundreds of years, right? We’ve been trading land for hundreds of years. And so, the rules of the road are kind of ancient. I mean, we solved the fundamental plumbing problems that make those markets run to the point we don’t even see them anymore.

But none of that plumbing is there for data. Okay, so that all sounds squishy. We’ve been very squishy. Let me get very concrete. Let’s do a concrete example. So, imagine that you wake up today and you decide, I want to buy an acre of forest land in Washington state. So, what is the first thing you do after you’ve decided to do this?

Andrew: Well, either Google or ask an LLM or a ChatGPT, where do I buy land in Washington? I mean, no, I guess you sign on to some third-party site, like a Zillow for land.

Kendra: Right. You would know exactly what to do. You want to buy real estate, you open a real estate website. There’s a real estate market at your fingertips. You would open one of a dozen well-known sites, all of which are kind of pulling from these centralized property listing systems that have been there forever and you just browse what’s available. Consumers know where to shop, no bigs. Now, imagine you want to go buy access to regularly updated shipping container movement data. Now what do you do?

Andrew: Same answer, right? Google, ask ChatGPT. I don’t know. I mean, truly, that’s where I’d start.

Kendra: But there’s not like containerdata.com. Like containerdata.com is not like It’s a common marketplace where all data sales are happening.

Andrew: Website idea.

Kendra: Oh, there we go. We can just quit what we’re doing right now. So, there’s like, the real estate, there are well-worn pathways for discoverable real estate and not so much for other kinds of data, right? You’d like, you’d poke around online, you’d Google it, but there’s no… a business can’t wake up and say, I need this very specific kind of data and I know where to acquire it in most cases. Does the supply of data you want even exist? Who has it, right? And so, the reason data brokers exist is because you go hire these people to find data for you because there is no place that you can just simply go find it yourself in most cases, right? So, that’s one problem, discoverability. How do I discover the supply? Where is it? How do I get it? Does it even exist?

Problem number two, okay, you’re back on Zillow. You’re buying your acre of forest. How do you figure out what you should expect to pay for that data?

Andrew: Compare… well, see what’s out there, right? Look at what’s on the market and compare them to, I guess, decide the parameters of what you want and compare them to other comparable acres of land, houses, etc., whatever you’re trying to buy there.

Kendra: Yes, exactly. You look at comps, or you look at a house with the same… if you’re buying real estate, you look at a house with the same number of bedrooms and bathrooms that you’re looking for in the same street. And you’ll say, “Oh, with the same square footage,” and you’ll say, “oh, it usually sells at this particular price.” You found your million-dollar parcel, right? Whatever.

And then the value, whether or not that value is correct, basically gets confirmed through an appraisal in the process of buying your property. And it’s the same with the labor market. If you want to hire a senior engineer with 10 years of experience, you check Indeed or ZipRecruiter or Glassdoor, and you see what everyone else is paying for the same set of skills. And of course, capital markets have decades of these sort of established valuation methodologies. So, you can find the price for similar items easily, whether you’re buying or selling.

Now, if you’re buying or selling that shipping container data, what should you expect to pay for that? How would you know that you’re paying fair market value if somebody does quote you a cost? And if you are selling data, how do you even know what it’s worth or what you should be charging for it at all?

Andrew: Yeah, I mean, I guess no real answer. I don’t really know. But I mean, fundamentally, I guess it’s worth whatever someone’s willing to pay for it.

Kendra: Right. Yeah. 100%. There’s no real standard metric for valuation. This type of data is valued at this amount of money in general. Right? It’s very hard to do that. A, there are so many different types of data. But B, we just haven’t been selling it that long. And it’s hard to compare one data transaction to another data transaction right now. And so, I mean, I think this is very interesting, but the inability to put a very clear standardized value on data actually creates this sort of cascading set of downstream problems.

And here’s my favorite one. Let’s say you’re a small tech startup. You don’t really own that much physically. You don’t have any equipment, you don’t have real estate, you don’t have tractors or anything. But you’re sitting on a genuinely valuable data set, or you’ve collected or made some data that is worth a lot. You think it’s worth a lot. That data is your most valuable asset. Now you go ask a bank for a loan.

Andrew: And of course, They want like collateral or something to back the loan.

Kendra: Right. They want collateral. You don’t have physical assets. Physical assets work in collateral in part because they’ve got a clear value. The bank knows it can resell your equipment for a million dollars if you default. But if it takes your data, which is your only asset as collateral, what are they going to recoup on that? Where are they even going to put it? How would they offer it to…? They can’t price it. They don’t know what it’s worth.

And so, that creates this situation where data-rich companies that don’t have a lot of assets, which is to say like a lot of tech startups, become a sort of structural advantage when they’re looking for financing. They can’t use this valuable thing that they have.

Andrew: Yeah, I guess I had not thought about it from that aspect in terms of becoming a structural challenge for capital allocation. I mean, I think maybe the U.S. and the West broadly may be a little bit better at that through venture capital, but that’s like, basically, gambling is the wrong word, but you’re taking big bets on something you have no idea about. And China has obviously a venture capital ecosystem, but there’s a long-term problem that small companies, innovative companies can’t get capital. So this makes sense that it would feed into this issue of lending issues, capital allocation issues.

Kendra: Yeah, exactly. I’m going to give one more example just to give a little bit more meat on the bones. So let’s say you bought your land, you have purchased it, and now you go to closing, and it’s time to take ownership of that land, right? There’s a mechanism for doing that that is very well worn. The deed gets transferred into your name, and that transaction and whose name is on the deed gets registered with some kind of county recorder’s office so that forever after, if anybody needs to verify who owns that land right now, they can check the registry.

There’s nothing like that for data. We don’t really even conceive of data as something you would need to register in that way, right? That you would need to kind of confirm that you have the rights to buy and sell and the right to own and the right to use, that there would need to be some kind of allocation. Beijing does think that that is probably necessary. So, you can kind of see these four issues pulling back a little bit, right? All of these things are related to trade, these kind of invisible pieces of it, discoverability, valuation, can you figure out how much it’s worth? Collateralization, can you turn something into an asset that can be used as collateral?

And registering or confirming ownership or rights to ownership over some kind of property. Those are four of the many unglamorous, invisible plumbing problems that have basically been solved for every other factor of production and just don’t exist at all for data.

Andrew: So, you’re saying that basically establishing those four things for data is the underlying project that the Chinese state or policy apparatus is trying to achieve here? Do I have that right?

Kendra: Yeah, that’s the whole project. I mean, not just those four. There’s probably about 20 different unglamorous plumbing problems like that, that the state has identified and gone, OK, we’re going to have to launch a sort of policy initiative to do that. But yeah, I mean, when Chinese policymakers say data is a factor of production, what they’re really committing to is just what we said, define the fundamental rules and processes and systems surrounding transactions so the market can grow.

And the theory of the case is if we make data easy to find, if we make pricing standard and predictable, if we let companies legally sort of establish and protect their rights to data so that they can trade it, then more companies will want to sell data. More companies will buy data. That means more companies will acquire and use data, empowering the data economy and share data and trade data. And so, supply goes up, and circulation goes up. That’s generally, that’s the fundamental data theory.

Andrew: Okay. Yeah, makes sense. All right. So, thanks for laying that out. I think that kind of sets the sort of theoretical and sort of contextual piece of this. But let’s kind of go a layer down. What can you talk about, like an actual policy here, something sort of more concrete that solves one of these problems that the Chinese policy apparatus is putting forth?

Kendra: Yeah, actually, I’ll give you three. I’ll talk a little bit about how the state is actually trying to solve those three problems, like those couple of the problems we just talked about. So, first, the registration and ownership problem, right? How do you confirm you have the right to sort of use a specific data set in a specific way? What we’re seeing now is that the NDRC, China’s big sort of macroeconomic agency, is piloting what they’re calling a data property registration system.

So, you can think of that, well, the way they’ve described it is a land registry or like a patent office, a securities depository, but for data, where data owners and users can register their claims, log rights to use, and then trace the history of ownership of specific types of data. So, in other words, I could basically say I made this data set. I’m putting it on this registry. I think they’re talking about the underlayer maybe being built on blockchain or something like that.

But I’ve got this registered that I’m the owner of this data set. And then let’s say I’m transferring… It’s not really actually with data about transferring ownership. It’s, I’m going to allow you to use my data set for the following purposes. And the right to use the data in that way is then logged in this registry. And the end user can then take that data and use it without worrying that there’s going to be some kind of… you know, there’s like a clear transaction that they can point to and a clear rights document that they can point to that is sort of part of a sort of central depository.

So, that’s the general idea with that. And they’re already kind of trialing that at the local level. Shenzhen in particular is actually running a trial that’s supposed to go national in a couple of months. And last year, we actually saw the NDRC’s National Data Administration put out this call for research proposals on how to construct, basically asking researchers for ideas on how the base construction of that system should be run nationally. So, we see a lot of movement, right? Early movement on constructing a system like that, meaning that companies in China in five years, three years that acquire data, that sell data, that use data, that leverage data in any way, will probably have to transact with this registry.

Andrew: So, this is like the county recorder office registration system, but for data sets, you’re saying?

Kendra: Yeah, exactly. That’s exactly right. So, the second issue, right, discoverability, the where do I even shop problem? This one’s pretty simple. We’ve been watching this for many years. There’s been this sort of wave after wave of state-backed data trading platforms established. They call them data exchanges. Usually, it’s a local government that stands one up. It’s basically a platform where you can browse available data sets.

Most of the companies listing data sets on there are state-owned companies, indicating that the private market is not really that interested in transacting on these state exchanges. So, I don’t know that they’re the best idea, you know, but the state has been essentially doing that. There’s one in Shanghai, there’s one in Beijing, there’s one in Shenzhen, there’s one in I think Guiyang still, where it’s essentially just a centralized marketplace where people can go and kind of shop for the data that they need, or at least that’s the fundamental idea.

Andrew: Okay, got that. But I guess a follow-up question would be, what are they doing, that sort of resource allocation issue that we talked about before, or how to get a bank loan based on your data assets? How are they looking to solve that issue?

Kendra: Oh, well, this one’s actually my favorite because it’s really concrete. State banks are running pilots that let companies use their data as loan collateral. And so, we’ve studied quite closely the structure of those pilots because I think they’re pretty interesting. It’s a three-party structure. So you have the bank that’s making the loan. You have a data-heavy and asset-light company that wants a loan. And then the third party is usually one of those state-backed data trading institutions, so like a data exchange, that independently certifies the value of the company’s data assets, like an appraiser or a data appraiser.

And so, then the bank sets the loan rates based on the value of the company’s data assets. So, there’s like one example, I think from August 2024, when the Chongqing branch of Huaxia Bank partnered with this data trading platform locally and offered a 1.3 million renminbi, so not a big loan, to a company in Chongqing that was doing smart city development. And so then the trading institutions certified the data’s value, the bank priced the loan’s interest rate off the certified value. And that’s how the money was issued. So, these aren’t big numbers. 1.3 million renminbi is not like a massive loan or anything like that. But it’s interesting just to watch them kind of see, does this work? Can we proceed here? Yeah.

Andrew: I mean, that strikes me that that whole system depends on the bank or someone else, some third party, whatever it is, being able to credibly say what the data is actually worth, right?

Kendra: Yeah, yeah, exactly. So there’s another piece, right? Another piece of unglamorous policy plumbing. So, the Ministry of Finance has basically been supporting research into standardized data valuation methods. And we saw a couple years ago in like 2023, there’s this body called the China Appraisal Society, which is like an industry association tied to the Ministry of Finance.

They usually just do physical asset appraisals. And so now they’ve been publishing guidance on conducting data asset appraisals, right? And so, they ask people to look at basically creating a sort of framework for determining for how an appraiser should be able to set a price on data. It’s very interesting stuff.

Andrew: Okay, let me step back for a second. So that all makes sense in terms of domestic flow of data, right? Kind of trying to boost the infrastructure behind the pricing of data, how data can be used as collateral, where and how you can sell it, where and how you can exercise the rights to data. But, I mean, as we talked about before, foreign companies who we work with, non-Chinese companies, are primarily interested in cross-border data, right?

Getting their data, in particular, out of China. And China’s regulatory regime on that front is incredibly strict. So, we’ve worked with these companies trying to get their data out of China for months and months and months. So, it strikes me as actually quite normal for China. But talk to us about that dichotomy where, yeah, we want stuff flowing freely internally, but we don’t want it to go across the border. What’s going on with that?

Kendra: Well, so I’m glad you brought that up, right? Because actually, I think this is the single biggest miscalculation in how D.C. reads China’s data security regime. I mean, the D.C. read is China’s data security rules are digital protectionism and that’s it. China wants to build a wall to hoard data inside of China’s borders while they steal data from everybody else’s. That’s kind of the standard, right?. That’s kind of the standard framing. But from Beijing’s perspective, the data security regime isn’t a wall around the market. It’s actually the guardrails that make the market possible.

Like, it’s not unusual for markets to have guardrails, even really, really heavy handed guardrails for cross-border trade. Capital markets have a zillion guardrails for cross-border trade. Labor markets have a zillion guardrails. I’m not necessarily cross-border, but there’s some. And so, the logic runs if the state clearly establishes what kind of trading is not allowed and where the safety risks are, and a lot of those risks are bigger in cross-border trade, and if it clearly defines which categories of data cannot be traded and starts there, then everything outside of those lines can sort of flow more freely and with more confidence.

I urge listeners, anybody who cares enough to, after you finish this episode, go read the actual text of China’s data security law. Go read it. I think DigiChina has a really good English translation. And I promise you it will read differently than you remember if you’ve read it before. There’s all this language in there about how data security is the fundamental building block of data trade, and that security has to be strong before data trading can occur. And that’s how all these data security rules are about enabling the safe trade of data, and the state’s job is to enable the safe trade of data.

And I think we just kind of gloss over that because we don’t, again, it’s not really on our radar that this is the plan. I do actually want to say one other thing, though. So that’s the plan. But China’s data security regime is still over-calibrated. I think they do want trade, but they have significantly overshot on the let’s secure this before we allow trade to the point where the current regime is not serving its own goals. There’s like a genuine desire to enable safe data flows, but the state is kind of its own worst enemy with this like, knee-jerk over-securitization. And so, what we’re watching right now is the state kind of actively hunt for a balance point.

How do we balance development and security? We heard that a thousand times, right? And we’ve watched the pendulum swing really hard towards security. We’ve watched it swing back a couple of times. It’s a live negotiation.

Andrew: Yeah. I mean, that’s not shocking, right? Like the security versus development debate, to the extent that it’s even a debate or finding that balance is an ongoing endeavor among Chinese policymakers, like in a range of areas, right? Data, technology, supply chains, you name it. They’re always trying to strike that balance. So, that’s not shocking to me. And it’s also not shocking to me that they’ve leaned a little bit further into the security side than the development side, which also is normal for governments everywhere, but also in particular for China.

But I think you’ve done a really good job here of laying out kind of the main rationale that China is using to put forth this data governance regime. Some of the specifics around the very concrete plumbing and flowing issues or flow issues that Beijing’s trying to solve. But flip that around. What do we as people who are in the policy community in the U.S. to make of that, what should Western policymakers or policy thinkers take away from this discussion?

Kendra: Yeah, I mean, I definitely don’t think that the United States needs to adopt the idea that data is a factor of production and rush into Beijing’s footsteps and do exactly as they have been doing. That’s definitely not the point. I think the biggest takeaway is that like when you lay China’s approach to data policy next to America’s approach to data policy, on our side, there’s this kind of massive gaping hole where a proactive pro-growth U.S. style data strategy ought to be. China has a pro-growth strategy, so we need a pro-growth strategy.

Every major U.S. ally has already done this. We are the outlier, right? The UK, Japan, the EU, Canada, Australia, all of them have looked at this issue. How can we use data to foster growth? What are the problems we need to solve? What are the pathways we need to take? What are the incentives we need to put in place? And we simply have not done that. And I think it’s because, as I mentioned earlier, when the U.S. talks about data, it’s almost exclusively as a security issue. And when security is all we talk about, then security is all we do.

I mean, just look at the last five years. We’ve done a ton on security. We have secured telecom equipment, smart car software, port cranes, cellular modules. There was the TikTok fiasco. We went after WeChat. We’re doing ICVs, preventing Chinese cars from coming into the U.S. because they collect data on this. So all of those actions was fundamentally about preventing the exfiltration of sensitive American data. And that’s just the entire American policy portfolio right now.

Andrew: Yeah. Okay. So I understand that. I guess the question then to me, actually, I was thinking of this, as you were talking through the Chinese side, is it that the U.S. has just decided like we don’t need a growth strategy for data per se? Or is it like, does the government need to be involved to the extent that China is involving itself here, meaning like our U.S. policymakers just saying like the market will figure this out or which I think it would be…? You know, that might be also an appropriate way to go. I don’t know. How is that conversation happening in the States? Is it just like a growth strategy is nice to have? Should it be left to the market? And where do you land on all of that?

Kendra: I think every time I have heard policymakers talk about this kind of sort of pro-growth strategy in the U.S., it has been talked about like, like those are the Montessori kids. Like that is a kumbaya, get out the guitars and sing together. Let’s all talk about data sharing. Let’s all talk about… like almost it’s taken on this like hard left kind of, I don’t know, let’s all hold hands and share data kind of initiative, right? It’s just got this very strange overlay in the U.S. that I haven’t really seen it take on anywhere else. I’m exaggerating.

There are certain initiatives that have made some progress. But there’s been a lot of that. I mean, there was some government data sharing initiatives where the U.S. decided to try to push more government agencies, is another thing China’s doing, to release more of their data in a format that researchers could use to the general public. And that was treated as this like… you know, there’s some open data laws about what research was supposed to do. Get government departments to share more data with each other so that they could be more, you know, efficient and improve bureaucratic efficiency, all this kind of stuff. But these don’t have any staying power. They die. They go to the back burner.

They get treated as not important. I think because, my personal take on that is that in order to see the value of initiatives like this, you’re looking at a 20-year investment. You’re looking at a 20-year investment in research. You’re looking at a 20-year investment in changing the way that the bureaucracy functions, you’re looking at a 20-year investment before you see any returns. And in a four year or an eight year administration. We’re not good at that, we’re not good at making… I mean, that’s one of the US’s weak points unfortunately. We’re just not great at making investments that we hope will, you know, prioritizing investments that we’re going to reap the dividends in two decades.

We’re great at let’s reap the dividends next year, but we’re just not really good at those kind of long-term goals. And so, I think that’s why, security strategy, you can implement within the span of a single administration. You can ban TikTok in two years. Or I guess not. I guess you can’t. You can try to ban TikTok in two years.

Andrew: Yeah. That took three administrations, technically.

Kendra: That was a bad idea. You can institute semiconductor export controls or whatever. You know, you can put out an executive order in a minute. Generating more efficiency and growth economically from data is like a little bit of a squishy idea and it’s a little bit of, it’s too long-term. And actually, I just want to say, this is real money. This isn’t just a sort of wishy-washy, oh, gross. But there are actually numbers there, right?

The OECD kind of concluded back in 2019 that data access and sharing, if you increase the supply of data in the economy, that it can generate benefits worth 1.5% of GDP if you’re just talking about public sector data. In other words, if you just make governments release more data, then you can really generate a bunch of significant economic benefit out of that because companies will jump on that data and they’ll make new businesses out of it. There’s more data available, let’s make an app that like uses that data to do something, and then that creates jobs and then that creates productivity.

And then if you also account for private sector data, if you basically get companies moving their data around between market actors more than they do, instead of sitting on it or hoarding it or being afraid to share it or can’t be bothered to sell it or whatever it is, then, you know, the range gets a lot bigger. You can get a bump of like between 1% and 4% of GDP. So, it’s like really leaving, actually leaving potential gains on the table in a way that’s pretty detrimental, I think.

Andrew: Yeah. Can you talk actually just a little bit more about the channels through which you see and, again, Chinese policymakers or others, non-Chinese policymakers see like what avenues are there for data to be a growth driver, generally speaking? I think that’d be interesting for listeners as well.

Kendra: Yeah, I’ll give a couple more examples. So, I just kind of mentioned one of them, which is job creation, right? I mean, I think some of the studies that are coming out now are basically showing, as I just said, data is available to startups, to innovators, to entrepreneurs. They come up with cool ideas for creating businesses with the data. If the data is not available, then they don’t do that, right? And that’s especially interesting because you have a lot of situations where the government or a large company or a collective of companies is the only body capable of putting that data together.

I’ve got one example I cite a lot, which is, so in 2017, Deloitte did a cool study. They looked at what happened when Transport for London released real-time transit data through APIs. And I think it was free. If I recall correctly, I don’t remember exactly, but I don’t think they charged for it. But like Transport for London put this out. 600 apps got built off the back of that data. 500 jobs were produced. And the economic savings for the city were like 130 million pounds. That was one data set.

This is one data set on the market. And if you aggregate that across the entire economy, what you could do with that is like pretty cool. There’s some early research indicating that you will get a small productivity boost when firms invest in collecting and using their own data. So, if you basically encourage a company to go acquire data and then transform that data and make, I mean, we’re seeing that in our company right now. We’re using data more than we did before. And there’s a lot more, like we’re doing bigger things faster, right?

We can see it kind of in the way that we’re working at the moment. So, the productivity is a way that you can kind of get growth out of that. And then third, it’s like the government itself kind of gets better. The bureaucracy gets more responsive. People get better public services, right? And China’s a really good example here too. Nobody really liked how China responded to COVID, but they responded really fast. And that, you know, epidemic control was all totally data-driven, built on 20 years of investment in data sets for public health, for transportation, that they just leveraged the minute this disease kind of appeared.

They took all these existing data sets and they pulled them, and started drawing insights on disease spread. And that’s kind of how they did the entire epidemic control measures. And they did that in just a couple of weeks because they’d made that investment already. Right? And finally, now it’s, of course, it’s talking about this a bit, but it’s AI. The big issue in AI is like AI researchers and small AI startups, like specialized AI startups and niche industries really need a steady supply of this high quality data, especially data that’s hard to get.

So, that would be things like, imagine what you could do if you had an entire data set of all of the mechanical equipment failures in smart factories across manufacturers, not just one manufacturer’s data, but every manufacturer’s data. Could you improve uptime, productivity, production speed of machinery? You know, what insights could you gain from that? So, tons of things like that across in almost every sector. And so, you know, health care, another great example. Hard to get good health care data because of various privacy restrictions, etc. But you get tons of benefit from that.

You can cure diseases with that kind of stuff. And so China’s made that producing that supply, this is where we come back to factors of production.

If data is a factor of production, then making sure that supply exists so that these things can happen, it’s a state’s job now. It’s a state’s priority. They’ve taken on that responsibility. They’ve decided to move that ball forward. Right? So anyway, that’s the game.

Andrew: China is obviously pursuing that. And you would say that U.S. policymakers are just kind of leaving that on the table in terms of not having a national strategy for data development and supply.

Kendra: There was a couple of mentions of data in the Trump administration’s America’s AI Action Plan. And when I read those, I got real excited about them. Some of those are really good, right? They’re actually really good ideas. And they have not at all been prioritized as much as all of the securitization stuff in that plan, right? The funding has not gone to those initiatives yet. Tick tock, tick tock. It’s that kind of stuff. It’s like somebody will recognize that, yes, mostly those initiatives were about funding consortiums that pool sort of high-quality data and compute for leading-edge researchers so that researchers were solving that access to research data problem for AI specialists and stuff.

So, it’s not that somebody hasn’t written it down. It’s not that somebody hasn’t said, hey, we ought to do this. It’s that when you look at where policymakers’ time and energy and attention is going, that’s not what anyone’s talking about. When you walk into a room where they’re talking about AI and DC, nobody’s sitting around saying, “How can we really squeeze economic value out of data? What proactive, positive, long-term roads can we lay down so that we really get benefit from data?” That’s not the conversation that’s happening. So, it’s not that it’s not recognized. It’s just not prioritized.

Andrew: Yeah. Well, and again, I just sort of anticipate listeners saying, you know, “Well, that’s not the state’s job.” And I guess my thought would be, of course, the U.S. is never going to take the same state-heavy interventionist approach that China is.

Kendra: Totally.

Andrew: But that doesn’t mean there’s no role for the government to help kind of build this ecosystem. I mean, of course, like as you talked about, the government, whether it’s city government, county government, national government, has taken a role in governing and overseeing transactions and putting guardrails around all the other factors of production, but we just don’t seem… I mean, you know, we haven’t caught up in terms of kind of treating data fundamentally as so structurally important to the economy. I mean, you know, the old, obviously, cliche is data is the new oil, but we’re certainly not acting like it, right?

Kendra: Yeah, yeah, exactly. Exactly.

Andrew: Well, this has been super, super interesting. Obviously, a ton of work that you’ve done on this. And just in case it’s not clear, the work that Kendra has done on this, in case it’s not clear to listeners, was specifically with an eye towards informing U.S. policy. So, everything we do at Trivium is kind of trying to understand China, but this was like an effort to understand what China’s doing in order to kind of make strategic recommendations on how the US might want to be thinking about these issues. And so that’s one of the reasons that we kind of leaned so heavily in the last part of the conversation on what the U.S. is not doing here. I think this is great.

I hope that this work gets some uptake from policymakers and people in that space. We will keep sounding the drum or pounding the drum, sounding the alarm. I don’t know.

Kendra: Sounding the gong.

Andrew: Yeah. And yeah, well, I’m sure there will be a lot more opportunities to talk about these kinds of things. It’s always good to kind of take a step back and do kind of a wonkier, a higher-level… wonky higher level; those are maybe at odds. Anyway, I’m rambling now. But this was amazing. We’ll just leave it at that. Thank you, Kendra, for the time and for walking us through that. I found it super helpful and fascinating. I’m sure our listeners did as well.

Kendra: Awesome. Well, always good to be here.

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

• But while many analysts are asking why Beijing isn’t doing more to stimulate growth, this week’s Trivium China Podcast explores a different question: why are policymakers deliberately choosing not to?

Pod host Andrew Polk is joined by Trivium’s Head of Markets Research Dinny McMahon to examine why Beijing may be quietly embarking on its first genuine economy-wide deleveraging effort in years, and what that could mean for China’s growth model.

The two discuss:

• Why recent weakness in investment, consumption, and the property sector won’t trigger a major stimulus package

• Whether Beijing’s annual fiscal “stimulus” has become more theater than meaningful economic support

• How slowing credit growth could signal a deliberate shift in macroeconomic strategy

• Why strong exports and rising inflation may have created a rare opportunity to reduce leverage

• Why policymakers appear to be prioritizing future borrowing capacity over stronger short-term growth

Andrew and Dinny also explore what slower credit growth means for businesses and investors and how Beijing’s evolving priorities could complicate trade negotiations with Europe and other major trade partners.

Transcript

Andrew Polk: Hi, everybody, and welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium Co-Founder, Andrew Polk, and I’m joined today by Trivium’s Head of Markets Research, Dinny McMahon. Dinny, great to have you back on the pod. How are you doing, brother?

Dinny McMahon: Doing good, mate. Great, as always, to be here.

Andrew: Yeah, it’s been a couple of weeks since we’ve had a podcast. So, I was on vacation with my in Hawaii. Nice to get away. Come back to the very, very hot DC weather, although it’s cooling off a bit now, but I’m glad to be back in the groove and glad to have a fan favorite here, Dinny, to kick off the second half of the year with me. We are going to talk, of course, about the Chinese economy. And specifically, we’re going to talk about what’s happening with credit growth in the economy, which may sound, I don’t know, wonky, but it’s hugely important to the overall trajectory and pace of growth in the Chinese economy.

And it’s traditionally how the Chinese policymakers either stimulate growth or sort of pull back on growth rather than using the monetary lever per se. It’s really more of the credit impulse. That, of course, has changed more towards a fiscal impulse in the past, say, four or five years. But credit growth is hugely still important to the, like I said, the overall management of the economy, the trajectory of the economy. Dinny has some really unique, and I think… well, I mean, unique in a good way, like out of consensus views on what’s-

Dinny: Sounds like unique and courageous.

Andrew: Yeah, yeah, yeah. Shall we say unique views? No, I think really thoughtful views on what’s happening here, how credit policy relates to overall macroeconomic growth, and kind of what that means around economic performance in the second half of the year. So we’re going to get into all of that. And it’s going to be an exciting conversation.

But of course, before we do that, got to start with the customary vibe check. Dinny, it’s July 9th, 3.20 pm in the afternoon Eastern time. And you are recording from the Eastern time zone, which is not normally the case. You used to be in the Central Time Zone. How’s your vibe? Welcome to the East Coast.

Dinny: Mate, I mean, look, no shade on Chicago. I was there for nine years, and I love the city. But dude, North Carolina is doing good things for my vibe. I mean, no one can see this. We’d hope to record this, but we haven’t kind of got our act together yet. But like my back window opens onto a forest. I mean, I’m loving the warmth. I’m loving the humidity. I’m loving the greenery. This place is doing some good things for my soul. So, I might still be in the honeymoon period, but I’m doing great, mate.

Andrew: Well, that’s great to hear, dude. I’m glad you like it down there. And a chilled Dinny is a happy Dinny is a happy Trivium is a happy Andrew. So, I love it. And you can bring your chilled but still intensely thoughtful vibes to the podcast. And I, meanwhile, super rested, had a couple of good weeks off with the family, just no work, all relaxation. So ready to get back to it, second half of the year. I had a good night out with a handful of my China nerd friends last night in D.C., which was good to catch up with people.

So, I’m ready to get back to it. That’s my vibe is raring to go. So, with that out of the way, we also have to quickly do the housekeeping up top. Just firstly, 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 in a range of areas — autos, tech, macro, econ, as we’re going to talk about today, commodities — you name it, we do it.

But it also includes policy towards China out of Western capitals like D.C., London, Brussels, and others. So if you need any help on any of those fronts, please reach out to us at hq@triviumchina.com. We’d love to have a conversation about how we can support your business or your fund. Otherwise, if you’re interested in receiving more Trivium content, check out the website, www.triviumchina.com. We’ve got a bunch of different subscription options, both free and paid. You can definitely find the China policy intelligence option that you need on our website, www.triviumchina.com.

And finally, always say it, but tell your friends and colleagues about the podcast. It’s how we grow our business. We truly, truly, truly appreciate those word-of-mouth recommendations. And like and subscribe as well to the podcast on your favorite podcast app. That helps us get more visibility as well.

All right. With that out of the way, Dinny, we are going to get into the latest on the macroeconomic front, and specifically what’s happening with credit growth and the credit environment, I think we can sort of safely say that after a really good start to the year, the past few months, so really Q2 have been pretty terrible for China’s economy. Fixed asset investment. So overall kind of capex in the economy fell 12.5% year over year in May. So negative growth, actually significant contraction of 12.5% year over year. Last month, May is the most recent data we have. That was a sharper contraction than April’s 9.4% decline. So, not only is the economy weak, it seems to be weakening. And one of the key issues is that deterioration is broad-based.

So, it’s manufacturing investment down 4%, infrastructure down 9.5%. And the property sector, where we had been sort of hopeful that the worst was over, even it took a pretty clear return for the worst in May with new home sales by floor space falling about 12%. That was down from the 9% year-over-year drop in April. So, just kind of across the board looking terrible. On the retail\consumer side of things, the dynamics are just as bad. Auto sales down 16% year-over-year last month. Home appliances sales down about 16%, furniture down 9%, even mobile phone sales, which people replace pretty regularly, and which had been holding up in recent months, they just eked out 0.7% year-over-year growth.

So, pretty terrible profile after a good start to the year, but it all sort of raises the question, why aren’t policymakers doing more to support or stimulate the economy? And I know you’ve got a lot of thoughts on this, specifically, as I said, when it comes to the credit side of things. So, Dinny, I’ll just throw it over to you. Can we expect more support, lay the land on kind of what you’re thinking here in terms of what policymakers’ approach is?

Dinny: Well, I think the real question isn’t exactly support because, I mean, we’ve held the position for ages that interest rate cuts aren’t coming. I mean, monetary policy isn’t really in the toolkit at the moment in terms of sort of dealing with economic weakness. They’ll tweak here and there, but that’s not really what’s going on. The question is, are we going to see stimulus, straight up fiscal stimulus? And I think the answer is yes and no. So, every year for the last few years, in the last few months of the years, we’ve got some sort of stimulus.

So, what we had last year in October was an extra 500 billion RMB worth of special purpose bonds for local governments to issue. And some of that had to go into infrastructure. And some of that was just broad fiscal support to help local governments with their budgets. Some of it was for paying down arrears. And I think it’s likely we’ll get something like that again, probably around 500 billion again. The question is, though, should we consider that as being stimulus? Now, what I mean by that is that last year, local governments were permitted to issue 4.9 trillion RMB worth of special purpose bonds, And that was broken up into a 4.5 trillion RMB quota that they got in March at the legislative session, the government work report.

And then they got that additional 500 billion at the end of the year I was talking about. Now, this year, they got the same 4.4 trillion quota in March. So, we could get an additional 500 billion top up by the end of the year. And that would be the same as last year’s total. So, the question then becomes, is that stimulus or is that just the bare minimum necessary to maintain economic activity at last year’s level, right? For local governments just to be spending as much as they did in 2025, do you need an additional 500 billion RMB? And I think in this economic environment, the answer is probably yes.

So, it’s also, the other question here in addition to that is, is it stimulus if the government’s doing the same thing every year, if it’s providing that same top-up on government spending in October every year? Which is what it’s been doing. To me, that doesn’t strike me as stimulus. That strikes me as state management, right? They kind of lay the expectations earlier at the beginning of the year. We’re going to let government borrow this much. And then, lo and behold, everybody chill. We’re going to provide stimulus in the last few months of the year.

But if they’re doing that every year on a comparable amount, that doesn’t really feel like stimulus. That kind of feels like drum roll, please, everybody. Everybody chill. There’s more stimulus. Everybody be cool. It feels like smoke and mirrors as opposed to a real injection into the economy. And I think that’s particularly pertinent this year because I don’t think we should be watching the stimulus because I think it is smoke and mirrors.

I think what we need to be watching is what happens with total social financing, which is the government’s measure of the total amount of credit being put into the economy. Because I think what’s happening this year is that Beijing is striving to start deleveraging. So, regardless of whether we get stimulus, the amount of credit being pumped into the economy this year, I think is likely to fall pretty significantly. And what Beijing is trying to embark on is a conscious effort to start deleveraging the economy.

Andrew: Okay, well, so you’ve broken it out well. It’s a good point around if stimulus is every year, is it truly stimulus, right? Or is that just the new baseline? I mean, I’m trying to go back to my economics 101, macro 101, a permanent expansion in aggregate demand versus a temporary expansion in aggregate demand via fiscal stimulus. Very Keynesian idea. And the short-term stimulus tends to have more of a policy effect, whereas longer-term perpetual stimulus, typically prices just adjust, right? And people adjust to this new level without really seeing it as a way to kind of boost their short-term economic prospects.

So, without getting way too into that, and I’m sure someone will call me out on that. I’m sure I got part of that wrong. But point being, if it’s permanent, people and businesses, which matter ultimately in the economy, think about it differently. And it doesn’t really provide that stimulatory effect exactly that you’re talking about. On the credit side, which is so important, I want you to get into that a little bit more. The last piece you talked about was sort of deleveraging, which I think a lot of people argue about is, we’ve been arguing really since 2017 when China first started its financial prudence or financial cleanup efforts, now a decade ago. What is deleveraging in China? Are they truly trying to outright reduce leverage?

Where in the economy are they trying to reduce leverage? Talk to us about what you mean by that concept.

Dinny: The thing that it isn’t, it is not the total amount of debt declining. It’s not having $100 worth of debt yesterday and having $90 worth of debt today. What it’s about is we’re talking about reducing the debt to GDP ratio. So, GDP here is nominal GDP. And that is the important thing because it reflects the capacity of the economy to sustain and service its debt. So, it’s about the size of the debt pile relative to the size of the economy. And Beijing has wanted to bring that down or at the very least stop it from growing for a very long time.

So that cleanup campaign that you mentioned, I mean, that was called explicitly a deleveraging campaign. And they launched at what, a tail end of 2016, really sort of launched, got going in earnest 2017. And at the end of the day, it was more of a de-risking campaign than a de-leveraging campaign. But that said, over the, about an 18 month period over 2017 and ‘18, That debt to GDP ratio did come down. And that’s because they were unraveling shadow banking. And there was a lot of additional debt in the system that was just unnecessary. It was kind of like just layers of debt to kind of obscure what was really going on in the heart of the financial system. And about that time, the debt to GDP ratio was about 240%.

And then it started rising again in late 2018. And in early 2019, the then Premier Li Keqiang, he set a formal target for deleveraging. He said that on a year-on-year basis, what they were aiming for is for credit growth, as measured by total social financing, to roughly, the expansion of credit, as in TSF, to roughly equal the growth of nominal GDP. So those two things would be expanding roughly at the same time. If nominal GDP was growing at 8%, then total social financing would be growing at that pace as well. Now, according to the official data, we did get a period, a short stint of deleveraging in 2020 and 2021.

I mean that was during the pandemic. Credit demand collapsed. But I mean at the time, the GDP data during that period is a little bit sus. I mean, I think there’s a bit of a consensus that the economy probably went into recession in that period but it doesn’t really get borne out by the data. So, whether there was deleveraging then or not, the data says there was. It’s probably fair to assume that there perhaps wasn’t. but what is clear is that the ratio started rising again in a very meaningful way after the housing market peaked in the middle of 2021.

Now, back then, the debt to GDP ratio was about 255%. And by the end of last year, according to the Bank for International Settlements Data, they reckon it had gone up to 300.1%. So that’s an increase of about 45 percentage points. Now, there’s a think tank inside Peking University, which also keeps track of this. It puts out its own numbers. It’s put out more recent data than the BIS. It reckons at the end of the first quarter, the debt to GDP ratio was already at 309%. So, anything over 300% is really high.

I mean, this is a club that includes Japan, Canada, France, the Netherlands, some global financial hubs because they’re doing a lot more sort of financial activity globally relative to the size of their economies, but it’s a pretty small club. And certainly, for developing economies, I mean, you have India’s, Brazil’s, they’re well below 200%. So, over 300% is way, way up there. But as I said, we’ve had this real increase since the housing market peaked. And frankly, that’s perfectly reasonable.

A collapse of economic activity of that scale really requires borrowing to ramp up, usually borrowing by the state. Now, in China, it wasn’t purely by the state. It was the government, and it was also corporations who borrowed and pumped a huge amount of money into manufacturing and industry, particularly around the time, really kicking off just as the pandemic was starting. And that increase in credit, it wasn’t just about making up the shortfall because there was this shortfall of economic activity as investment in property, the property sector contracted. But it was also in aid of achieving Beijing’s growth target, which the economy has consistently been able to do over the last few years.

But here’s the thing. Governments of economies that have experienced a crisis, they often want to pare back their support, their fiscal support, prematurely because they freak out after they see the fiscal burden rising. They start to worry they’re borrowing too much money. They start to worry about overall debt levels. And so, they cut back before the economy can sustain itself. Now, I don’t think Beijing is necessarily freaking out.

I think it’s being a little bit more opportunistic. I think they believe they can… This is a moment in which they can start deleveraging on a sustainable basis because of resurgent inflation and because of strong net export growth.

Andrew: Yeah, thanks for that explanation. I want to get into the inflation and export piece, but I do have to say my piece on the 2017 de-risking campaign. I think you nailed it. That’s the right way to describe it. In fact, I had to train myself for years to call it a de-risking campaign, not a de-leveraging campaign, because every time I call it de-leveraging, people would say, “Ah, they’re not actually de-leveraging. Their total credit’s rising.” I’d be like, yeah, okay. Well, it’s growing more slowly.

And the most important thing I would always point out is as they were de-risking the riskiest, most vulnerable parts of the system, which primarily was the interbank market, that part of the economy, that part of the financial system did deleverage, right? The interbank market, total lending in the interbank market contracted for, I think, 18 months or so. And that was really the riskiest part of the system. So, it was a deleveraging campaign, but just for semantics, probably easier to call it a de-risking campaign.

It was quite successful, and that’s put us in this sort of new world. Sorry, just that point of privilege that I had to touch on. But back to inflation and net exports, talk to us about how those two pieces fit into this deleveraging picture you’re talking about.

Dinny: So the way to think about it is this. As I said, you achieve deleveraging when credit growth is slower than the growth of nominal GDP. So, nominal GDP is real GDP, which is the number that we care about every quarter or so, plus inflation. So, if prices go up, nominal GDP goes up. So, in this current environment, nominal GDP is going up because inflation is back. But credit growth, even at that same moment, credit growth is slowing because credit demand is weak. So, total social financing growth was 7.7% in May year on year.

And that is the slowest pace step ever. So, credit growth is coming down even as nominal GDP is going up because of inflation. So that’s why inflation is such an important part of this picture. The other important condition here is exports. Now, exports are important because deleveraging really requires a growth driver that doesn’t require much debt. The old economic growth model in China, the old property-driven growth model, it was all about debt. You couldn’t drive the economy through property without more and more borrowing.

I mean, people borrowed to buy homes. And the expansion of that borrowing, that was kind of the bedrock of economic growth model. But exports are different. They rely on global demand. It doesn’t require anyone inside of China borrowing more. So, with exports, growth can increase without exporters needing to take on really much additional debt. And so that’s why Beijing feels like it has a moment here to de-lever because it can add growth through exports without taking on much additional debt and inflation is pushing up nominal GDP.

So, if we break down the numbers and what Beijing might be sort of aiming for by the end of the year, it has a real GDP growth target of between 4.5 and 5%. So, if full-year growth comes in at the upper end at 5% and inflation comes in at, I mean, say 2%, then deleveraging starts once total social financing growth gets down to 7%. As I said in May, it was 7%. So, if it gets down to 7, maybe 6.8, 6.9, well, it’s conceivable that that’s the point at which deleveraging begins. Now, of course, if the real economy only grows at 4.5% and inflation is 1%, then total social financing would need to slow to 5.5% by the end of the year, which is far less feasible.

So, the real question is what pace of inflation is likely? I mean, in June, CPI, commercial prices were up 1%, but producer prices were up 4.1%. So, it’s really a bit of a toss-up as to where it’s going to land by year-end.

Andrew: Well, that’s a pretty big call, I mean, especially given how bad the domestic economy is. So, when you think about it, I mean, now doesn’t seem like the time to start deleveraging. You want to deleverage when you’ve got a tailwind to your economy, an upward economic trajectory. So, can you kind of, I don’t know, justify a little bit further or not justify, but expound on why you think they’re not going to kind of try to come in and pump things up?

I mean, I know we haven’t seen much of it in the rhetoric, but typically, even when they’ve been pretty reticent on stimulus or pretty measured on stimulus, when things get this bad, they usually step in with some kind of additional support, as you talked about at the beginning of the podcast. I mean, you know, the debt-to-GDP ratio has been rising for years, right? And they haven’t undertaken a concerted deleveraging campaign. So, just talk to us a little bit more about why you think that term is coming now.

Dinny: Yeah, I think it’s a combination. So, on one level, they’re being opportunistic because of what I said about exports and inflation. They’ve got a moment, they’ve got an opportunity to do something that they’ve always found quite difficult to do. But I think they’ve also got one eye on the long term. And here, the real issue is China’s demography. Because sometime in the next 60 years, the number of retirees in China are going to exceed the working age population.

And I mean, that’s 60 years in the future, but the burden on the state from the transition to that point, as the balance moves against the working-age population, the state is going to need to borrow more and more to fund the healthcare and pension needs of retirees. Now, I’m not sure when Beijing is going to have to sort of start borrowing to meet those obligations, but it’s almost inevitable. And when it does start, borrowing will go on for decades and it will just keep increasing.

So, when that day comes, when Beijing needs to start borrowing to meet the welfare needs of the retirees, it needs as much fiscal space as possible. So, if it starts borrowing when the debt-to-GDP ratio is at 300%, it will have far less runway than if it starts at 250%. But crucially, it’s not about where the level is at the moment. It’s where the level will be if they don’t start deleveraging now, right? Because if the ratio keeps increasing at the pace it has since the housing market peaked, it’ll hit something like 240% within a decade by 2035.

So, something has to give. They either, at the very least, need to stop that ratio increasing as soon as possible because the more it goes up now, the more they really need to pull it back or put it to reverse to kind of prepare for that sort of that demographic decline that’s on the horizon. And that’s far more costly than sort of putting a line under it now and then sort of incrementally pull it back over time. So, something has to give. And, you know, I know I’m talking about total economy-wide debt to GDP ratio. I’m talking about the 300%. And perhaps the more relevant ratio to talk about is the government debt to GDP ratio, because by BIS calculations, it’s about 100%, which, relative to the U.S., is pretty decent. I mean, the US level is 120%.

But the problem is with China, when you’re talking about government debt levels, you’re wading into a morass, because so much of the corporate borrowing is in some way state-related. Most of the corporate debt is either borrowed by state-owned enterprises or it’s borrowed by some local government financing vehicle or some other entity borrowing on behalf of some level of the state. And so, these are implicit liabilities. And we’ve seen over the last few years that implicit liabilities do become explicit in times of financial stress. I mean, we’ve seen this migration of local government debt from LGFEs to local governments. It’s ongoing. We don’t know where the end is. So, looking at that formal debt-to-GDP ratio doesn’t really help as much.

So, I think looking at the overall levels of debt in the economy kind of give us a little bit more of a sense of sort of the potential stresses that the economy could be under and what Beijing is dealing with. Now, the irony of all this is that Beijing’s been aware of this for years. I mean, as I said, they called the cleanup campaign in 2016 a deleveraging campaign. Li Keqiang set that target of you know keeping nominal growth and credit growth in line back in 2019. And this whole new economic growth model, new quality productive forces, which we’ve talked about heaps on this podcast, that new model is, by design, supposed to be debt-light, right?

New quality productive forces is all about generating superior sustainable growth that is driven by productivity gains not by borrowing. So, they’re trying to bake it into the system, they’re trying to overhaul the economy in a way that it will grow on a sustainable basis over the long term with less debt. But because Beijing is still dealing with the fallout of the property bust, we’ve still got this debt rising and rising, and so we’re at this point of what does Beijing do about it? Because on one level, it needs to keep borrowing until the fallout of the crisis is properly dealt with.

But if it does allow debt to continue rising, then it’s really storing up real problems for a not-so-distant future when its hands are tied and it is going to have to ramp up borrowing.

Andrew: Yeah, that makes sense. I mean, truly like trying to not borrow from the future or to maintain your headroom for borrowing later. That makes a lot of sense. I think it all makes sense conceptually, right? I think you made a really compelling case, but I guess the follow-on question for me is what are you seeing that really indicates Beijing has pulled the trigger on deleveraging? And I know you’re going to talk a little bit about credit growth slowing.

But I think the natural sort of skeptic of this argument would say, “Well, credit growth is slowing. Maybe that’s more of the balance sheet recession idea. It’s not about Beijing’s desire to reduce leverage. This is just businesses being in such dire straits that they don’t want to put any more new borrowing on their books. And a lot of this is all outside of Beijing’s control,” right? That would be the bare argument that this is all an imposed reality of years and years of overborrowing and financial expansion. So, tell me what you’re seeing in terms of why you think they’ve pulled the trigger and then respond to that kind of preemptive counter argument.

Dinny: Yeah, I mean, it’s a really good point. I mean, if you looked at the debt to GDP ratio of China’s households, I mean, they’ve been falling really since the peak of the, a bit after the peak of the market in 2021. I mean, households are deleveraging. There is certainly an element of a balance sheet recession going on there, at least with Chinese households. Credit demand is incredibly weak. No one wants to borrow. But of course, I mean, China’s response to these sorts of moments when there is weak credit in the past is always for the state to have stepped in with some sort of measure policy shift that results in an expansion of borrowing. In the late 1990s, when China was dealing with the Asian financial crisis, that’s when we got the housing reforms.

And that sparked off a 20-year boom in housing investment. Global financial crisis; China’s response was a massive expansion in investment in infrastructure and public works. And even when we saw the peak of the housing market in 2021, sparked by government policy changes, the three red lines and whatnot in 2020, the response was a state-initiated and led massive expansion of investment in manufacturing and industrial capacity. So, every time a slowdown in one aspect of the economy was met by the government initiating an expansion of credit somewhere else.

So yeah, you can argue, “Oh, this is just inevitable. This is what happens.” The way that Beijing has dealt with such inevitabilities in the past is to find some way to ramp up credit. And yet it feels like it’s different this time. And we’ve talked about this a little bit in terms of Beijing’s increasing focus on services and trying to get more growth out of low debt parts of the economy. But there’s three things that have really struck me this time, and the first is Beijing allocated less money this year to the consumer trade-in program.

Now, we got these numbers back in March at the NPC. Last year, 300 billion renminbi were allocated to support consumer purchases of big ticket items — cars, furniture, white goods, home appliances, and personal electronics. This year the quota came down to 250 billion. But that decline is far more significant than it looks like at face because the way that this program worked was by pulling forward future demand, right? So, to be able to sustain last year’s consumption at 2025 levels, not even expanding it, Beijing would have had to have increased the quota.

So, to ensure sales stayed at last year’s level, that 300 billion in subsidies they provided needed to have gone up. Now, instead, they reduced it to 250 billion. So, they cut and sales plunged. I mean, you outlined the degree to which sales were down in May at the very beginning of this. I mean, I think auto sales are down 16%. Furniture sales, white goods sales are down double digits as well. So, Beijing made a decision not to throw good money after bad and accept a sharp drop in retail spending in favor of less debt. So that’s the first thing. I mean, that’s a conscious decision like, okay, we’re not going to stimulate the way that we used to.

We’re going to pare back debt because this is not doing what we’d hoped it would. Second thing, SOE remittances, state-owned enterprise remittances. Now, I’m not sure we’ve spoken about this on the podcast, but we’ve written a heap about it. At the end of last year, the central government ramped up the remittances that centrally owned state-owned enterprises are required to pay to the government. So, as a percentage of their profits, it went up from almost all centrally owned state-owned enterprises by between 10 and 15 percentage points.

Now, that’s great for government revenue, right? But it is a meaningful hit to investment. And that’s because SOEs, they use profits as seed money for new projects. Any new investment project requires a certain amount of equity before the firm that’s making the investment can go out and borrow. It’s usually about 20% of the value of the project. So, if SOEs have fewer retained profits, it means that they have less seed money for investments. And so that seed money gets massively leveraged up by borrowing.

And so, it means having the government take a bigger share of SOE profits make meaningfully less investment. We estimate it could reduce fixed asset investment this year by 2.3 percentage points. Now, that’s a back of an envelope calculation, and there’s a whole lot of caveats on that. But the point is that Beijing here has chosen to increase fiscal revenue, over boosting economic through investment. In fact, it’s not even about boosting economic activity. It chose fiscal revenue while knowing that the trade-off would be less economic activity through investment.

So, I think the thing to take away from both of these things is that Beijing realizes that the drag on domestic demand is structural. There are no band-aids that will tide things over until the economy recovers. So, the acknowledgement that you need to keep doubling down on the consumer subsidy program because consumption isn’t going to come back until the underlying problems are fixed. Specifically, the property bust is over, that local government fiscal shortfall is dealt with, and perhaps industrial overcapacity is dealt with.

And so I think that’s where it is, there’s this recognition of like, well, look, borrowing more and more, it’s not fixing anything. All it is, is it’s good money after bad. It’s just about trying to get an extra percentage point of growth, and ultimately it doesn’t really fix anything. And so, yeah, those are my first two, which kind of brings me to the last thing.

Andrew: Well, what’s your last thing?

Dinny: So my last point is it’s less about government policy and it’s more about what the PBOC Pan Gongsheng, PBOC Governor Pan Gongsheng said at the Lujiazui Forum in June. So, you know, Pan has given a speech at this thing annually for the last few years and he usually uses it partly to make some big policy decision announcements, a real shift in the way that the central bank is doing things, and/or to kind of outline a shift in the way government is approaching a particular issue. Last year, it was all about renminbi internationalization. It kind of very much was a signal that Beijing was kind of seeing a significant shift in the way that the world perceived the dollar and kind of saw, okay, this is now a moment for us to do more to promote the RMB’s internationalization.

And in the year, since then, we’ve seen a huge amount of new changes sort of supporting that effort. Now, the really interesting thing, I think, that came out of Pan’s speech this time round were his comments about credit. Now, the first thing he did was that he noted that the severity of the decline in borrowing by property developers and local government financing vehicles since the peak of the property bubble makes it difficult to maintain the pace of growth.

And he said the remaining loans must first fill this decline before they can be considered as incremental growth. And this is, I thought, was really important. He’s like maintaining the previous growth rate for all credit is difficult and unnecessary. And so, rather, this is what he said, rather than trying to maintain high levels of new credit which inevitably leads to some wasteful investment, Pan said this slowing down and improving the quality of loans may become one of the new normal modes of macroeconomic operation.

So, in short, Pan seems to be laying the groundwork for even slower credit growth and acknowledging that the payoff for keeping credit growth high is declining.

Andrew: Well, so, you know, I guess the final question, so you’ve made the case, right? I think, again, convincingly, like this sort of needs to happen. There are structural drivers that the government sees, pushing them to act now. You even have people like Pan Gongsheng, PBOC governor saying like, “This is what we’re trying to do.” But what’s your view in terms of the consequences of all this in terms of short-term economic growth?

Because we have seen, of course, before policymakers enact deleveraging, that was actually the one of the unintended consequences of the last deleveraging campaign was private sector credit growth, private sector borrowing cratered in a way that policymakers didn’t expect. And then they spent years trying to get more credit resources to the SMEs in the small private sector. What do you see as the outcomes, the major outcomes of this effort that you’re arguing is starting to take shape now?

Dinny: Well, I think it’s more of what we’ve already got. So, so far, we’ve got Chinese economists increasingly calling it a K-shaped economy. The up leg of that K is incredibly strong exports. The down leg is domestic demand. And I think domestic demand will stay weak and it will potentially get weaker. It also means export growth is going to become even more important, right? Because the only way for deleveraging to be successful is if China can maintain robust economic growth through robust expansion of net exports.

Now, I think what that means is that that’s going to make it even harder for the EU to get the trade deal they want out of China. I mean, China is going to be even less willing to make concessions. The question is, though, is whether China blinks. So, it might want deleveraging and it might think it’s kind of got this perfect environment in which to do it. But what it means is that weakness in the domestic economy is going to be with us for longer, potentially for quite some time, maybe even forever. And the question is whether ordinary people are willing to tolerate it.

Whether the Chinese public can take the pain, is willing to accept this chronically weak domestic demand environment. So, I think that’s really the question. I think what we’re going to have is weak ongoing domestic demand. Net exports are going to become more and more important. The question is just how long is Beijing willing to endure it?

Andrew: Yeah, that is the key question. And I think that will be the determining factor in terms of how long they’re willing to stick with the policy. And, you know, whether the policy of trying to maintain some level of what we’ll call balance sheet integrity for the economy is worth weaker demand, right? So that you can maintain some headroom for borrowing to support demand in the future. It’s all kind of trying to figure out when you want to kind of play that card to support growth because you’re going to have to do it at some point.

But, Dinny, we got to wrap up. This is all super fascinating. We will see kind of the effects on the economy. We will see how this nascent deleveraging effort plays out. I think you’re early on this. You know, you’ve been kind of looking at this for a while, testing it out. I think hearing people again, like Pan Gongsheng say it, doing our own analysis of various policy tools that have been sort of being deployed. Again, you make the strong case. So, I think it’s a good call. We’ll see kind of how it plays out, whether it’s a good early call.

And I think, like I said, you’ve convinced me. So, I appreciate you walking us through this today. Really fascinating stuff as always, man.

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

Andrew: All right. Yeah. Good to see you. Good to be back on the pod. And thanks, everybody, for listening. We’ll see you next time, everybody. Bye.

On this week’s Trivium China Podcast, host Andrew Polk is joined by Trivium’s Lead Macro Analyst Joe Peissel to unpack the latest economic data and what it reveals about the increasingly uneven nature of China’s growth story.

The two discuss:

• Why China’s economy is increasingly operating on “two tracks”

• The continued boom in AI, semiconductors, clean energy, and export-oriented manufacturing

• Why much of the rest of the manufacturing sector is struggling

• The first year-on-year decline in retail sales since the pandemic

• What collapsing auto sales reveal about the limits of Beijing’s trade-in subsidy program

• Why consumer confidence continues to deteriorate despite policy support

Andrew and Joe also examine the growing constraints on policymakers as fiscal pressures mount across the country.

Overall, the discussion reveals an economy that remains remarkably strong in a handful of strategic industries — but increasingly fragile everywhere else.

Transcript:

Andrew Polk: Hi, everybody. Welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium Co-Founder, Andrew Polk, and I am joined today once again by our Lead Macro Analyst, Joe Peissel. Joe, how are you doing, buddy?

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

Andrew: Yeah, great to have you on. I am back in Washington, D.C. and getting settled in after a week in Shanghai. So, it’s good to be back on the pod and glad to have you on. We are going to talk today about the latest monthly macro data as we do each month. And this one in particular is going to be quite interesting because the macro data, some of it’s very bad. And it also really just shows how unsustainable, I think is a really good snapshot of how unsustainable China’s growth model currently is.

So, I don’t want to give away too much, but we’re going to getting into all that with Joe. But of course, before we do, we got to start with the customary vibe check. Joe, how’s your vibe today?

Joe: My vibes are good, Andrew. I live about three minutes from the sea. So, on my lunch break, I went for a swim, first swim of the summer. I mean, it’s pretty horrible because the sea’s still freezing and, typical British weather, it started raining halfway through my swim. But I came out of the sea feeling invigorated and still invigorated for this podcast.

Andrew: Amazing. I love that. I love that. Wow. I didn’t realize, I knew you lived close to the water, but I didn’t realize you lived three minutes away. That’s awesome.

Joe: Yeah, I can see it. I can see it from my window. I’ve timed it. It’s literally a three-minute walk to the beach. It’s glorious.

Andrew: That’s amazing.

Joe: I’m sure it will be glorious once the sun comes out and it stops raining mid-swim.

Andrew: That is one thing that I don’t love about Washington and didn’t like about living in Beijing. I like to be close to the water. So maybe at some point in my life, I will be living on the water again. But I’m jealous of that. And it’s a great vibe check. Love that you get to dip in the ocean in the middle of your lunch break. My vibe is still jet lagged just back again from China, but it was great. I mean, I talked about it a little bit last week, like we had 10 Trivium people together in one room, which almost never happens.

I think that’s the most people, most Trivium colleagues that we’ve had together physically in one place ever. So always pumped, always interesting, also to hear from executives on the ground what they’re seeing, some really interesting anecdotes, specifically on kind of what the local government chicanery around still doing the audits, the back taxes, all that stuff. So that was really interesting. I will say one of my colleagues said I need to be more energetic at the beginning of the pod. So, I’m trying to bring some of that energy.

Feedback is good. I welcome constructive criticism. So anyway, that’s a kind of scattershot vibe check, but that’s all going into my vibe today. So, with that out of the way, I also have to do quickly the housekeeping up top. The number one thing today is just to let listeners know that we’re going to be off for the next couple of weeks. I’m going to be on vacation. I had hoped to maybe pre-record a couple of pods, but unfortunately, time did not permit that.

And so, we’re going to be off until the first week of July, but that will give us a chance to kind of reset, get some new content going. So sorry for listeners that you’ll have a couple of weeks without us, but we will be back in your feed soon. Otherwise, the typical housekeeping reminder, we’re not just a podcast. 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 navigating domestic policy in China, 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 subscription products, both free and paid. They’re all Chinese policy intelligence, Chinese policy tracking, monitoring, and analyzing products, but they’re products around tech policy, markets policy, any kind of policy that’s going to impact business.

So definitely check those out if you haven’t had a chance to yet. You will definitely find the China policy Intel option you need on our website. And finally, I always say it, but I mean it, tell your friends and colleagues about Trivium and about the podcast. It helps us to grow the listenership, grow the business, which is what we’re trying to do here. So, we really appreciate those word-of-mouth recommendations. All right, with that stuff done, Let’s get into it, Joe.

So, I already previewed it a bit. China’s economy slowed significantly throughout May after really a pretty solid start to the year, we should say. But what’s the big takeaway from the May data? What’s your headline?

Joe: So, I think the big headline is this is a clear two-track economy now operating in China. And by that, I mean that manufacturers and the export base that’s related to AI and to clean energy is booming and continue to boom throughout May. I mean, the numbers are just striking. So, exports grew by almost 20% of which semiconductor chip exports more than doubled, computer hardware up more than 70%, car exports and batteries up more than 40%, just crazy numbers, absolutely booming in these segments of the economy. And of course, all this export activity, unsurprising, it’s feeding through to manufacturing activity.

So, manufacturing output of those industries also grew really strongly. Output of semiconductors and consumer electronics grew by double digits. Manufacturing of cars almost hit double-digit growth. So, really strong exports leading to really strong manufacturing output in one part of the economy. But when we look at China’s manufacturing base, why I refer to it as two-track is put AI and clean energy aside, and the rest of China’s manufacturing sector, particularly that that’s more related or more reliant on domestic demand, isn’t performing anywhere near as well.

So, we could think of things like metals processing, or petroleum processing, or textiles production, even things like food manufacturing, beverages, all of this stuff that some of it is exported, but the proportion of exports is much smaller than AI and clean energy. So, these more domestic-oriented industries, the manufacturing either grew really slowly, or in a lot of cases, manufacturing output actually declined. And clearly that’s domestic demand story going on. So that’s what I mean by a two-track.

You’ve got one part of the economy kind of heavily reliant on exports and booming. The other part of the economy that’s more reliant on domestic demand is struggling to grow or, in some case,s actually declining.

Andrew: Yeah, we’ll get into the domestic demand piece of that in just a minute. Something I was just thinking about while you’re saying that is, you know, when you break it down like that, everyone obviously externally is unhappy with China’s export-driven model currently. But it kind of sounds like, from this data at least, China’s basically riding the ai and clean energy boom, as are many economies. The U.S. economy is riding that boom, of course, is more domestic, but when you think about it that way, a lot of their exports are growing because that’s where the specific growth in industry is throughout the globe, and also because these companies are really competitive in these areas — AI and chips production and related items and clean energy in particular.

What do you think about that? In a way, should we give China, I don’t know, not more of a pass, but they’re clearly just hitching their ride or hitching their wagon to a global economic trend in a way? I don’t know. What do you think about that? Does that provide any area for China to push back against the European export-dependent economy model in your mind?

Joe: Well, I mean, I’m not sure whether, from a European or from a Western policymaker perspective, I’m not sure whether that’s a reason to give China a pass because it’s still concerning. I mean, they’re seeing a hollowing out of their industrial base because China is so competitive. That’s concerning from a Western economic perspective. But I mean, I certainly think we can give China credit for running an extraordinarily successful industrial policy over a number of decades, right? It’s this tried and tested playbook of identify kind of upcoming and emerging technologies, throw loads of money at it, utilize its ultra-competitive domestic market to build world-leading firms, and then start exporting.

And we see that with solar, with batteries, with EVs, you name it. It’s the same tried and tested playbook, and it works really well. The consequence of that is that China then becomes this integral part of the global manufacturing supply chain. And so even if countries want to diversify, or even if countries are mad with Beijing’s policy toolbox. There’s nothing they can really do about it because they’re reliant on Chinese intermediate inputs, or in some cases, Chinese final products to grow their own industrial base or to grow their own economies. I mean, think about decarbonization.

Lots of economies can’t decarbonize without Chinese clean tech. So, I don’t think it’s a case of giving China a pass on its industrial policies, but it’s more just about giving it credit. It’s worked really well. And this is part of the reason why China’s achieving such strong growth in these areas.

Andrew: Great points. Yeah, I think that’s a good framework, giving them credit for being able to look ahead and say, you know, this is what seems to be upcoming, and owning kind of the clean tech space in particular, I think makes sense. Of course, totally understand all the complaints, you know, the subsidies and competing on a level playing field. But as Cosimo, our colleague Cosimo Ries, said last week, you know, in many cases, especially in Europe, like local companies have had the chance to step up and just decided they don’t want to do it, right?

This isn’t an industry they want to get into, various parts of the clean tech supply chain. So, again, not trying to like, as you say, give China a pass per se. I’m just trying to kind of tease out whether this issue is a little bit more complicated than the politicians often seem to make it.

Joe: Yeah, it’s not as simple as saying subsidies and an unlevel playing field. It doesn’t always make sense. Actually, this is a bit of a diversion, but I always chuckle when I think one of the things that people complain about is, or politicians might complain about, is Chinese government providing cheap credit to their manufacturing base, along with all of these other support, kind of overlooking the fact that the ECB ran negative interest rates for the best part of the decade or something like this.

It’s definitely more complicated than simply saying subsidies and an unlevel playing field. China also just has a very successful, ultra-competitive industrial policy toolbox.

Andrew: Totally. I mean, again, we don’t want to belabor this, but there are two things I will say. One is I recently, so on the American side, I often talk to U.S. government officials, U.S. policymakers around like, should we at least think through how U.S. policy might be contributing to the imbalance? Because, right, this is a global economy. An imbalance on China’s side is an imbalance on someone else’s side by definition, right? And so, everyone seems to think China is the motive actor.

But at the same time, are we undertaking policies that are sort of keeping us from being as competitive or keeping us running very large current account deficits? Which I think the answer is almost certainly yes in the latter case. The other thing, I saw something online recently. This is kind of zombie-brained China takes where someone was talking about how, yeah, China’s auto industry is competitive, but they learned from and stole the tech from the Americans.

And it’s like, there’s like very little U.S. or other tech in Chinese EVs. Like, these are just totally different products. Just because they carry you on the road doesn’t mean they’re the… Like the EVs and ICEs are totally different products. And U.S. companies have proven they really can’t compete on EVs because they aren’t good at the tech and the software stuff. They’re really good at making the engines. But, you know, the tech and the software, and then the internal part of the car is actually pretty easy.

You see that because companies in China, like Xiaomi or Huawei, who are tech companies, who’ve never made a car before, can spin up a pretty decent model in a few months. Anyway, this is all another pod, but I just kind of wanted to layer in some of these bigger ideas to the monthly data. All right. So that’s the story on the strength of the economy, very clearly tied to AI, clean energy, and particularly to the export of those products, those industrial products. The issue obviously is domestic demand. You already previewed it, that it was not great, but talk to us a little bit more about what that looked like.

Joe: Yeah, so May was pretty significant in that retail sales of consumer goods declined. They fell by 0.6% in May. That’s the first decline in over three years. So, the last time retail sales of consumer goods declined, this is year on year, right? So, May 2026 relative to May 2025. The last time there was this year-on-year decline was during the pandemic. So, we’re talking over three years ago. So that’s pretty significant symbolically, if nothing else. And some of the biggest drivers of this decline were these big-ticket items, which we’ve talked about previously.

So, autos, home appliances, furniture. And these things have fallen by double digits or close to double digits. In autos’ case, I mean, sale of autos collapsed by, I think in value terms, 17%, 18%. And in unit terms, in models, I think it’s over 20%. It’s just huge decline. Now, why is that significant? Well, that really tells us that the government’s trade program, this subsidy-driven consumption stimulus has totally run out of steam. It’s no longer working. And we’ve talked about this before, so I won’t labor this point, but that’s to be expected because what trading subsidies do is encourage consumers to upgrade early.

So, it pulls forward future demand. So as a consumer, if I was thinking of buying a car next year, maybe I’ll buy it this year instead because I can take advantage of the subsidies. So, we saw a huge surge in sales of these items, these same big-ticket items in 2024, 2025. It’s kind of no surprise that the program’s now come to a standstill, it’s no longer stimulating demand for these items. But consumption weakness goes well beyond just these big-ticket items. So, we saw sales in a broader range of categories as well.

Things like sports equipment, recreational equipment, jewelry sales, things like this. So, this is really reflective of declining, well, a decline in consumers’ willingness to spend, a decline in consumer confidence. Consumer confidence, as measured by the Stats Bureau, they have a Consumer Confidence Index. It’s household survey level data. The most recent data was for April. That’s dropped to like a 12-month low. So consumer confidence is declining again from an already very low base.

I think there’s maybe a couple of caveats to this doom and gloom. So, I think the first thing to say is because autos are such a big part of retail sales just because they’re very expensive, if we exclude autos, so retail sales excluding autos, that grew by 1.1%. There’s nothing to shout about, but it’s just to say this decrease in retail sales, this first year-on-year decline in three years, that’s driven by the decline in autos if we exclude that. There’s still very modest, very low growth in overall sales. The other thing to point out, which is slightly more positive, is spending on services. We estimate that grew by 4.6%.

That’s an estimate because the MBS doesn’t release monthly growth rates for services. But we estimate it’s grown by about 4.6%. That’s a decent rate, right?

Andrew: Mm-hmm.

Joe: Although with a caveat that it’s dropped sharply. So, for comparison, in April, retail sales and services grew by 5.9%. So, it’s a sharp slowdown. So overall, it’s a very bleak consumption picture. I just want to kind of point out those two caveats to say this, like, I mean, you could say there’s kind of pockets of strength, perhaps, in the consumption picture, but overall, it’s very bleak. And it gets bleaker because there’s very little upside for consumption. When we think about, okay, income growth is slowing. In real terms, that slowdown is going to be even sharper because of this uptick in inflation from the Iran war.

We’ve just discussed that the government’s flagship consumption support policy, the trade-in program, has fallen flat. And there’s really limited fiscal maneuverability from the government side to support consumption. So, not only is consumption doing pretty badly now, there’s very little upside for consumption growth in the coming months.

Andrew: Not a pretty picture. I have a few follow-ups. One is, you know, just to highlight for folks, one of the reasons we spend so much time on the auto market is because it’s a, I don’t know if micro is the right word, but it’s more of a micro issue than a macro issue, but it feeds into it and informs the macro picture so substantially, right? As you say, it’s a big chunk of any individual, any household’s income or purchasing basket in any given year or really lifetime, I guess.

It’s a big driver of consumer growth, consumption growth, and also industrial production, exports, and of global competitiveness between China and the rest of the world. So, it’s a sort of industry with outsized importance. So, it’s one reason we spend so much time on it. And obviously, Chinese companies sort of stepping onto the world stage in this industry has been very abrupt in some ways. I mean, in some ways, it’s been a long time coming, but also just seems to have happened very suddenly in terms of Chinese EVs being everywhere.

So, that’s just one thing for listeners to keep in mind is that’s why the auto market’s so important, or one reason. The other question I wanted to ask you is what’s your read on, and I guess we’ll get into this when we talk about the fiscal piece in just a minute, but why aren’t officials doing more to support consumption? We’ve been having this conversation for years, every month for the past several years, but it was pretty obvious that consumption was going to contract this month.

That was all the estimates from various economists ahead of the data release, in large part because the consumer trading program or the consumer goods trading program has been losing steam and was funded at a lower level this year than it was last year. So, this seems like something that could absolutely be seen in advance by policymakers and yet no real action. What’s the story there, you think?

Joe: I mean, that’s a huge question. That could be a podcast in and of itself — Beijing’s reluctance or inability to stimulate consumption. So, one part of the puzzle is kind of this ideological preference for supply-side stimulus. And so, when Beijing releases a consumption support policy, generally, it’s through supply-side stimulus, supply-side support. So, for example, policymakers, they will argue they’re trying to boost consumption by unlocking latent demand, which is essentially the idea that consumers want to spend their money. It’s just there’s not an adequate supply of high-quality goods or services for them to spend their money on.

So, policymakers think, okay, well, if we have a supply-side stimulus to improve or to expand the supply of goods and services, then consumers are going to spend more. So, I think this is one of the puzzle. Actually, Beijing releases lots of “consumption support policies.” It’s just they’re generally geared towards supply-side stimulus, which doesn’t really work in the current macroeconomic climate. The second thing to say is there’s been lots of nudges towards trying to boost consumption. So let’s think about the trade-in program this year. You’re right to point out the level of subsidies were reduced, but the scope of the program was expanded to include things like AI-related products, like smart consumer watches, things like this.

So, there’s actually an expansion in program eligibility into new goods types. There’s a subsidy for consumer loans to encourage consumers to take loans to spend on goods and services. So, there’s been kind of some nudging around the edges. It just hasn’t been that effective. One of the reasons is because of a lack of fiscal firepower, which is really like the second part of this puzzle, which is like the policymakers, particularly at the local level, don’t have the fiscal maneuverability to stimulate consumption.

Policymakers at the central level don’t really have the desire because of these ideological reasons. They’d rather use that money for infrastructure stimulus or for supply-side support. I think those are the two of the main reasons.

Andrew: Well, so a couple of things. One, I want to share this anecdote, which I sort of alluded to earlier in the pod. I had a bunch of good anecdotes from my trip to China, but one of them, you talk about fiscal maneuverability and all this stuff, the chicanery around local government finances. We were talking to a company in China last week, and they were talking about how they had been waiting to get some subsidies for an investment; foreign company, which also gets subsidies.

People should remember that foreign companies also receive subsidies in China, but had been waiting and waiting, waiting to get the subsidy for an investment they were making — excuse after excuse, apparently from the local government. And then they had the ceremony, I believe, to mark the investment or kick off the investment. And they got the subsidies announced or whatever, officially paid around that ceremony. And then the very next day, the local government gave them a tax audit and fined them the exact amount of subsidies they had just received in back taxes the very next day.

And I just like, you multiply that times a million, and that’s happening just all over China. Dinny McMahon, our colleague, is pointing out that that’s basically local government fiscal austerity, right? China style. But I just thought that was too good of a story.

Joe: Not even subtle, right?

Andrew: Oh, not at all.

Joe: They could have waited a week or something.

Andrew: Yeah, yeah, yeah, exactly. And then the other thing I was going to ask you about on the consumption side, this is another company, this wasn’t for my trip, but a company we’ve been working with that’s a consumer-facing company. We were working with them on some conversations, basically with kind of public comments that they wanted to make around consumption. And they were making the argument, which I thought was smart, and I think partly true, but also maybe partly just diplomatic, which is they’re saying it’s not that consumption’s weak fundamentally.

It’s that consumers are becoming more value-oriented and more discerning. And so, companies have to bring better value if they want consumers to buy their products. What do you think of that as a framing for what’s going on? I guess it’s not mutually exclusive. Of course, when consumer confidence goes down, consumers become more discerning. But I don’t know. Can you just talk me through…? Sorry, I also think that’s actually a good framing for a company to take and think through.

Because whether or not it’s because macro consumption is weak or consumption is weak from a macro level, it is true that you’ve got to provide more value to the Chinese consumer, to find a way to do that. But anyway, I just wondered what you thought of that as a framing.

Joe: I think that’s quite a smart way to think of it. Particularly as China has a growing middle class, they kind of satiate their demand for low quality or for cheap, accessible goods and services. And so, you can kind of imagine that their demands also move up a value chain, right? They start to demand higher quality goods and services, which don’t necessarily exist at the moment or aren’t supplied, there isn’t adequate supply.

I mean, that actually goes back and gives weight to policymakers’ idea about trying to unlock latent demand.

Andrew: 100%.

Joe: Yeah. And so maybe there’s some truth behind that. Maybe this latent demand approach is part of the formula that’s needed for trying to unlock consumption. I think that’s probably part of the story. I mean, if you look at the data, there’s undoubtedly other structural factors at play here. Collapsing consumer confidence, slowing income growth, dropping property wealth. All these things are going to constrain consumers’ willingness to spend as well. But I think there’s some truth to that. I think in a similar vein, there’s also an argument that if you look at China’s consumption, not in terms of value, but in terms of volume, so you could think about, I don’t know, the number of cars per capita or the number of shoes purchased per capita, then in terms of volume levels per capita, China’s consumption isn’t that far off more developed economies.

Part of the reason in value terms it’s much lower is because the quality of these goods and services they purchase is much cheaper because the quality is lower. And so again, this kind of feeds into the idea that perhaps one of the ways to unlock more consumption is to actually try and move up the value chain, expand provision of higher quality goods and services, which is super relevant from a company perspective, right?

Andrew: Yeah. Yeah, that’s a really good point. Yeah, I think we always poo-poo the idea of this, like, oh, there’s just not the types of consumer goods that people want, but then maybe there is some validity to that. And definitely, companies should basically be thinking that way. And also, I mean, they should be thinking, like, we need to bring more value, right? Because in this kind of environment, consumers are going to be more choosy. But also, everything’s true when it’s China. Sort of everything’s true at the same time, right? So it can be weak consumer confidence. It can be more discerning. It can be moving up the value chain. It can be a weak macro environment, kind of all rolled into one.

Joe: I think even if we accept that unlocking latent demand is part of the puzzle, the reason it’s not working at the moment is because if Beijing plays or rolls out these policies without addressing the other macroeconomic issues, like slowing income growth or collapsing consumer confidence, then only increasing latent demand without addressing these other issues isn’t going to stimulate consumption. Consumer willingness to spend still remains low.

Andrew: Yeah. And a lot of that’s in the property market, which we’ll get to in a minute, which of course has undermined Chinese wealth and Chinese wealth expectations. But before we go to property, the other piece related to fiscal weakness, so we talked about lack of government spending to support consumption, but also fiscal weakness or the lack of a fiscal expansionary environment has undercut infrastructure spending as well. So, talk to us about the infrastructure side.

Joe: Infrastructure declined 9.5% infrastructure spending in May, which is just a, I mean, it’s a striking data point when we think about, A, the importance of infrastructure traditionally as a growth engine, but also how vocal Beijing has been about boosting infrastructure this year. So, it’s remarkable that after all this lip service policymakers have paid to infrastructure, it’s actually declined. This is the second consecutive month of declining infrastructure spending. And there’s a couple of reasons behind this. So the first is related, and Andrew, you and I talked about this the last time I was on the pod, so I won’t kind of go into too much detail about this, but state-owned enterprises, they are now obligated to remit a larger proportion of their profits to central government than they did before.

And it’s a huge step up. In some cases, it’s up to a 100% increase. So, the amount of profits, the amount of retained earnings of state-owned enterprises transferred to the government has doubled in some cases. So, this is hammering, absolutely hammering their retained earnings. They’re holding less capital. And as a consequence, they invest less because they use the capital as an equity injection into any sort of infrastructure project. So, that’s part of the reason why infrastructure has declined is because SOEs have less retained capital because of this new policy. And the second reason is special purpose bonds, which is a local government debt instrument, which traditionally was used to fund infrastructure investment, is now being diverted to other things.

So, infrastructure-related SPBs in May dropped, the issuance of infrastructure-related SPBs dropped by 60% in May. And that’s because a big chunk of these SPBs are no longer being earmarked for infrastructure. They’re being used for things like paying down hidden debt, or they’re being used for land buybacks, which is really a property support policy. The idea being if a property developer has bought land and they haven’t utilized it, so they’re sitting on this unutilized land, then the local government buys that land back off the property developer. The idea being to try and inject liquidity into property developers, which have a huge credit crunch.

So, kind of a good idea in principle, but this unintended consequence of crowding out infrastructure investment because all this money is instead being spent on paying back hidden debt and land buybacks. And as a consequence, infrastructure is now declining.

Andrew: Just another thing to undercut domestic demand. I think when we talk about domestic demand, we often kind of emphasize the consumer part of demand, but infrastructure and investment is also part of domestic demand, right? And so, just further sort of weakens the domestic economies need to buy up products. So also translates into weak imports. And, you know, I was actually, again, on my trip to China, one of the other presenters at one of the things I was at was talking about, like, what is China even going to import in the future? Like, with the property sort of realignment, they are not importing anywhere near the commodity base they were for construction. And then, even we’ve seen the pieces in The FT and others recently that China’s really ratcheted down its oil imports.

And it’s like, is China going to be importing anything for the rest of the world? So, that’s also a problem for other countries, right?

Joe: Yeah. Kind of just to real briefly touch on imports because import growth was really strong in May, but that’s a little bit misleading. That’s because of a huge increase in the cost of commodities and raw materials. In volume terms, China’s import of commodities actually decreased year on year.

Andrew: Yeah. And that seems to be a trend.

Joe: Yes.

Andrew: Okay. Last piece, property sector. You already touched on it a little bit, at least to how developers and their financing are sucking up some of the fiscal resources that would otherwise be diverted to, or not diverted, but spent on infrastructure. But talk to us about what you’re seeing in the property market, which the previously all important property market, increasingly less important, but still highly germane to the outlook for the economy. What do you see in there?

Joe: Yeah, increasingly a smaller part of China’s total economy, but still dragging economic activity as of now. So, for a while, we’ve been tracking the property sector and saying there’s kind of these very early tentative signs that the property market may, at some point, start to bottom out. I’m being really tentative in my language there, right? But what I mean by that is home sales, the decline in home sales is moderated for six consecutive months. That’s really positive, actually, if we’re trying to look for the market bottoming out.

Same idea of house prices. House price declines have slowed. And in first-tier cities, prices are now growing. So, all this stuff kind of thought, okay, well, maybe this is the beginning of a bottoming out. But May’s data kind of pours cold water on that idea. We saw an acceleration in the home sales decline. So, it kind of reversed this six consecutive months of decline moderation. And other real estate metrics, their decline also quickened. Real estate investment declined by almost 25%. That’s the highest on, I don’t know how long. It may be a record drop. I’m not sure. Don’t quote me on that.

But earlier this year, it was declining by somewhere between 10% and 15%. It’s now accelerating April to about 20%, in May to about 25%. So, kind of, again, a reversal of what we are hoping was the beginnings of a bottoming out of the real estate sector. I think, particularly when we think about real estate investments, real estate construction, these metrics are going to keep falling for a long time, even if we do eventually see a stabilization in home sales and prices.

And that’s because right now, property developers are sitting on a huge amount of unsold stock, essentially a massive infantry overhang, which they want to sell down before they start building new properties. And interestingly, we’re also seeing a shift in consumer preferences away from new homes towards secondhand homes, which are cheaper, and there’s not a risk of completion delays and things like this. So, I mean, it’s kind of much the same with the property sector, yet this decline is ongoing. These tentative signs we thought might mean at the beginnings of a bottom out have reversed in May. Yeah.

Andrew: The drama continues.

Joe: Yeah.

Andrew: We keep thinking there’s got to be a bottom at some point, but it’s a protracted adjustment. Interestingly, I think we’ve talked about this on the pod, the policymakers have even stopped, in some documents and some for a, talking about property in the context of the macro economy. Instead, they talk about property policy in the context of social policy. Like, here’s what we want the housing market to look like from an affordability standpoint, from an urban renewal standpoint, from a livability standpoint.

I mean, they’ve officially made the transition. This is not a macro growth driver anymore. And so, this is the new world we’re in. Okay, so we’ve gone through the main parts of the economy. Let’s wrap it up. So, two kind of related questions. Put this in context. So, we had a really great beginning of the year. As I said, Q1 data was better than I think policymakers expected, most analysts expected. Did Beijing just bank Q1 and say, “Okay, that got us a long way to where we wanted to go in terms of the growth target for the year. And so, we can just kind of take our foot off the gas pedal”? Or what’s going on? And then this data was bad in May. Is it going to get worse?

How bad is it? Was it hair-on-fire bad? Or I don’t know. Just talk to us about the contextual piece and what you expect going forward, both from the economy and from policy.

Joe: From a policy perspective, I don’t think we can characterize it as policymakers taking their foot off the pedal so much as there’s been a bunch of external events which have really thrown a spanner in the works, right? Iran war, imported inflation, tariff war, all this geopolitical uncertainty. So yeah, whilst I don’t think we can say, “Okay, well, policymakers just kind of chilled out and have taken their foot off the pedal,” what I do think we can say is that they’ve been kind of remarkably consistent in their reluctance to unleash any big bank stimulus. And we say that in the monetary policy side and the fiscal policy side. So, in many respects, policymakers have been very disciplined. Despite these external events, they’re sticking with their game plan.

Now, the outlook for the year, a lot of it depends on exports, right? Because that’s the main growth driver, not just through the trade surpluses that contribute to GDP, but through supporting manufacturing and the spillover on the labor market and wage growth and things like this. Now, the issue being, as we discussed earlier in May, China’s export growth was really centered on two areas — AI and clean tech. And that leaves the economy very vulnerable to changes in geopolitical dynamics, right? So, I mean, that’s certainly something to look out for is what’s going to happen with China’s trade dynamics.

In terms of GDP overall, I don’t think we’re at the stage where we should be panicking and thinking the economy is not going to hit its growth target. Remember, Beijing has flexibility this year. Their target’s 4.5% to 5%, or 4.5%. I think it was 4.5% to 5%, yeah. They hit 5% growth in Q1. So, they’re way above the baseline of their targets. And I think there’s enough potential tailwinds in terms of fairly robust services growth, fairly robust manufacturing output, obviously, really strong export growth that’s going to get the economy over the line.

But given all these challenges we’re seeing, particularly the decline in retail sales, the reversal in the property sector, the slowdown in the property sector decline, which is now accelerating, I mean, we’ve adjusted our expectations. We don’t think the economy is going to hit the target, at the top range of that target towards the 5%. It’s going to be close to the 4.5%, 4.6% area. Yeah, kind of the long and short of it is there’s a bunch of headwinds, but I think there’s sufficient tailwinds to get the economy over the line.

Andrew: Yeah. I think we often sort of focus on the headwinds to growth and forget that there are still some tailwinds. This is an economy that still has some fundamental strengths. Obviously, advanced manufacturing being one, and as you say, consumer services being increasingly one as well. You’re 100% right that the external environment is going to be important, which is, just to tie that back to our conversation last week or my conversation last week with Joe Mazur and Cosimo Ries, this could become an issue if Europe decides it’s ready to get into more of an overt trade war with China.

But I did like there, again, I think it was an FT headline that said something like, if Europe starts a trade war, China will end it. I was like, oh, okay. Well, really appreciate you walking us through all this. Just for listeners, we have a whole service that goes through macroeconomics and dynamics that impact anyone who’s, first of all, running business in China, but also investors thinking about China, especially from a macro standpoint. It’s our China market service. Joe does a bunch of work on that. We have a whole team that works on that. So, a little bit of an organic plug there for that work.

As I said at the top, check out our website or reach out to us and we can tell you some info about that. The team does really great work. And we’re going to throw some of Joe’s charts in the pod notes this week because some of them are quite striking, especially like the absolute reliance on semiconductors and clean tech when you see it in a chart compared to the other industrial parts of the economy. It’s pretty striking. So, be on the lookout for that. Otherwise, Joe, thanks, man, for the time. Really appreciate it. Really appreciate your insights today.

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

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

• On this week’s Trivium China Podcast, host Andrew Polk is joined by Trivium’s Head of Geopolitical Research Joe Mazur and Head of Clean Energy and EV Research Cosimo Ries to unpack these two critically important developments in China’s external relations.

First, Andrew and Joe break down Xi’s first trip to North Korea in nearly seven years and what it reveals about Beijing’s priorities amid shifting regional dynamics.

The two discuss:

• Why Xi chose North Korea for his first foreign trip of 2026

• China’s complicated relationship with its only formal treaty ally

• How North Korea’s growing ties with Russia are reshaping Beijing’s calculations

• What practical outcomes may emerge from the visit

Then, in the second half of the pod, Andrew, Joe, and Cosimo turn to Europe, where concerns about Chinese industrial competition are fueling calls for tougher trade and investment measures.

The conversation covers:

• Whether “China Shock 2.0” is the right way to think about Europe’s challenges

• Growing tensions between the EU and China over trade imbalances and industrial policy

• Why clean energy, EVs, and advanced manufacturing sit at the center of the dispute

• How Chinese companies are responding through localization and investment in Europe

• Whether Europe and China are headed toward a full-blown trade war – or a prolonged period of managed friction

As always, the guys cover a lot of ground, so sit back and enjoy!

Transcript

Andrew Polk: Hi, everybody, and welcome to the latest Trivium China podcast, a proud member of the Sinica Podcast Network. I’m your host, Andrew Polk, and today I’m joined by two of my colleagues, a semi-regular on the podcast — First off, Joe Mazur, our Head of Geopolitical Research. Joe, how are you doing, man?

Joe Mazur: I’m doing great.

Andrew: Good to have you here. And then we have a new Trivium guest on the podcast, and that is our Head of Clean Energy and Renewable Energy Research, as well as our Head of EV Research, and that is Cosimo Ries. Cosimo, great to have you on, man. How are you doing?

Cosimo Ries: Yeah, doing great. Glad to be on the podcast.

Andrew: Yeah. So, with Cosimo and Joe today, we’re going to get into a little bit of geopolitics. So, we’re going to talk about the sort of big geopolitical news when it comes to China with Xi Jinping’s trip to North Korea over the past few days. So, we’ll talk about sort of what happened there and what the implications are, how to read it. And then we will also talk about sort of the budding, heightening tensions between the EU and China.

Tensions have been rising for a while, but over the past few weeks, they really seem to have taken another leg up. And the EU and China seem basically like they’re on the precipice of potentially yet another trade war or another front in the trade war for both economies. So, we’ll talk through that. Joe, of course, is our head of geopolitical research, so he’ll bring that aspect.

And then Cosimo not only is our head of renewable energy, clean energy research, and EVs, but also is our resident Italian citizen. So, we’ll bring a perspective, a European perspective, but also a lot of this clean energy stuff is key to sort of that whole trade dynamic and diplomacy dynamic. So, we’ll also bring his expertise there as well. Excited to get into it. But before we do, we’ve got to start with the customary vibe check. Joe Mazur, how’s your vibe today?

Joe: My vibe is good. Cosimo and I are usually based in Beijing, but we are in Shanghai this week. It’s kind of a sort of a company get-together/retreat, get to see some colleagues that we haven’t seen in a while. And so, I’m going to say my vibe is grateful for a change of scenery, not only in geographical terms, but also the fact that it’s been quiet on the U.S.-China front, which means I get to take a kind of a break from Trump watch.

And so, it’s quite invigorating to not just be going through the same routines, whether that’s your same old commute or the same old, you know, issues you’re looking for in U.S.-China relations.

Andrew: Yeah, waking up to see what bleats came out overnight or what Truth Social posts came out overnight. Yeah, everybody needs a break from Trump Watch, I think. You most, more than most.

Joe: Yeah, I’ll enjoy it while I’m laughing.

Andrew: Cosimo, how’s your vibe?

Cosimo: Yeah, I second what Joe said. And it’s great to be down here hanging out with colleagues, getting some good food in. Yeah, and the space I’m watching, it’s been very interesting and eventful, I think, especially in terms of Chinese auto-EM’s overseas expansion efforts. It’s really picking up, really blistering pace. So yeah, always interesting that things are happening.

Andrew: Yeah. Well, you definitely are in a pretty sexy space when it comes to your research agenda, your research portfolio. We’ll definitely get into that. I’m excited to have you on for the first time to talk about some of that stuff. I, similar to you guys, am also in Shanghai. I hesitate to say because I was not very good on this trip about letting folks outside of the company know that I was coming. So, I set up very few external meetings. So, I’ll probably have some listeners yell at me after hearing that I’ve been in town for the week and I didn’t reach out to many folks outside of Trivium.

But the whole point of the trip was to hang out with you guys, the Trivium folks on the ground. And it’s been fantastic as always. Always love getting here and seeing the team and catching up with everybody and hearing what’s going on and getting a little FaceTime and getting some excellent Chinese food, of course. So yeah, my vibe is thrilled to be here, which is just a pretty steady vibe for me. Always thrilled to be wherever I am, thrilled to be on the podcast.

But we, of course, will get into all the meat of this stuff, but we also have to do some quick housekeeping. Just a quick reminder to everybody, we’re not just a podcast here. Trivium China is also a strategic advisory program that helps businesses and investors navigate the China policy landscape. And that, of course, includes domestic policy in China and a range of issues, as well as policy towards China out of Western capitals like D.C., London, Brussels, and others, much of which we’re going to get into today.

So, if you need any help on that front, please reach out to us at hq@triviumchina.com. We’d love to have a conversation about how we can support your business or your fund. That’s hq@triviumchina.com. Otherwise, if you’re interested in receiving more Trivium content in general, check out our website. Again, triviumchina.com, where we have a bunch of different subscription options, both free and paid. We’ve got policy intel updates around the markets for investors, policy intel updates on tech policy, on general business developments for business executives. So, you’ll definitely find the China policy intel option that you need on our website. So, check that out.

And finally, as always, please do tell your friends and colleagues about Trivium. It helps us to grow the listenership and to grow the business. And we really appreciate those word-of-mouth recommendations. So, with that, let’s get into it, fellas.

We’re going to start with North Korea. Joe, I’ll go straight to you as the expert. Just maybe fill us in, kind of, on the details for listeners who don’t know. When did Xi Jinping go to North Korea? How long was he there? What were the key outcomes? And then we’ll get into sort of what the impacts were and how to read it.

Joe: Yeah. So he was in North Korea from June 8th to June 9th. This is going to be his first visit in very nearly seven years. I think it’s almost exactly seven years since he was in the country last. And what’s also interesting is that this is Xi Jinping’s first foreign visit of 2026, believe it or not. We’re almost halfway through the year, and this is the first time that he’s left China. And this is usually kind of an indication from a protocol perspective that whatever country he goes to first in the new year, or really any time, Xi Jinping can be sort of roused to leave Beijing, that’s a pretty good indication that the country he’s going to is going to be a major priority for Chinese diplomacy in the coming year.

So yeah, I mean, I think probably before we talk about the specifics, it’s worth getting into a little bit of context about China-North Korea relations. And I think, you know, if I can use one word to sum up the relationship, it’s weird. You know, North Korea is China’s only treaty ally, right? So, I think that in the media, we hear a lot of stuff about, you know, oh, Russia is China’s ally, and Iran as China’s ally. That’s not technically true. I mean, sort of a metaphorical sense, they’re maybe aligned on things, but China only has one treaty ally, and that’s North Korea.

And in fact, that was kind of the anniversary that Xi’s trip was centered around. It was the alliance treaty that the two sides signed in 1961. So, commemorating the 65th anniversary of that. But it’s a weird relationship because on the one hand, they’re ideologically aligned in the sense They’re both communist powers, albeit they look kind of very different in practice in terms of how their economy and political system is structured. But there is sort of a historical pedigree there, and that was one of Xi Jinping’s kind of major talking points, and we’ll get into that a bit later.

And of course, China is by far North Korea’s biggest trade partner, provider of foreign aid, etc. It’s not even close. But equally, I think that China has oftentimes kind of looked askance at North Korea, given what a geopolitical wildcard it tends to be, right? I think sort of even dating back to the time of the Korean War, the concern was about instability, right? At that time, there was concern that sort of the Americans and the UN forces would push up right to China’s border.

And sort of, subsequently, the fear of North Korean collapse has been one concern. Something that might send millions of refugees potentially across China’s border. But also the fact that it has sort of been daring the U.S. and other countries to do something about its nuclear program. And sort of that instability on China’s border makes Beijing obviously very nervous. So, it’s kind of this weird relationship where on the one hand they’re technically very close and obliged to support one another. But in practice, I think that oftentimes North Korea is more of a liability than an asset in China.

Andrew: Yeah, well put. I think with the liability piece and also just the moniker of weird, I totally agree. I’m actually reminded, I forget exactly what the anniversary was, but there was some anniversary in China, some big political anniversary. I want to say it was 2017, 2018. And my friend and former colleague, Jude Blanchett, who we were working together at The Conference Board, I believe at the time, or maybe I just left. He’s currently at RAND. I’m sure listeners will be very familiar with Jude, who’s a political analyst on China.

He was on Bloomberg TV, and the host asked him, “What do you think about the fact that Kim Jong-un has sent this congratulatory letter to Xi Jinping on this political anniversary?” And Jude’s response just off the cuff was, well, it’s a little bit like getting a birthday card from your ex-wife. And I thought that kind of summed up pretty well kind of what this relationship is like. With the ex-wife, you’ve still got shared interests in some ways. You’ve got to have a-

Joe: Shared history. Yeah.

Andrew: Exactly. If you’ve got kids together, you have some shared responsibilities. You have obligations to each other. And sort of you have to make it work. So, I thought that was just another way to say weird, I think, is right. So anyway, go ahead.

Joe: And not to mention the phrase that China, I think North Korea also used to describe the relationship as being as close as lips and teeth, which is a very kind of evocative, if slightly weird way of putting it. Anyway, so while we’re in the territory of weird but apt metaphors, there’s another one for us.

Andrew: Yeah, Joe, you and I are as close as lips and teeth, right?

Joe: I will report this conversation to HR immediately.

Andrew: All right. Maybe it’s time to move on. So I do want to press on one point, which is, you said this is Xi Jinping’s first trip abroad in 2026, which is pretty striking. I mean, it’s early June. It’s pretty wild that he hasn’t left the country all year. Part of that’s because this year has really been marked by a steady stream of foreign leaders coming to Beijing. And that’s been characterized in various ways. You know, some people saying, well, with the U.S. being somewhat more erratic or less of a reliable ally, the Europeans are coming over.

Of course, some people characterize it as kowtowing. I think either way, whatever you want to characterize it, the optics are pretty good for Xi Jinping, right? That the steady stream of leaders, including Donald Trump, have been coming here. So, maybe just talk to us about, I don’t know, that aspect of how you put this North Korea trip in that context, even though that’s a wider context. Talk to us a little bit about that. And then also, you know, what does that say about how important this trip was for Xi Jinping?

Joe: Yeah. So, I mean, in this case, it’s kind of funny because the shoe’s a little bit on the other foot. And I think you’re right, kowtowing, whether you’re talking about foreign leaders going to Beijing to meet with Xi Jinping is probably too strong a characterization. But equally, though, I mean, Xi Jinping is, yeah, I’m not going to say like a supplicant because that’s certainly not true given the massive power imbalance. But there is sort of a dimension of Xi Jinping trying to sell a lie with his trip to North Korea.

And the context here is that, to go back a little bit further, following the collapse of the Soviet Union, and maybe even before, I’d have to look at the trade data there, but China’s been sort of, like I said a minute ago, far and away North Korea’s most important economic lifeline. During COVID, the border closed, and that did a lot of damage to the North Korean economy because it was sort of cut off from this important economic lifeline in China. But then with the outbreak of the war in Ukraine, that kind of presented an opportunity for Kim Jong-un.

And since then, he’s obviously dispatched something like 16,000 North Korean soldiers who have fought in Ukraine on behalf of Russia. In return, Russia has bought North Korean munitions, which has provided a boost to the economy. In addition to soldiers, North Korean laborers have been sent to Russia to earn money for the regime. Russia’s been offering oil in return, technology, weapons. And, obviously, for those North Korean soldiers fighting in Ukraine, that’s real combat experience that for as much as the Kim regime depends on the military, it’s a basically untested military.

So, some real-world combat experience. So, in this context, you sort of have Pyongyang tilting more towards Moscow in a way that it hasn’t before. And I think this is something that makes China uneasy, even despite the fact that China is also a close partner of Russia, because it does kind of, to a certain extent, put Kim Jong-un in the position where he can pick and choose a little bit and kind of erode somewhat Chinese influence in North Korea.

I think China’s really eager to maintain or reassert that influence because it’s important for all the reasons I just mentioned earlier, right? You know, best scenario, having leverage over North Korea is, in effect, leverage over the U.S. and South Korea, both of whom want to see the country denuclearized. But equally, it’s an important form of being able to conduct damage control, right? If Beijing gets concerned about how aggressive or how kind of unpredictable or erratic North Korea is getting, it wants to be able to have enough and pull the step in and say, “Hey, chill out.”

So, for both those reasons, it makes sense for China to sort of really jealously guard that influence. And I think that’s kind of been the theme of Xi Jinping’s message was he put a lot of emphasis on historical ties, but also on the future, on continued trade cooperation, governance, experience sharing, and the like. So yeah, really, I think, by Xi Jinping, to remind the North Koreans about the benefits of partnership with China.

Andrew: Great points. And I would say it strikes me also as a pretty sort of easy give for Xi Jinping. It’s not a very long trip. He has the stature of everyone coming to China this year and can kind of say, “Listen, I’m going to come to you as a,” I don’t know, an olive branch or whatever, you know, whatever you want to call it to the Kim regime and say, “We’re going to show you that respect and remind you, like, we’re willing to do that. We want to work with you.” It’s a pretty, I don’t know… It just strikes me as a bit of a savvy move because it’s really pretty low-hanging fruit or very little downside to doing that. Do you agree?

Joe: Yeah.

Andrew: One last piece on this, and then I think we’ll move on to the Europe stuff, which is just, how did potential denuclearization of North Korea feature in the discussion at all? Because that was a part of the conversation between Donald Trump and Xi Jinping. When Trump was in Beijing just a few weeks ago, like three and a half weeks ago, and it’s an issue the U.S. administration really wants to push with China. And my understanding is didn’t really feature it at all. And I think there’s differing accounts between the U.S. and China on this, or at least Trump has said, like, “Oh, yeah, Xi Jinping’s on board and doesn’t want a nuclear in North Korea. Wants North Korea to denuclearized.”

But the Chinese just haven’t said anything about it, I believe. Is that right? Am I getting that right?

Joe: Yeah, that’s correct. So, I mean, as far as I could tell from the readouts I saw from the meetings between Kim and Xi, there was no discussion of denuclearization, or at least there wasn’t one that was mentioned. And you’re right. I mean, there were sort of differing accounts from the Trump visit about how much that was discussed, or if it was discussed at all, right? The U.S. side said they had discussed it. The Chinese side didn’t say if they had one way or another. And I think that that’s sort of in recognition of the fact that there’s absolutely no incentive for the North Koreans to give up their nuclear weapons. Like, absolutely none.

I mean, you could point to a number of examples, the most immediate one being sort of Iran, how sort of the denuclearization process did not help, did not save Iran from U.S. intervention and war with the U.S. You could even point to Ukraine, which gave up its nuclear weapons sort post-fall of the USSR in exchange for security guarantees, which, guess what, were not honored.

So I mean, China’s position has historically been that it wants to see the denuclearization of the Korean Peninsula, which is kind of an interesting way of phrasing it because there’s only one nuclear power on the Korean Peninsula, that’s North Korea. But I think it also kind of implies that obviously China would not want to see South Korea get its own nuclear weapon. It wouldn’t want to see the US stationing nuclear weapons in South Korea. So. it’s a slightly more broad thing. And in the past, China’s been sort of an active participant in trying to get North Korea to denuclearize.

But I think now at this point, there’s a recognition that like, no, it’s never going to happen. I mean, the North Korea’s nuclear status is sort of its ultimate hedge or trump card against sort of US or Western aggression as they would see it. And so, I think probably officially denuclearization is still China’s preference and policy. But if it was discussed, and it may have been, it certainly, I think, Xi Jinping and his team went in understanding that there’s no way they’re going to get Pyongyang to denuclearize.

Andrew: Yeah, so why even push on that issue? I think that totally makes sense. But I think, yeah, it’s pretty well understood and mostly agreed at this point that, yeah, it probably is in North Korea’s interest staying onto those nukes because it just gives it a level of security and outsized importance, frankly, that it wouldn’t have otherwise. We should pivot to the Europe piece of this, but anything else from this trip or just broader China and North Korea that we should be thinking about that you want to highlight before we move on?

Joe: No, not really. I mean, I think what I’ll be watching is if we get a sense of what kind of material support, if any, China has offered to North Korea, right? I got to imagine that in addition to all the rhetoric and just kind of the pageantry of Xi Jinping having gone there, there are probably also some meaty deals that were done, but we’re probably not going to get a clear sense of that until we, for example, look at trade data or get some kind of update on that. So yeah, just seeing what this visit changes in practical terms, if anything.

Andrew: Yeah. Yeah. Okay. Great. Well, thanks for that rundown, Joe. Super helpful. Let’s now turn to Europe. As I mentioned at the top, there’s sort of a brewing Europe-China trade war seemingly on the horizon. Quite a bit has happened in the past couple of weeks with some key European meetings, specifically about China, and then the EU trade commissioner speaking with the Chinese side and also trying to sort of ramp up negotiations, it sounds like. Can you start to give us the lay of and then we’ll bring in Cosimo as well to tell us, you know, things we should be on the lookout for?

Joe: Yeah, I’ll just give some kind of initial context, and I’ll let Cosimo get into the nitty-gritty of it. But basically, this has been kind of something that’s been in train for a while. Europe has been increasingly concerned about its trade imbalance with China and the hollowing out of key industries that support many, many jobs within the EU.

And so, I mean, there’s a number of factors that are converging here. So, one is that Chinese products have increasingly moved up the value chain and compete directly with European companies in a way that they did not before. So, you know, the example par excellence, which I’ll leave it to Cosimo to kind of talk more in depth about, is cars and EVs, right? It’s no longer a case of Chinese cars being kind of an inferior knockoff and a novelty. In a lot of cases, they’re as good or better than their European counterparts at a more affordable price.

So, that’s one. And you see that also in the cleantech industry. But the other is the fact that as energy prices have risen in Europe as a result of the war in Ukraine, and more recently kind of accelerating with the disruptions in the Strait of Hormuz, that’s really crushed the margins of a lot of key European industries. And I think chemicals is a good example here, where this is a very energy-intensive industry, which is very sensitive to the price of energy.

And so what’s interesting about that is while Europe does not import a lot of chemicals in their initial state from China, they do import a lot of the midstream and downstream products, which effectively takes market away from these key European players. So, all of this has kind of, I think, in the first half of this year, led to panic. And I think we’re seeing an inflection point in Europe trying to put together a pretty robust series of measures to counter that on a timeline that’ll be fast enough to save these industries.

Because, I mean, the European Union does tend to be somewhat hamstrung in the sense that it’s process bound and requires a lot of consensus from constituent states, which have their own kind of interests that either overlap or compete or both. And so, for that reason, it is very hard to kind of get an agreement on things in sort of a timely manner. So, some of these measures are aimed at allowing the EU to react more quickly and more decisively than in the past.

Andrew: Thanks for laying out that kind of context there, Joe. And we’ll get Cosimo in here in just a second. But can you also just give us some detail, I mean, there were some recent meetings by the European Commission specifically on this issue, can you just walk us through that process in terms of how the specific meetings that European leaders are having in order to move this issue forward from their side?

Joe: Yeah, so there was a debate at the European Commission on May 29 about China. And the readout that came out from that was we didn’t really get much meat from that, but said the current state of trade investment relationship is not sustainable. And sort of the very next day, China’s Ministry of Commerce fired back and said it would resolutely take countermeasures to safeguard its own interests.

And then on the same day, Yuyuantantian, which is sort of, for folks who don’t know, which is sort of a state-affiliated blog, which kind of is in this position where it can elaborate on the official line in a way that sort of presents itself as journalistic, but is a little bit like kind of an unofficial mouthpiece, which can warn certain countries or regions about what they can expect.

Insider Sources is saying that China may initiate anti-discrimination investigations and supply chain security reviews if Brussels doesn’t change course. So, I mean, that all sounds pretty bad. There’s going to be an EU leaders meeting on, I believe, June 18th and 19th, where I think we may get some more color on what’s kind of coming down the pike. To be clear, there’s been reports that one of the major pieces of legislation that the European Union is looking at would be effectively requiring companies to diversify sources of critical inputs and relying on something like no more than 30% or 40% from any one country, if I’m remembering that correctly.

But basically, that’s the kind of thing that’s under discussion. So yeah, I mean, I think, again, we’re still at the very beginning of this process. And even this thing, which is meant to be moving quickly to address a crisis in the European context, still moves pretty slowly. So, you know, I think it’s going to be a while before we see this even fully agreed upon, let alone fully implemented.

Andrew: Yeah, no, that whole diversification thing of critical inputs is one of those things that I’m watching because it sort of like makes sense on its face. Like you can see how somebody came up with that as a policy issue. But from a company’s perspective, it is like something that no company is going to want to do. One. And secondly, it may be impossible for a lot of these companies to do. And even if they can do it, it’s going to cost them a ton of money. So, I wonder if policymakers are thinking that through fully. But we’ll see.

I mean, that hasn’t become policy. It’s just something that’s been floated. But anyway, let’s bring in Cosimo. Cosimo, I’ve been speaking with a ton of European diplomats and companies over the past few months throughout 2026. And I mean, there is legitimate angst around China Shock 2.0 that is hitting Europe in a way that I hadn’t seen in previous years. Real concern about the industrial juggernaut. A lot of that is around renewable energy and EVs. But how do you see the debate playing out among sort of the countries in Europe that really matter in terms of shaping the policy response?

Cosimo: Yeah, thank you for the question, Andrew. So, yeah, I guess I do have a bit of an issue of the characterization of China shock 2.0. Because I think it’s an oversimplification of a lot of issues that are happening. For example, when China shock 1.0 happened, it was effectively a more cheaper, more competitive Chinese exports that crushed a series of legacy industries. And I think a lot of European industries certainly find themselves in that position, right? from mechanical steel or even autos and so on.

But I think that’s definitely not entirely the case, right? If you look at, for example, batteries, energy storage, and EV batteries, a huge export industry. Europe effectively does not have any local alternatives that it can even protect to begin with. I think you can say, for example, in the solar space, China shock 2.0 has already ended. I think it ended in the early 2020s when Chinese, yeah, were driven by the Ukraine energy crisis, started importing solar panels in huge quantities, and that basically Chinese exports, completely demolished Europe’s manufacturing base.

So I think that’s in many ways already over in their areas. Like, say, you know, electrical transformers and a host of grid equipment’s and all kinds of equipment that are crucial to Europe’s wind energy supply chains. And these are areas where Europe has, you know, a lot of domestic supply shortages, right? It’s now more and more tapping Chinese suppliers to try and meet, right? So I think calling this China shock is yet not entirely fair, right?

When it’s often cases that it’s European companies that are tapping Chinese suppliers to meet real needs and urgent needs that they’re trying to address. So I think that’s kind of how I view it to begin with. And yeah, in terms of, I think, the internal debates, I think, as with a lot of European policymaking, there is tons of internal disagreement. I think you have the France-led camp that’s more pro-industrial policy, more pro-European strategic autonomy, and so on.

And then you have obviously the northern, more kind of free trade liberal economies like Germany, the Netherlands, Nordics, and so on, who I think until quite recently viewed industrial policy as a dirty word. I think they’re not quite in favor of this type of extremely aggressive Europe-wide investor policy that rocks the boat and also the fundamental economic interests of these countries, also drive this diverging approach. Obviously, the German industry is far more exposed to the China market than almost any other country.

So, they’re also beyond the receiving end of a lot of retaliation. And obviously, in many of the Southern European countries that advocate for more EU-wide industrial policy, they’re in a lot of debt. France, Italy, they all have debt-to-GDP ratios of more than 100%. So, if the EU takes common debt to fund industrial policy, in the end it would be the more frugal Northerners who have low debt who have to pay for it. And also, it’s obviously very convenient getting the economic benefits and not paying for it yourself.

And also, I think it was important to mention that there were also a lot of disagreements between industries. The EU recently proposed this new steel industry safeguard measures, which proposes basically cutting down the quota of import-free steel imports. And so, obviously, this is protecting your steel by giving them more protection against more competitive inputs.

But obviously, this also then raises costs for a host of downstream industries that have to pay for more expensive European steel. Yeah, it’s important to see these internal differences about policies like the government plays. They inevitably hurt some and benefit others.

Andrew: That’s a great point. And I actually want to sort of pause on that, the point you made about saying that China’s shock 2.0 is not the right characterization. I mean, that’s a pretty hot take. I like it. The reason I say it’s a hot take is I feel like every European company or policymaker I talk to is talking about China’s shock 2.0. So, I guess two questions. Do you think they have the analysis wrong on saying China’s shock 2.0, or do you think they’re using that term for political reasons? Because they truly are worried about the de-industrialization of the European industrial base.

So, generally speaking, if you can generalize, would you say they’re getting it wrong analytically or that it’s maybe more a political argument? And then secondly, how would you characterize the competition? If it’s not China Shock 2.0, what’s a better sort of general framework to think about it in your mind?

Cosimo: Yeah. So, I mean, it’s definitely, I’m not saying it’s fully wrong. I tried to get at that at the beginning, right? I think there are definitely a host of industries that are very much exposed to the China shock 2.0 characterization. I think it’s entirely fair, but I’m saying it’s not entirely fair to characterize everything across the board as falling under this. And in many ways, I think it’s somewhat self-serving because when Europe had its Ukraine-Russia energy shock at the beginning, what did they do? They turned to Chinese solar manufacturers. They imported record quantities now year after year.

And that’s been absolutely crucial in helping Europe navigate a lot of the energy crisis that has come from the Russian gas being cut off and everything. So, when it was time to import, that was all well and good.

But now suddenly, when they face a huge record trade surplus, then it’s no longer good. We don’t like this. And you’re seeing the episode dynamic take place. It’s needing Chinese industrial equipment to tackle really urgent needs, often, especially in the energy space. And then, yeah, complaining about the trade circles, I think it’s, yeah, that’s how I see it, or at least for some cases. And I think that’s definitely politically convenient, in my opinion.

Andrew: Do you have thoughts on how they should be thinking about it? Like, what a better framework is? If you don’t, that’s fine. I’m just curious.

Cosimo: Yeah, I think it’s just, you know, there are also so many areas on the clean energy supply chain where everyone knows that Europe desperately needs to ramp up its domestic capacity and its [[inaudible 00:31:52] firms that could do it, but they’re just not doing it. They’re forcing firms that are further downstream to turn more and more to Chinese alternatives. I think that’s, yeah, it’s a bit of a patchwork issue. It’s like industrial policy doing something, but not others.

Andrew: Yeah. Well, we need to work on this. We should come up with a that says it’s not China Shock 2.0 and kind of proffer an alternative framework. I’ll pick that up with you because I feel like that would be added to the discussion. I really like that perspective that you have and we should continue to pursue that in this pod and in our writing. I want to bring Joe back in quickly. You touched on some of the things, Joe, that you think. So, whether or not China Shock 2.0 is the right framework, it’s definitely the ones that many in Brussels are using.

And you touched a little bit on kind of the increasingly aggressive tools that the Europeans are looking at using to fight back. But can you touch on some others? What else are you hearing? What’s kind of the mood that you’re seeing? I mean, in my mind, this is ramping up. Do I have that right? And if I’m right, like what should we be on the lookout for in terms of concrete actions from the EU side?

Joe: Yeah, I mean, maybe I’ll slightly reframe the question to talk about the EU-China dynamic more broadly. As I said at kind of the beginning, and as Cosimo alluded to, this is not really a new phenomenon. It’s maybe gotten more acute in the past several months. But I mean, what’s been really interesting is that as the EU has been trying to, I guess, from their perspective, save their industry from what they view oftentimes as unfair Chinese competition, China has been exercised, I guess, what I would call a significant amount of strategic patience.

So, when you look back to the tariffs that the European Commission imposed on EVs, electric vehicles, back in, I think it was October or November 2024, the Chinese response was pretty muted. They did launch a number of anti-dumping and anti-subsidy probes into things like European dairy, pork, brandy. But all of these were sort of pulled punches in the end. I think they were sort of there as leverage. And so, in the end, none of them really came down with the full force they could have done. And the damage to EU industries and farmers in particular was pretty toned down, pretty mild.

So I think the question now is, at what point is enough going to be too much? And I think that China’s been pursuing that strategy with hopes of kind of being able to dialogue it out with the EU and just trying to be able to get to a mutually acceptable agreement. The problem is the two sides are kind of poles apart. The trade deficit that the EU runs with China keeps growing. Chinese industries are incentivized to continue exporting for reasons related to the domestic market, right? That the consumption is not there to the extent that these companies need.

So it’s kind of doubtful how much room there is for the two sides getting to yes. So, you know, I think that ultimately China doesn’t want to fight a trade war with the EU. But at some point, I think it is going to adopt this sort of tit-for-tat approach, whereas anything that the EU does, which is viewed as harming Chinese interests, will be met with comparable response from the Chinese side that attacks EU interests. And equally, I think there’s going to be a tit-for-tat approach to de-escalation. So there are going to be off-ramps. And so one thing I’m looking for here is Šefčovič, the EU trade chief, he met with Li Chenggang, who is China’s top trade negotiator.

Coming out of that meeting, there seemed to be a renewed push for dialogue. And I think that that’s probably an avenue that the EU should be exploring because I’m not particularly optimistic about the EU’s ability to successfully wage a trade war with China. I don’t think it’s really got the leverage or the chops to do that and certainly can’t mobilize political will as quickly as China can. Maybe Cosimo can chime in with his perspective if that’s a fair characterization or not.

But, you know, I guess what I’m going to be looking for is, first of all, what does the EU do on what timeline and how hard does China hit back? Because I think that will give us a better sense of when we’ve left the era of strategic patience and entered the era of honest-to-goodness trade war.

Andrew: I’ll just posit something before I bring Cosimo back in, but I do kind of wonder if both sides are sort of like, well, we’ve had trade tensions, well, in particularly the European side, but we haven’t wanted to fight a trade war on two fronts. We’ve been fighting with the U.S. since, you know, Liberation Day, you know, April 2025. But those tensions seem to have dialed down as, you know, the U.S. the IEEPA tariffs got shot down by the Supreme Court. And the U.S. generally has been focused elsewhere geopolitically with Iran and Venezuela and things like that.

And just generally like a little bit less focused on tariffs. You know, China has obviously struck some sort of deal with the U.S. Or at least they’ve struck a deal. We don’t know how long it’s going to last. But my point being, both of them seem to have gotten some sort of stability on trade with the U.S. And so maybe now they’re ready to take the gloves off with each other. What do you think about that idea, Joe? Am I wrong there?

Joe: Šefčovič said basically as much in his comments after he met with Li Chenggang and said basically, oh, well, we realized that for the U.S. and China to hash out their differences, it took six or seven meetings. And so I think that, yeah, the EU is in a very, very tough position where, you know, whether or not you want to call it China Shock 2.0 or whatever it is, it is facing, I think, in a lot of ways, kind of an existential crisis for its industry. There’s no question that they are being hollowed out.

And now, yeah, I think the EU would be in a significantly stronger position if it wasn’t having to also face down tariffs and trade war threats from a country that until recently it thought it could rely on. So, it’s a very tough position for the EU to be in. And I do sort of feel that exhausting all options for dialogue is probably the better option for the EU at this stage.

Andrew: Cosimo, what do you think about all this? We all hazard to make predictions, but do you think that EU is going to lean into dialogue, or is your read that they are going to try to use some of the actual legal and regulatory tools at their disposal? And sort of what do you think of the timing of all of it? Do you think sort of officials think, all right, we’re stable with the U.S., we can be a little bit more aggressive towards China? Just kind of walk us through your thinking.

Cosimo: Yeah, to me, I think like in the past couple of years, I think it’s going to continue to be a combination of both. Unfortunately, yeah, some of it will, you know, just simply the time it takes to put policy frameworks in place is the issue. I think with the solar industry, you know, the EU’s been talking about protecting its domestic manufacturing sector, you know, for many years now. But in the meantime, you know, in the time that it took them to come up with concrete policy mechanism like they’re proposing now with the Industrial Accelerator Act, Europe’s solar manufacturing industry had all been wiped out by Chinese competitors.

In the meantime, the timing is a big issue. And I think the EU, for a lot of things, it moves very slowly, right? So, a lot of the, yeah, industrial policy measures talked about in the Industrial Accelerator Act, we’re waiting until 2029 before they’re being put in place, right? So, a lot can happen in that time. So, I think, yeah, what Joe said, the timing is very, very important, right? And yeah, then again, I think in terms of how aggressive they’re going to try to be, I think that’s a big consideration as well. Europe’s economy has been quite stagnant now for some years.

So, to try and fund the big, expensive industrial policy program when your economy is not really doing well, when you have a lot of debt, and you also have a big trade partner that’s going to try and hurt you back, I think, yeah, we’ll see how much appetite there is for all this.

Andrew: Yeah, when push comes to shove, yeah, the tune might change. That’s a good point. Joe touched a little bit on kind of how China’s approached all this. What do you think China’s reaction will be if Europe starts turning up the heat? Will they go tit for tat or will they kind of pull a rare earth’s trump card and kind of not go nuclear, but like really up the ante and say, “Do not mess with us on this. We have leverage, We have choke points”? How do you think the Chinese are thinking of this from your perspective?

Cosimo: Yeah, I mean, I feel like that’s certainly always an option, right? But then, yeah, I think in some ways, like the EV example is a good one, right? EVs and autos more broadly, where, you know, there was a lot of anger about the tariffs and so on. But then in the meantime, yeah, nothing happened, right? Like Chinese auto exports to Europe have grown exponentially, right? in April, they took a 15% market share on the continent. And that was like 2% in 2024. And, you know, all the mid-big players are seeing exports to Europe growing at triple digits.

And so that’s, I think, the reality, right? Yeah, we’ll see how effective a lot of these policies are, right? Because if they’re nominally very, very tough, but then doesn’t actually do enough to change the reality, I think maybe Beijing would be okay with it. Or yeah, same with other measures like sea ban or the steel measures. Yeah, I think we just have to see.

Andrew: Yeah, that’s a great point. Yeah. It’s one thing if the Europeans kind of up the rhetoric and then take some policy actions that actually don’t have really all that strong of an impact. I do think that the Chinese have shown, at least with the U.S., and I think with other countries, in times of tension like this around trade, they’re willing to sort of sit back and assess kind of the practical impacts to shape a response.

So, a lot of times, yes, they do have to react sort of for tat on a not rhetorical basis, but sort of a symbolic basis. But really, at the end of the day, if the other side’s taking action that they don’t deem to be actually that inimical to Chinese interests, then why fight back that hard, right? If the actual regulations aren’t going to reduce the ability of Chinese companies to sell into Europe, as with the EVs, which is a really, really good example. One last one for you or getting towards the last kind of set of questions here is, I mean, you follow Chinese companies closely on all of this, again, primarily renewable energy, cleaning energy and EB space.

I mean, how are Chinese companies reacting? I mean, the obvious one answer is they’re investing a lot more in Europe. Is that a solution to this problem from their standpoint and from the European standpoint, and what other kind of general trends are you seeing in terms of Chinese EV investment, what are these companies kind of trying to accomplish? Those are two kind of big questions, but what are the companies involved, the Chinese companies doing, and how do you think that will impact the back and forth?

Cosimo: Yeah, I think absolutely in terms of the auto industry, I think that’s just an established global norm. If you want to be a truly well-established player in the market, you have to localize in the long term. And I think that’s exactly what we’ve seen where the Chinese OEMs, they’re relying a lot on exports in the short term. But the amount of projects that have been announced and are underway now in Europe has been pretty mind-boggling. Just in the past two, three weeks, we’ve seen, I think, maybe five or six new projects.

So, yeah, I think they’re very well aware of that fact that they want to be in Europe long term. They’ve got a manufacturer there. You’ve seen something like BYD that’s announced that it’s going to be manufacturing all the cars it sells in Europe. And, yeah, so I think, broadly speaking, they also understand the political implications of flooding a market with exports, destroying its industry is not creating any local jobs. I think they’re obviously looking to accommodate but then the reality then is how does that take place?

And I think if you look at the latest price undertaking a framework that the EU proposed some months back, and yeah, it’s a pretty onerous list of requirements in terms of the EU domestic content requirements, the investments. So, they obviously want most of the economic benefits coming from Europe to be generated in Europe. And I think the Chinese OEMs will need to make their calculations and see how much it makes sense, if it makes sense.

I think that’s something we’ve got to see how it’s going to shape out. But unfortunately, I think Europe’s also making it relatively difficult now for a lot of projects. We see that in the wind industry or countries like the UK, so not in the EU anymore, and Germany, and so on, are taking pretty strong steps on security reasons to try and shut out a lot of Chinese turbine manufacturers from even entering the market. So, that’s a situation where the Chinese industries are trying to come in and invest and create jobs and are not allowed to. Yeah, I’m not entirely sure how that could play out. Yeah, the industrial policy requirements are just too onerous for it to make sense anymore. And yeah, I think we’ve not seen that answer yet.

Andrew: Good point on the investment side. I mean, that’s obviously happening again. Maybe not obviously. That is happening in the U.S., making it much more difficult for China, Chinese companies to invest in the U.S., a lot of pushback even against Chinese investment in a range of industries, definitely in the vehicle industry, which is unfortunate because most U.S. auto companies know that they need certain types of Chinese technology if they want to compete in the market going forward.

And so, I personally don’t love that trend, that policy. I think we should do the exact opposite and encourage more Chinese companies to create value, invest, and make things in the United States. And so it’s interesting that that’s happening across Europe as well. Interesting and unsurprising, right? Especially if what you’re worried about is deindustrialization. And you’ve got companies who are saying, “Hey, we’ll come manufacture there. We’ll create jobs. We’ll create tax revenues, all that stuff to push them out on security grounds.” I mean, obviously, legitimate security grounds are important. But I think oftentimes the national security argument is made a little bit too widely. Just last one for both of you guys.

Cosimo, I’ll start with you and then we’ll wrap up with Joe. It’s just, I mean, where do you see things going trade-wise, tension-wise between Europe and China? Can we dial things back at some point or just in the near term, or are we in for kind of more of a rocky, higher tensions, more of a rocky relationship? What do you think?

Cosimo: Yeah, I see it going on for longer, especially because there just seems to be more and more new kinds of exports that Chinese companies find a way to ship out and that there actually is a genuine need in Europe as well. So, if that’s the situation, then I think the localization piece is something I’m watching because if there is a more systematic effort where Chinese companies to localize and then China and Europe are industrially tied together in that way through supply chains, I think that could be, in the longer term, a way to de-escalate when your economic interests are shared that way. But yeah, I think until that happens, I don’t think it’s going to get better anytime soon.

Andrew: Yeah. Well, a good analysis, unfortunately somewhat pessimistic, although I’m glad you brought up that point again, sort of just the absolute flood of Chinese exports into Europe, which is going to be a challenge, is a challenge. I mean, maybe that also, not maybe, almost certainly that also informs the timing here, which both sides have sort of gotten some sort of trade stability with the U.S., but part of that trade stability has been much fewer Chinese exports into the U.S., and a lot of those are being rerouted to Europe.

So that’s only further made the flood even more aggressive of Chinese goods into Europe because they’re not going into the U.S. That just kind speaks to the whole idea of really, if this is an issue countries want to address, this being the onslaught of Chinese exports is going, countries are going to have to do it basically in global concert, not just allied countries, not just a few countries. Everybody’s going to have to work together. Otherwise, those exports are just going to keep coming. Joe, I’ll throw to you for the last word here. Where do you see things going in the next few months? Are you with Cosimo, kind of pessimistic when things are going to get worse before they get better?

Joe: Yeah, I mean, certainly I don’t see an easy resolution to this issue, kind of as you just alluded to, right? China doesn’t really have the incentive to do much about it. And I don’t think the EU has the means to make them do something about it. Kind of what I expect to see is maybe something a little bit less dramatic than we saw with the U.S.-China trade war. Maybe something kind of like a two-track approach where, on the one hand, you have the EU introducing new measures that China views as unfriendly. China will respond with a probe or countermeasures of its own. Meanwhile, you’ve got dialogue happening in the background.

And I think also it’s worth remembering this is kind of a very multifaceted issue in the context of Europe, both sectorally, because there are so many different sectors kind of at play, which are subject to this challenge from China, but also because you’ve got not just the EU at a block level that you’re dealing with, but individual EU countries. So I expect we’ll see a lot of back and forth and sort of, okay, there’s been an escalation and that was a de-escalation and this sector is heating up and this sector is cooling down. So, it’s not going to be quite the same as last year with the US and China where you just had this giant blanket series of tariffs. And that was kind of just the one discrete issue, more or less, that was being discussed.

I mean, it’s a bit of a oversimplification, but I think you know what I mean. So I think it’s going to be an uneven process. I think maybe there is some scope for Europe to kind of implement some measures that gradually diversify away from China and gradually kind of reduce dependence on China. And yeah, maybe that’s the sort of thing, if it happens on a gradual enough timeline and China doesn’t feel that its companies are being singled out, then maybe there’s scope for China being able to accept that, given, especially as we’ve mentioned a number of times now, the long timelines that these sort of things happen on. So, I don’t think it’s going to be sort of a dramatic escalation and de-escalation. I think it’ll be a little more piecemeal than that.

Andrew: Yeah. Well, I like that slightly more optimistic take. It’s still not usually optimistic, but slightly more optimistic. So, we’ll take it. I mean, as I always say, we’re not really here to predict far into the future because there are so many unknown variables. But we are here to help companies kind of think through the scenarios and how to react to whatever does play out. And this is definitely one where we will be monitoring closely and helping our clients sort of think through the right way to play this, whether they’re American, European, or otherwise, companies doing business in China or with China. So, guys, I really appreciate the time today. This was an excellent discussion. Cosimo, thanks so much for coming on the pod for your first time and sharing your expertise with us, man. I appreciate it.

Cosimo: Yeah, happy to be here. Thanks for the invite.

Andrew: Of course, we’ll get you back on soon. And Joe, thank you as well, man, as always. Appreciate it.

Joe: Yeah, my pleasure.

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

• Beijing has famously deployed these levers as retaliatory weapons in its tech war with Washington.

But there’s a parallel, less headline-grabbing export control system that rarely makes the news.

• And new research from some of China’s top state scientists suggests that Beijing’s senior technical advisors are fundamentally rethinking how China manages its industrial technology exports.

The details: The paper — titled “Framework and Empirical Study on the Selection Framework of Export-Restricted Technology in the China-U.S. Technology Landscape” — was published in March by researchers from four of China’s leading government-affiliated science and engineering institutes.

• The South China Morning Post brought public attention to it in a June 1 report.

To be clear, this is a technical research paper; it is not official government policy.

• But in China’s Political system, research like this doesn’t get published unless leadership wants options on the table.

• We therefore expect it to directly inform the highest levels of debate on export control strategy.

To understand why this matters, it helps to understand the distinct purposes that China’s parallel export control systems serve.

The first system is the one that makes headlines: The dual-use export control system, established under the 2020 Export Control Law.

• This is the mechanism Beijing has used to impose retaliatory restrictions on critical minerals and materials amid U.S.-China trade tensions — a tool of economic statecraft deployed in pursuit of geopolitical objectives.

The second is far less well known: The industrial technology restriction system, which has been quietly operating since 2001.

• Governed by a document called the Catalogue of Technologies Prohibited or Restricted from Export, this system manages civilian technologies — process know-how, licensing, and technical transfers — wherever they are relevant to China’s industrial competitiveness.

• Think advanced cathode production, high-value crop breeding techniques, and cutting-edge metallurgy.

• Critically, most technologically advanced economies, including the U.S., have similar mechanisms.

• This is routine industrial policy, not economic warfare.

The new research focuses entirely on the second system — and its diagnosis is blunt.

• China’s management of the Catalogue is, in the authors’ own words, “weak.”

• The system is opaque, slow, and more reactive than strategic.

• That was perhaps acceptable when China was still catching up technologically. But it is no longer acceptable now that China has become a global leader in frontier technologies — and faces what the authors describe as “systemic suppression” and “comprehensive containment” from the West.

The solution the researchers propose is a structured, three-test framework for deciding which technologies should be restricted — explicitly modelled on how the U.S. manages its own technology export controls.

Under the proposed framework, a technology earns a place on the restricted list only if it clears all three tests.

• Necessity: Is the technology strategically important to China, and does China genuinely lead the world in it? Both must be true.

• Feasibility: Is the technology mature enough to actually control, and can buyers not easily source it elsewhere? Again, both must hold.

• Impact: Would restricting it cost China more than its rivals in lost innovation, jobs, or trade?

It is a rigorous framework that prioritizes leverage over reflexive protectionism. A technology only gets restricted if China actually leads in it, if the restriction is enforceable, and if the costs to China are manageable.

• That last test is a built-in check against the kind of overreach that would harm China’s own innovators and exporters.

In a pilot implementation, the researchers identified 63 technologies where China either leads or is contending for global leadership.

• Technologies were categorized into three tiers: “urgent” candidates for near-term restriction, “forward-looking” technologies worth monitoring, and “reserve” technologies not yet ready for controls.

So could the results of this pilot indicate how Beijing will govern future industrial technology export controls, as it looks to lock in future industrial advantages?

• Well, maybe — but there are important caveats.

First, the pilot was incomplete.

• Recall that the three-test framework requires each technology to clear three hurdles: necessity (strategic importance to China plus Chinese global leadership), feasibility (technological maturity plus limited substitutability elsewhere), and impact (net cost to China of imposing controls).

• In the pilot, the researchers could not assess substitutability or impact due to time and data limitations.

• That means the 63 technologies identified are not a rank-ordered menu of proposed new controls, even by the authors’ own standards.

Second, it’s critical to note that the logic under which the researchers propose this framework — preserving China’s industrial competitive advantages — is fundamentally different from the logic that drives China’s retaliatory dual-use controls on critical minerals.

• Those latter controls are geopolitical weapons, and their use is assessed on the basis of a given material’s strategic importance to other countries, often as a form of retaliation.

• That means anyone trying to predict what comes next in China’s retaliatory toolkit should not be reading this research as a guide.

But what the research does tell us is something genuinely important: China’s approach to protecting its industrial technology base is being rethought from the ground up.

• The framework being proposed openly reverse engineers the U.S.’s own approach, and may signal that Beijing intends to be far more systematic and forward-looking about where it draws the line for industrial tech export controls.

That means, while this research is not a list of controls to come, it is a serious public signal that the governance logic underpinning China’s industrial technology export controls is changing — and that the 63 technologies identified by China’s own experts as areas of strength are exactly where foreign companies and governments should be paying attention.

Cory Combs, Head of Supply Chains and Critical Minerals Research, Trivium China

What you missed

U.S.-China

On May 30, U.S. Defense Secretary Pete Hegseth delivered a speech at the Shangri-la Dialogue (SLD) in Singapore.

• Beijing couldn’t have asked for a more gratifying speech: Hegseth’s language on stability mirrored Xi Jinping’s own rhetoric on U.S.-China relations and his non-mention of Taiwan suggests Trump is taking China’s concerns seriously.

On Tuesday, the office of the U.S. Trade Representative (U.S.TR) announced the results of its Section 301 investigation into the alleged failure of 60 U.S. trade partners to prevent the import of products made with forced labor — with China being subject to a 12.5% tariff rate as a result.

• China’s foreign ministry didn’t mention potential Chinese countermeasures, likely due to the understanding Beijing reportedly reached with Washington about maintaining tariff rates at or below the levels agreed at the Busan meeting in October.

Foreign affairs

On Thursday, EU Trade Commissioner Maroš Šefčovič met with China’s top trade negotiator Li Chenggang in Paris.

• Šefčovič said that the EU planned to engage in “meaningful discussion” with Beijing to address “what is becoming an unsustainable trade deficit with China.”

On Tuesday, British Foreign Secretary Yvette Cooper kicked off a three-day visit to China.

• Anglo-Chinese relations had a breakthrough back in January when British Prime Minister Keir Starmer paid a visit to Beijing — Cooper’s visit was more about making sure the ice stays broken rather than major deliverables.

Econ and finance

Beijing is massively underestimating the scale of local government hidden debt.

• Huaxi Securities estimated that by March 2023, total interest-bearing debt of local government financing vehicles (the main holders of hidden debt) stood at RMB 54.7 trillion — 3.8 times the hidden debt level recognized by Beijing.

In May, local governments issued RMB 141 billion worth of infrastructure special-purpose bonds (SPBs), down 59.1% y/y, marking the third consecutive month of decline.

• The continued slump in infrastructure SPB issuance does not bode well for the Q2 infrastructure investment print, adding another downside risk to an economy already reeling from the Iran war.

Corporates

SAIC — China’s second-largest automaker — is building a EUR 200 million auto plant in Galicia, Spain.

• The plant is expected to produce up to 120,000 vehicles annually under the MG brand when it comes online in 2028.

Business environment

China’s listed firms are being forced to pay back taxes — so far in 2026, 69 listed companies have disclosed that they owe back taxes, totaling over RMB 4.9 billion.

• Cleaning up the myriad local government tax breaks will help weed out the unproductive overcapacity that bedevils many sectors.

• However, a government retroactively demanding money from firms will not help business confidence.

China has established its first comprehensive national framework for overseeing outbound direct investment (ODI), replacing a patchwork of lower-level ministerial rules.

• The rules explicitly authorize Beijing to take countermeasures against discriminatory foreign restrictions on Chinese investment, as well as against foreign organizations or individuals that “unreasonably” restrict their legitimate overseas investment rights.

Agriculture and rural affairs

The State Council published the 15th Five-Year Plan (FYP) for Accelerating Agricultural and Rural Modernization on Tuesday.

• The plan calls to “significantly improve the level of self-reliance in agricultural science and technology and make major breakthroughs in developing new agricultural productivity” by 2030.

Politics

On Tuesday, the Party’s disciplinary commission (CCDI) announced that Li Xiaohong, former head of the office of the Central Leading Group for Inspection Work, is under investigation for “serious violations of discipline and law.”

• As former head of the office of the CCDI, Li ran the machine that drove then-CCDI head Wang Qishan’s anti-corruption campaign between 2012 and 2017.

• Our question: Is the net closing in on Wang Qishan himself?

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 this week’s Trivium China Podcast, host Andrew Polk is joined by Trivium’s Head of Markets Research Dinny McMahon to discuss one of the most important — and least understood — developments in China’s fiscal landscape: asset revitalization.

The two unpack how local governments are increasingly turning underutilized state-owned assets into new revenue streams, and why the strategy may become a key pillar of Beijing’s broader effort to stabilize local finances.

Their conversation covers:

• Why local governments remain under severe fiscal pressure after the collapse of the property market

• What “asset revitalization” actually means in practice

• How provinces are monetizing everything from mining rights and industrial land to transport hubs and public facilities

• How several local governments are already generating meaningful new revenue from the strategy

• The role asset revitalization could play in easing local government austerity and supporting domestic demand

• The risks of self-dealing, hidden leverage, and unsustainable one-off transactions

• Whether asset revitalization can become a durable solution to China’s local government debt and revenue challenges

While asset revitalization is unlikely to solve China’s fiscal problems on its own, Andrew and Dinny argue it may be emerging as one of the most important pieces of the local government finance puzzle — and a development investors and China watchers should be following closely.

Transcript

Andrew Polk: Hi everybody, welcome to the latest Trivium China podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium co-founder Andrew Polk, and I am joined today once again by Trivium’s Head of Markets Research, Dinny McMahon.

Dinny, how are you doing?

Dinny McMahon: I’m doing good, mate. Good to see you.

Andrew: Yeah, great to see you as always. It’s been a bit of a quieter week, at least on the news front and the geopolitics front, and even the policy front out of China. So, we’re going to step back a little bit today and talk about a bit of a broader issue. Often when we do that, it’s fiscal reform or fiscal issues. Today is no different really, but we’re going to talk about a subset of that which is a bit more interesting than just the China’s fiscal challenges. It’s specifically what’s happening at the local government level and an interesting new revenue stream. Specifically, it’s asset revitalization or state asset monetization.

Basically, it’s ways that states are using their assets to get new cash flow. And this is something Dinny’s been looking at closely, and we think it’s a pretty significant piece of the fiscal equation. I’ll give a little bit more of an intro here in a minute. But anyway, that’s why we have Dinny on today to talk a little bit more in depth about this issue, which we’ve been writing and thinking a lot about for clients. So, it’ll be a good discussion. I’m sorry to do a step back, which, you know, because of the news flow, we often don’t have as much of a chance to do.

But of course, before we get into the meat of it, Dinny, we have to do the customary vibe check. How’s your vibe today?

Dinny: I’m a bit frazzled. Me and the family got three weeks to go before we up stakes and moved to North Carolina. So, I’m just running around. Everything that’s been broken or I’ve been meaning to fix in the house for the last five years is sort of getting done in like a two-week period. I’m sort of stepping back. I wouldn’t mind actually staying here. But that’s me at the moment, between work and the kids finishing school and starting the school holidays, and just getting the house ready. Man, I just feel like I’m being pulled in all directions at once.

Andrew: Yeah, man, I hear you. I actually sort of am on the back end of it. We just moved houses over the weekend. And so, we did all the packing and stuff last week. We’re in our new house. There’s just boxes everywhere. It’s great to be here, but I think it’s just way more exhausting than I think I expected it to be. Maybe that was naive of me, but I am very tired. And then also, again, so I just went for a long run. I’m not going to say how long it was because when I talked about my last long run on the pod with Cory, it was by far our most controversial vibe check people have talk to me about.

There’s a lot both positive and clear negative. So, anyway, I went for a long run, whatever that means to you, is how long it was, and so with a combination of the move and this exercise has got me a little low energy. But we are going to pick it up for the podcast or the pod listeners today. So, don’t think that we’re not going to bring our…

Dinny: Bring the thunder.

Andrew: That’s right. So, excited to have you on and get into it today. But also, Dinny, quickly, we got to go through the housekeeping. A quick reminder, first, that we’re not just a podcast here. Trivium China is a strategic advisory firm that helps businesses and investigators navigate the China policy landscape. That, of course, includes domestic policy in China, but also 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 chance to talk to you about how we can support your business or your fund.

Otherwise, if you’re interested in receiving more Trivium content, again, check out our website, triviumchina.com. That’s where you can find our subscription products. These are mostly email products that give daily updates in most cases on key developments out of China. So, just updates and analysis. It’s more than just a newsletter. It’s really our take on what’s happening that you really need to know whether you’re an investor who needs to know market stuff or a policymaker who needs to know key developments, whether that will affect businesses or the tech sector, or you’re a business executive.

So, check out our site, triviumchina.com. You will definitely find the China policy Intel option that you need. And then finally, as always, please tell your friends and colleagues about Trivium. It really helps us to grow the business and to grow our listenership so that we can keep bringing you this free content. All right, that’s it. Dinny, you ready to get into it? That energy up? Are you ready to bring the thunder?

Dinny: Absolutely, mate. Let’s get into it.

Andrew: That’s what I like to hear. All right. Everybody will be ready for this. Okay. We are going to talk, as I said, about something called asset revitalization. What we’re going to talk about, or the framing for this comes from a report that we published about a month ago. When I say we, primarily Dinny and his team, again, on this concept of asset revitalization, or as Caixin financial reporting or financial media in China, as they call it, state asset monetization.

So, on a very basic level, this is really taking unused, underutilized or mispriced state assets, whether that’s land or a factory or mineral or fishing rights, concession rights, whatever, concession rights to run like train station, for example, all kinds of different assets that a state would own, especially that are revenue-driving, and redeploying them in a way that allows the state to extract greater value from them. So, it’s not privatization of assets, but it’s a way that the state can actually retain ownership and generate income.

The State Council now first started encouraging local governments to do this kind of thing back in 2020. And at that time, as often, when the new policy directive comes out, we were a little cynical, a little skeptical about it because you never know how much energy the State Council is going to put behind a new effort, but we’ve really kind of changed our tune, I would say, especially based on your report Diny, on this whole process. And we now see it as really a major and highly significant, even you would say, I would believe, game-changing development towards the financial quagmires that local governments have been in really since the collapse of the housing market it in 2021, right?

So, everyone knows local governments are in desperate need of new sources of income. And in 2025, for a few provinces, this asset revitalization push has absolutely been. And one of the reasons we want to talk about now, even though we wrote about a while back, is that we’re seeing more references to this program in the Chinese press and Chinese commentariat. And so, we know that it’s starting to get on folks’ radar, even among Western analysts. So we thought it was a good moment to kind of jump in because not only have we been thinking about it for a while but the scale and the exact process of what’s going on isn’t really well documented or well understood.

So, we thought we’d take the chance to really get into this significant fiscal local government debt and local finances development. Yeah, like I said, it has the potential to be a game-changer. So, Dinny, why don’t you do a little bit of scene setting for us. Give us context about why local governments so desperately need new sources of income, which some listeners will generally be aware of, but it’d good to kind of set the stage before we dive into this new and pretty complex topic.

Dinny: Yeah, absolutely. So, this stuff’s going to sound pretty familiar to a lot of people out there, but here’s a basic rundown of the problems facing local government finances. So, local governments have been chronically underfunded for decades. And so, the way that they traditionally made up the difference was by taking land from farmers and rezoning it and then selling it to property developers for much higher prices.

And they sort of walked away from that, well, with profit, right? So, they use the money in four key ways. The first was well that the land that they took needed to be cleared, you need to compensate the farmers, the land needed to be leveled and connected with road and power and sewer infrastructure. And that was a much bigger expense than it sounds because a relatively small portion of the land that local governments were taking from farmers was actually being sold to developers.

In any given year, maybe it was 25%, maybe it was 30% in a big year. Most of the land was being sold cheaply or sometimes just given away for free to manufacturing and industrial firms to build factories. So, effectively, it was a subsidy. And those land transactions really weren’t generating revenue for local governments as well, but they were still involved these costs of compensating farmers, clearing the land, leveling the land and whatnot.

So, that was one way that the money was being used for. The money they earned from selling the land was being used really to clear the land or prepare the sort of the next generation of land to be sold. The second source of the revenue was it allowed local governments to build infrastructure. So, typically, you’d have like a local government financing vehicle would build public works with debt, and then the local government would pay them some sort of management fee or operating fee, some sort of subsidy.

There’d be some sort of arrangement where the government would provide income to the local government financing vehicle. But ultimately when you stripped all that back, what was happening is that you had infrastructure funded with debt and the local government was using revenue from the land sales to service that debt. Even though the servicing was ultimately being done by an LGFV, the money was coming from land sales.

The third thing the money from land sales was being used for was servicing explicit government debt. So, since 2015, local governments have been able to issue their own special-purpose bonds to fund infrastructure. Well, that’s what the money was being used for as well. And then finally, a portion went toward paying for government services. And so, this is where things get a little bit confusing because the Chinese government, pretty much at all levels of government, they have four different budgets.

And one of those budgets is called the government fund management budget. And this is where all the revenue from land sales and funds raised from issuing special purpose bonds, that’s where it goes. And they go into this budget to effectively ring-fence the use of these funds to make sure that they are used for funding public works only. But if there is a surplus, if there is kind of money left over that they don’t need for servicing debt or building public works or whatever, there’s a surplus, it gets transferred into the general public budget, right?

So, that’s another one of these four budgets. And that’s the one where all the tax revenue goes. It’s the one that’s used for education and funding the police and health, and public services. And so there was an incentive for local governments to sell more land than was needed for infrastructure so that it could top up public spending.

And certainly, in the years before 2021, when the housing market hopped, this became a marginal but an increasingly important source of revenue for local governments. And so then, of course, the housing bubble popped in 2021, and all of this unraveled. So, land sales collapsed, which meant there was less revenue to service the debt and less revenue to transfer into the general public budget. The problem wasn’t just coming from a collapse in land sales.

Tax revenue fell as well because so much tax revenue that was being collected by local governments was either directly or indirectly linked to housing construction or sort of the property market more broadly speaking. Now, the consequence of all this has been austerity. And I think we’ve talked about this a little bit before, but austerity that we’ve been seeing with Chinese local governments is not quite in the same form as we’re used to from Greece and the UK, although there are similarities.

So, in Greece and the UK, the central government, when they had excessive debts and they needed to ensure that, you know, they decided to prioritize debt repayment, that resulted in cutting funding to public services. So, there was less money for education and for the police and whatnot. But in China, those types of expenditures on public services at a local level have typically gone up.

So, in 2025, provincial expenditures from the general public budget were typically 15% higher than they were in 2021. Now, there’s a big range. Some provinces have done better than others. But broadly speaking, spending from the main budget for local governments has increased over the last four years. Instead, austerity turned up elsewhere. It turned up in local governments not paying their bills — to contractors, to suppliers, to what they owed to LGFVs.

And that doesn’t show up in the general public budget, but it would probably show up in one of the other budgets, the government fund management budget, if only we had more transparency on what was sort of going on inside it. So, the consequences of these unpaid bills, these unpaid arrears, are, in many ways, far more consequential for the economy than an unpaid loan to a bank.

With a loan the bank takes the hit, but it has capital put aside for that right, and it can always raise more capital. It can exercise forbearance if the regulators permit it, but more or less life goes on, but unpaid arrears, they ricochet through the local economy. When firms don’t get paid by the local authorities, that firm then can’t pay its own suppliers, which then can’t pay its suppliers, and so on and so forth. And the money isn’t there for bonuses or for firms to take on new staff or even to keep their existing staff.

And so just as land sales supercharged local economies, the collapse in land sales sent it into reverse. And this is one of the key reasons why domestic demand in China is so weak. We constantly hear, “Domestic demand is weak. How do we revive it?” This is one of the reasons. And you’re not going to revive that domestic demand until you fix local government finances, until you can reverse these sort of austerity practices.

Now, austerity is turning up elsewhere as well with pay cuts to state employees, with arbitrary fees and fines. But the big one is arrears. So, local governments need a solution. And often when people talk about what needs to be done, the conversation always comes back to the central government. Well, the central government has helped out to a certain degree. It helped out in 2022 and 2023 when it increased transfers to local governments by about 20%.

Now, that helped plug the fiscal hole. The money that wasn’t ending up in local government budgets anymore because of lower land sales because of lower tax revenue, Beijing stepped in and helped plug that hole at least partially. But over the last couple of years, those transfers have actually declined. Now, it’s also often argued that the only way out of the whole local government debt thing is if Beijing takes over the local government debts.

But then again, that’s incredibly unlikely to happen because Beijing has been adamant that it’s not going to do it and has repeatedly said that responsibility for the debts must be resolved at the local level. Beijing’s not transferring as much money as it used to. And it’s saying, “No, we’re not going to bail anybody out.” So that’s where we are. The collapse in land sales has left local governments chronically short of funds, which has resulted in austerity.

The central government has helped out a bit, but it’s been explicit about no bailouts. And that means the only solution left for local governments is to raise more revenue. Now, they can’t raise taxes. That right resides almost exclusively with the central government. And even if they could, in this economic environment, higher taxes would probably do more harm than good anyway.

Andrew: Just a different form of austerity.

Dinny: Yeah, exactly. This is the other thing that they’re doing. They’ve been imposing arbitrary fees and fines. Exactly the same thing. It’s effectively a deflationary practice in this sort of constrained demand environment. Now, the thing about fees and fines is that it’s such a tiny part of local government’s overall revenue that it’s not meaningfully moving the needle anyway. Now, there’s a couple of other things that it can do. SOE profit remittances, you know, they can ramp that up. And that is an area we’re watching very closely. And Andrew, we should really talk about that over some other podcast in the future.

Andrew: For sure. Yeah, yeah, yeah. I know you and the team have been doing good work on that.

Dinny: Yeah, absolutely. We’re all over this. But then the big one, the one that’s already helping plug that fiscal hole, at least in a number of provinces, is asset revitalization.

Andrew: All right. Excellent table setting. Now that you’ve gotten us to this point, the obvious next question, of course, is what is asset revitalization?

Dinny: In its sort of purest form, you kind of want to sum up the idea. It is about turning state assets into a recurring revenue stream. In particular, it’s not just any state asset. It’s assets that aren’t being utilized to their full potential already. And the idea isn’t unique to China. I mean, throughout the developed world, we’ve seen variations of municipal governments really doing this everywhere.

I mean, you see it particularly with old derelict industrial sites, you know, old ports, abandoned piers, unused train yards, they get turned into cafe and shopping districts or into new office space or new housing. Sometimes you see cities dredge old industrial canals and harbors to create more valuable shorefront. Developments like the High Line in New York City as well, same sort of thing.

It’s about taking something that was an eyesore and revitalizing them and turning them into a source of economic vitality. Now, China’s done the same sort of thing with these sort of historic and abandoned industrial assets, turning them into art galleries and shopping districts and whatnot. But China differs from developed economies in the sense that many underutilized assets are owned directly by government agencies and institutions such as hospitals, schools, regulators.

You’ll have the NDRC or the People’s Bank of China. They actually own assets, physical assets on a scale that you wouldn’t expect in any other economy.

But so often the assets that these sorts of institutions hold, they were never really intended for commercial purposes in the first place. And so, they might be underutilized or they might not be used at all. And certainly, no one has really thought, no one in sort of a staid bureaucracy has ever really thought creatively about putting them to different uses, certainly not to a commercial use because there was no incentive there to do it.

And so, that’s kind of what this is all about. And in the Chinese context, what we’re kind of seeing is the way that they’re sort of pushing forward with this, it broadly falls into four buckets. It is things like selling concessionary rights and generating royalties from allowing firms the right or the exclusive right to perform a service or access a resource. So, for example, many local governments, they own mining or forestry rights. They own the rights to billboards along municipal roads, or they own the rights to all the stores at a train station or an airport, or they generate fees from water companies. And they have the right to charge fees for entrance into like popular scenic spots, right?

There is all these sources of potential revenue generation over which local governments have the right, and then can sell those rights to other firms. And so local governments are looking to deploy these sorts of concessionary rights, these existing assets in creative new ways that might generate revenue. So, for example, that might look like taking a small piece of land that isn’t being used, like perhaps under an underpass, and turning that into a for-free parking lot or an EV charging site.

Or in some parts of the country, I mean, we’re seeing this a bit in Chongqing, or authorities are selling rights to manage affordable housing, either in return for like an annual fee or an upfront sum. But ideally, authorities are looking to sell concessions for assets that haven’t previously been monetized or for assets that have changed in some way, either because the authorities themselves have made a certain investment or because technology has changed or some sort of asset consolidation has made them more valuable, right?

So, for example, one local government we’ve been reading about, you know, amalgamated all the fishing rights in a local lake and sort of took them away from small-scale fishermen, consolidated the rights, sold them to a large firm, which is far more efficient, has greater capital investment. It’s generating more revenue and it’s paying more to the local government and fishing rights. Or elsewhere, we saw a local government sold the rights to an advertising company to advertise on light poles around the city.

Now, traditionally, that advertising may have looked like banners, but the company installed LED screens, which generated more revenue and also allowed the local government to charge more for the concession. So, that’s one way that local governments are generating more revenue. It’s all about concessions and royalties and trying to think creatively about what they have the right to sell and how they can extract greater value out of it.

Andrew: 1Can I ask a quick question on that?

Dinny: Yeah, shoot.

Andrew: When they’re selling these rights, it sounds like the mechanism is they’re not selling them outright for a one-off fee. They’re sort of, I guess, must be that the purchaser is purchasing the right to sort of manage the asset, but then some slice of the revenue still goes back to the local government. How is it that this isn’t just a one-off in some of these that you’re just describing? Does that make sense?

Dinny: Well, and sometimes it is. I mean, that’s kind of one of the big concerns about this. And we can get into that a little bit later. But the best structured deals are the ones where what you’re selling is a concession for 10 years, 15 years, maybe even 20 years. But as part of those concession rights, you have sort of baked into it an enduring ongoing revenue stream. So, every year, the concession holder promises to pay a certain amount.

Some of the deals we’ve seen, it’s a combination between upfront and recurring fees. But ultimately, there’s also a sense of trying to get who gets to buy the concession. Typically, these are done through an auction. So, the concessions are marketed publicly sold publicly and they’re done over online auctions. So, there is an expectation or a hope that by doing it that way, local governments will be able to get the highest price for them. But you’re right, a lot of it comes down to how it is structured.

If there isn’t a recurring revenue stream, and it’s just an upfront payment, then that certainly raises a few questions.

Andrew: Yeah, I mean, I don’t know exactly how they’re doing this. I’ve seen this actually done in the States before, where a private equity company or whatever will come in and buy the rights to manage some utility, for example. And the argument or the pitch from the private equity firm is we can actually make this so much more profitable, not by necessarily raising people’s utility costs, but by cost-cutting, which often means, of course, layoffs and stuff like that.

But that’s their pitch is we can do it so much more profitably that you won’t have to incur the costs. So, your costs go away as a state government or whatever. We will incur the costs and then we’ll give you X amount of money each year as a slice of the revenue. And we’ll still make money on it because we can do it so much more profitably. It sounds like that’s sort of maybe the idea that they’re kind of going for in some…

Dinny: Not quite, I don’t think. I mean, maybe. But in the instances I’ve seen, it’s not necessarily the private sector stepping in to say, “Hey, we can do it more cheaply than the state sector, and everybody wins.” The creation of additional value still seems to be generated or the idea behind how additional value will be generated seems to come from the state itself.

So, the state says, “Oh, we’ve worked out how to make this asset more valuable. We’ve done a certain amount of investment. So we’ve invested in this port.” So it’s been dredged. It’ll take deeper ships. It’s got better facilities. We’ve built this building. We will sell the rights to you, private sector firm, to manage a regional fish market, wholesale fish market. And you have to pay a certain amount up front, we expect certain fees every year. And so it’s not the private sector coming to the local authorities going, “Hey, we see what you’re doing and we can do it cheaper.” It’s more the state going, “Oh, we’ve worked out how to create to take this asset, which is being underutilized and deploy it in a more effective way. Hey, private sector, what firms out there are interested?”

And it’s not just private sector as well. I mean, often it’s state firms as well, which are ending up with the concessions.

Andrew: But still it stands that there are some commercial opportunity for the private sector company to be gained that is large enough, seems, must be large enough that they can also then pay an annual fee for the rights, right?

Dinny: Absolutely. Absolutely.

Andrew: All right. Sorry, I interrupted your flow. Keep going.

Dinny: Yeah, no, no, not at all. Well, I was saying there’s a couple of other ways that local governments are sort of generating value from asset revitalization. One of them, assetization, sort of taking assets and securitizing them, so securitization of assets. So, the idea being in recent years, Beijing’s been trying to encourage firms to take data resources and turn them into a viable financial asset or to take forests and turn them into carbon sinks.

And then you can raise money out of that through carbon credits. That sort of thing is sort of part and parcel of this as well. And then there is taking existing land and either leasing it or repurposing it. So, one example that I think sort of sums it up really quite well, although it’s a slightly older example, is a few years back, the Beijing municipal authorities looked at a sort of a wholesale clothing market, which was across the road from the zoo.

And once upon a time, this market was, it was the wholesale clothing market for pretty much all of northeast China. And yet, as time went on and Beijing became more developed and the city became bigger and bigger, what had been a wholesale market, more or less on the periphery of the city, had turned into a wholesale market on prime real estate. And it was using it as a clothing market. It wasn’t necessarily the most valuable use of the land.

And so, they bought it up, tore it down, not tore it all down. Some of it, they sort of retrofitted the buildings, but they repurposed it all, turned a big chunk of it into a fintech sector. They’ve got a whole lot of fintech clients who’ve moved, firms moved in there that are paying significantly higher rent than was ever possible from wholesale clothing firms. And so that’s kind of part of the idea as well, kind of looking around, looking at land, looking at factories, looking at the physical assets that local governments own, and try and work out if there is a better way to use it.

That also includes taking sort of empty, unused factories, retrofitting them so that they’re better equipped for more technologically advanced, autonomous tech manufacturing firms. We’ve seen this happen in a bunch of places. They update the factories and then effectively they move in ready for firms that are looking to sort of expand. So, that’s kind of the other thing that’s going on here.

And so, yeah, it’s kind of moving in a whole lot of different directions at once. But at the end of the day, it’s really about local governments looking at what assets they own, work out how they can be used more effectively. And that really requires a sort of degree of creativity about how to use them that they’ve never really had to deploy before.

Andrew: So, it sounds like a sort of loosely organized kind of push. We mentioned the State Council has kind of given the directive to at least assess whether or not this is possible in various jurisdictions. But beyond that, where did this idea really kind of germinate?

Dinny: Yeah, I mean, it really did kick off with the State Council in May 2022. It was very explicit about asset revitalization and a bunch of different areas, water conservation and transport, and all sorts of things. But the focus was a little bit different back then. It was very much about creating sustainable funding sources for investment.

So the idea was like, okay, well, investment has been driven by debt for such a long time. Probably not a good idea if that’s the way it goes. Can we use the existing asset base to kind of create opportunities for investment that are sort of, you know, less debt heavy? And so, it was all about project construction. But even then, when the State Council first talked about it, it included this caveat about government funding.

And it said, “For regions with high local government debt ratios and significant fiscal pressure, funds recovered from revitalized public assets may be appropriately used for three guarantee — expenditure, debt principal and interest repayment.” So, the three guarantees is sort of the state’s guarantee to provide funding for people’s basic well-being, to provide public sector wages and run bureaucratic operations.

So, what it was saying is like, hey, you know, for those provinces that are really over-indebted, the money you raise from this can be used to help sort of plug the fiscal hole. And very quickly, that sort of focus on heavily indebted provinces kind of went out the window. So, by the end of that year, Hunan province had a blueprint built around asset revitalization. And it laid out the steps for how they were going to pursue it. I mean, the first step was to identify what assets there were, you know, go throughout the entire province, work out exactly what the state owns, because there are so many levels of government.

It’s not immediately clear at a provincial, head provincial level, exactly what they own. The second thing was to value the assets. Third was to identify which government agency or body actually owned it, whether they were overlapping claims, because it was only once you have a clear idea as to who controls an asset, can you actually do with it? And then the fourth step was to find better ways to utilize the asset.

And the way, sort of the guiding principle of Hunan province was kind of summed up in this sort of pithy one liner, which is use what state assets can be used, sell what cannot be used, lease what cannot be sold and finance what can be financed. And since then, other provinces have gotten on board, a bunch have rolled out their own blueprints. But all of them, whether they’re heavily indebted or not, the big focus, or at least a big element of what they’re doing with asset revitalization, comes back to generating fiscal revenue.

Andrew: Yeah. Well, I said at the top that this is a big deal, and we think it’s one of the major planks and kind of the plan to get little government finances on board. But I said that because you told me to say it. So, why don’t you explain to the listeners why we think this is such a big deal?

Dinny: You’re giving the magic away. Okay, well, so in 2024 and 2025, asset revitalization became a major source of income for a small handful of provinces, specifically Chongqing, Shandong, Jilin, and Hubei. Now, that revenue turns up in the general public budget as a type of non-tax revenue called charges on the usage of state resources.

And in short, that captures revenue generated from the sale or commercial use of state assets that are owned by government institutions and agencies, like, as I said, hospitals, universities, village collectives, or government agencies like municipal finance bureaus. But what it doesn’t capture is assets owned by state-owned enterprises. You know, revenue generated by assets owned by SOEs, that turns up elsewhere in the budget, a completely different budget.

So, we’re talking about specifically government assets that are not owned by SOEs. And those state agencies and institutions, they don’t have to generate the revenue by using the asset themselves. They can sell the rights to use an asset like concessions and royalties, all that sort of stuff, as I was talking about before. So, just how significant is it? So, Chongqing has kind of been the leader with this.

Revenue from charges on the usage of state assets was equivalent to 6.8% of the city’s expenditures in 2021. Four years later in 2025, it was 15.1%. So, when you take into account all the revenue sources that go into funding the Chongqing budget, the taxes, the non-tax revenue like fees and fines, the money earned from land sales, the transfers from the central government, and bonds issued by the city to help fund its budget, when you take all of that together, charges on the usage of state resources, asset revitalization, accounted for 15.1% of those resources, up from 6.4% four years earlier.

And crucially, over that period, it’s not that Chongqing spending stagnated or that it’s flat. Over that period, spending by Chongqing municipality increased 17%. So, charges, this sort of where this asset revitalization revenue was ending up, these charges were rising as a share of a rising budget, and rose to a level, 15%, which is hugely, I mean, that’s a really significant chunk of where all of its revenue was coming from.

Now, in Shandong, in 2025, charges funded, so I’m just using shorthand now. When I say charges, I mean charges on the usage of state resources. So, these charges funded 12.9% of the budget, up from 5.3% four years earlier. And again, the budget was expanding. It was up 13% over that period. In Jilin, charges funded 9.2% of the budget in 2025, up from only 2.4% in 2021. And in Hubei, they were 8% of the budget up from 2.2%. And I think the real standout here is Jilin.

Because over the past four years, the general public budget has grown more strongly than perhaps anywhere else. So, the general public budget in 2025 was 30% higher than it was in 2021. Moreover, Jilin was one of the 12 provinces designated as being heavily indebted a few years back. And that designation imposed certain constraints on borrowing and what else it can do with its finances.

The central government, the Ministry of Finance, dropped Jilin from that list at the beginning of this year. It was only the second province to be removed from the list after Inner Mongolia, which is a very different situation. I mean, it’s having a bit of an economic renaissance at the moment because of renewable energy.

But with Jilin, we don’t think G-Lin could have exited that list without the revenue that it generated from asset revitalization. And there’s one last thing that’s worth mentioning here as well.

Now, when talking about the significance of this as a development, I focused on how it’s generating a particular type of non-tax revenue, it’s some charges on the usage of state resources. And that’s because it’s easy to track, right? It is almost exclusively leading to the expansion of charges, this non-tax revenue. But there are plenty of statements from local governments suggesting that asset revitalization is generating revenue that’s turning up elsewhere on the balance sheet as well.

But that’s much harder to track. So, the fiscal implications of asset revitalization might go well beyond the data we’re seeing in the increase in charges. But if it does, it’s very difficult to be able to measure how much of an impact that is.

Andrew: Yeah. Yeah, that makes sense. I guess that brings up the question, especially when you talk about the growth, sort of how sustainable is this expansion of revenue, or how sustainable is this as the solution, I guess, to government funding problems? I mean, the great thing about land sales, which is the big previous funding channel, was that it was replicable, right? Local authorities could do the same thing year after year after year, generating more and more revenue.

This sounds like there’s some one-offs. It sounds like it requires a lot more sort of creativity from local governments, requires looking at their assets and trying to figure out what they can do with them. So, the question is, is this sustainable in multiple aspects? One, outside the four provinces you highlighted, but also even in those provinces, can they continue not only growing it, but even just maintaining it at the current level of as a proportion of spending, as you already kind of laid out?

Dinny: Yeah, it’s a great question because in some ways it’s too early to tell. I mean, as I said, the state council started pushing this in 2022. It started building momentum in 2023. It was only in 2025 that we could step back and go, oh, wow, this is having a really big impact on the budgets of some provinces. There’s two ways to look at it. Firstly, beyond those four provinces I identified, for most of the other provinces, they’ve still got a long runway.

So if they start ramping this up, there’s real potential there for them to kind of increase their revenue. The question then becomes, looking at those four, how much longer can they either maintain growth or maintain these levels? And I worry that maybe they’ve already picked the low-hanging fruit. So there’s no doubt, there’s more potential to kind of look around at their assets and kind of work out how they can use it. But I can’t help thinking, surely it’s going to get harder.

Of course, the other side of the equation is that after, what, three, four years of doing this, they’re starting to get a sense of what’s feasible and what’s possible. So maybe they can kind of take that expertise and leverage it into new ideas. Now that said, Shandong, which as I said, is one of the leaders in this, is certainly worried.

So when it was talking about this in its 2025 budget report, it said, and this is a quote, “The space for revitalizing existing assets and resources is narrowing, constraining fiscal revenue growth.” That’s pretty explicit. They’re starting to worry. So, it is a case of like, okay, watch this space, but we’ll see. It really could go either way, I think.

Andrew: Well, I mean, sort of related question, but, you know, so the sustainability still a question mark, but then also what about the unknown unknowns, right?

Like what are the risks of this path that maybe local government officials and even state council officials aren’t thinking about this? Are there ways that they may be just generating more financial risks that will in the butt down the road? I mean, we’ve seen that movie before, right? In terms of like local government fundraising attempts.

Dinny: Yeah, absolutely. I think one of the things to worry about is we see a repeat of what we saw with land sales to LGFVs after the housing bubble burst in 2021. For the first few years after that, local governments seeing the collapse in land sales, trying to come up with new revenue sources, they sold lands to LGFVs rather than property developers, which meant they were effectively selling land to themselves. LGFVs borrowed money, used the money to buy land, but because they’re not developers and because there wasn’t really any demand for the land, they just kind of warehouse it.

They were stuck with debt. The asset that they bought wasn’t doing anything. And they really had no way of servicing the debt other than sort of hoping the local government kind of came up with the cash. And so, there is a risk that this happens here, that there’s a degree of self-dealing going on, that local governments sell a concessionary right to an LGFV, or another locally owned state enterprise. And that state enterprise borrows the money and makes the purchase and it ends up being a non-performing asset. That is definitely possible, largely because, as you said, I mean, we’ve seen this particular movie before.

Now, there’s other risks here as well. I think it comes down to three things, pricing, sustainability, and management. So, pricing is key. Now, as I said before, it’s great that there’s a kind of an open auction market so that the local governments get the best price. But if a state entity wins an auction and overpays for it, if it underpays for it, that’s fine, right? It ends up with more revenue. Local government might be a little bit disappointed that it didn’t maximize its fiscal gains.

The real problem is if a locally owned state-owned enterprise overpays because then, probably, you know, paid for the rights in debt, and then all of a sudden isn’t able to service its debt, and it ends up as, effectively, a hidden debt that the local government needs to sort of keep afloat. The other issue is something that you raised earlier, and it’s the whole sort of sustainability issue, sustainability of this as a recurring source of fiscal revenue. And that comes down to how the deal is structured.

Now, as I said, we’ve seen a bunch of deals that involve both an upfront payment and a recurring income stream. But I think there have been deals as well, which have just been an upfront payment. Now, that’s great for the government looking for a sugar high now. I’m trying to sort of cover a fiscal hole, you know, it’s like fantastic. We’ve got the money. We desperately need it. Great. But it makes it difficult, then, for asset revitalization to be an ongoing source of revenue. And it could mean that revenue not only just flatlines, but it could actually drop off in a few years if local governments can’t keep coming up with new deals.

And then the third thing to worry about is the management of the asset. So, even if an asset is potentially highly productive, well, who’s buying it? If it’s a state firm, there’s not necessarily a guarantee that it’ll realize the potential. And where a county outside of Jinan, in Shandong province, sold 30-year rights to the operation and maintenance of a low altitude economic zone for almost a billion renminbi, not only to a locally owned state-owned enterprise, but a state-owned enterprise that was, I think, incorporated the day of or the day before the auction of the rights.

Effectively, it created its own firm to buy the rights to a completely untested business. And we’re not entirely sure where the billion renminbi came from, but it’s got to be leveraged on some level.

Andrew: That smells fishy.

Dinny: It does. I mean, so even if it turns out that this asset is incredibly productive, if the low altitude economy in China turns out to be a real winner, there’s no guarantee that a state firm, particularly one that is formed for this purpose, will be capable of realizing the potential. I mean, where does the expertise come from? So, there are sort of real questions here about self-dealing in terms of the pricing, in terms of the structure, in terms of the expertise about making this work. But for the time being, the numbers are really encouraging.

So, it’s only in the longer term do we see the structure of the deal start to unravel.

Andrew: Yeah. Well, speaking of that, it’s probably a good place for us to look next and to wrap it up, which is we talked about whether or not it’s sustainable. You just kind of highlighted some of the risks, but where do you think this is going? How do you think it evolves in the future as local governments kind of become more creative, pursue this path more aggressively as we think they will?

Dinny: Well, I think it’s pretty clear that Beijing is behind this. Even though the way that it first envisioned asset revitalization wasn’t as a fiscal crutch, I think the degree to which local provincial governments have embraced it and been quite vocal about its fiscal contributions and the degree to which you still see central government documents talk about asset revitalization. You do see the party publications not just talk about asset revitalizations, but also talk about the contribution to sort of fiscal resources. I think Beijing is behind this. That said, this isn’t a full court press at the moment.

We’ve got a handful of provinces which are clearly the forerunners. They are the experiment. Beijing can then look at how things are performing there, how things are being pursued. It can choose what to crack down on and what aspects of it to promote. And other provinces, they can pick and choose what works for them. And so, I expect we’ll see this increase as a source of revenue for other provinces.

Now, that’s going to take a couple more years to build because local governments, as I was saying before, they need to have a full inventory of their assets. They have to have a fair sense of what they’re worth and they need to know who owns the rights. That’s quite an undertaking, particularly for some of these larger, not just physically large provinces, but the ones with large economies, that’s a real effort. So, once that’s cleared up, then I think authorities can work out how to turn those assets into cash. But I think it’s going to spread.

And I think it’s going to become a more important source of revenue elsewhere. And it will help revive domestic demand. It’s not going to happen overnight. But I think we’re going to see it pick up momentum over the next couple of years.

Andrew: Well, we will be watching it closely. Your team will be not only kind of keeping tabs on it, but analyzing whether it’s working, looking at some of the risks. And yeah, I mean, I think we will see more commentary about this in the press. It’s always interesting when you kind of see a thing happening officially early on in the policy space, and then it gets a little traction and people start commenting on it, especially locally in China, usually means it’s getting a little bit of traction.

But certainly like this, and as it relates to local government issues and local austerity more broadly, we will be watching closely and following. And, of course, it all ultimately impacts the macro economy and businesses and investors and all that stuff. So, Dinny, great idea. Also, we should definitely do the SOE remittances thing. I know, like I said, you guys are doing great work and have some really interesting findings there. And that, combined with this, could also, I mean, they’re related issues and could fit in, could make a powerful kind of one-two punch, right?

Dinny: Yeah, absolutely. I don’t think anyone should be looking for a single solution for local government financing problems. It’s the sort of thing where I think you’re right. This asset revitalization will help. SOE dividends potentially will help. In a perfect world, they’ll finally be able to start boosting corporate tax revenue. That would hugely start to help. So, if they can manage to pull a whole lot of different sources of support together, that’s what a solution is going to look like. There’s not going to be a one-size-fits-all bailout, or Beijing reaches down and fixes everything. That’s not how this is going to work.

Andrew: Yeah, for sure. That is how it tends to happen. Well, Dinny, I really appreciate the time. Thank you for bringing the energy today and for walking us through this complex but fascinating and important topic. Always good to get a chance to step back and let you cook a little bit on the stuff you’re really good at. So, thanks, man. I appreciate it.

Dinny: Thanks, man. I appreciate it.

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

On the first half of this week’s Trivium China Podcast, host Andrew Polk is joined by special guest Jon Czin — the Michael H. Armacost Chair in Foreign Policy Studies and a fellow in the John L. Thornton China Center at the Brookings Institution — to unpack what came out of the Xi-Trump meeting, what both sides were trying to accomplish, and where the relationship may go next.

Jon gets into:

• Why the current U.S.-China situation is more temporary stalemate than budding stability

• China’s evolving strategy for managing Trump and the broader bilateral relationship

• The significance of Beijing’s proposed framework for “Constructive Strategic Stability”

• How China views US leverage — and its own leverage — in trade, critical minerals, and supply chains

• How the Iran war is shaping the broader geopolitical context for US-China diplomacy

Then in the second half of the pod, Andrew is joined by Trivium’s lead macroeconomic analyst Joe Peissel to break down the latest batch of Chinese macro data, which showed a sharp slowdown in economic activity in April.

The two discuss:

• How the Iran war and supply chain disruptions are weighing on China’s industrial sector

• Why investment activity weakened more than expected last month

• The hidden policy changes dragging on infrastructure investment

• Continued weakness in Chinese consumption and consumer confidence

• What the latest data means for Beijing’s broader economic outlook

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’ve got a very special guest on the podcast today. He is the Michael H. Armacost Chair in Foreign Policy Studies and a fellow at the John L. Thornton China Center, both at Brookings Institution. He’s also a former member of the Senior Analytics Service at the CIA, where he was one of the intelligence community’s top China experts. And he was also on the National Security Council at the White House in charge of China policy from 2021 to 2023. Most people will not need that long introduction to be familiar with the guest today — It’s Jon Czin. Jon, how are you doing?

Jon Czin: I’m great, thanks. Thanks for having me on, Andrew.

Andrew: Yeah, so glad to finally get this together. For anyone who hasn’t seen it, Jon was so kind as to have me on his podcast at the Brookings Institution, excellent new podcast called The Beijing Brief. Everyone should be on the lookout for that. Really, really good stuff. And you should also be on the lookout for Jon’s work in Foreign Affairs magazine. He publishes pretty frequently there, pretty regularly. Has had some great pieces recently and an upcoming piece Anything I’m missing, Jon, in terms of work that you want to highlight?

Jon: No, I think that’s good for the podcast.

Andrew: Great. Okay. Awesome. Well, we are going to talk today, so I flagged this last week that we’re going to have Jon on to talk through the latest around the Xi Jinping-Dong Trump meeting. Obviously, the meeting happened at the end of last week. We’re recording on May 20th, 1 P.M. in the afternoon, just to timestamp this for folks. So, it’s been a few days since the meeting, but it’s a perfect time to talk about this because there’s really been kind of a trickle of ongoing developments in terms of what happened at that meeting.

So, it’s nice to have had a few days to let the dust settle. We even got some extra comments from the Ministry of Commerce this morning that we’ll go through. So, with a few days’ perspective, Jon and I will talk about kind of what’s the latest, what we think it means, what it means for U.S.-China going forward. Going to be a great conversation. And then for listeners, the second half of the pod, stick around. I talk to Trivium’s Lead Macroeconomic Analyst, Joe Peissel.

We just got the latest monthly macro data out of China. So, we do a quick update on that at the end of the pod. So, stick around for that. So, it’s going to be a lot of meaty content again, as always today. But before we get into it, Jon was so kind to join us for the customary vibe check today. Jon, how’s your vibe going into this podcast?

Jon: You know, after the past week we’ve had, and just how much follow-up there’s been in the ensuing week, my vibe is extremely well caffeinated.

Andrew: That’s a great vibe. Great energy to bring to this pod. You were just saying like my vibe is usually pretty chill. So, I’ll stick with the chill vibe, even though there’s a lot going on. Hopefully we’ll be a little bit of yin and yang here. You can bring the energy and I’ll just be asking the questions. How does that sound?

Jon: I am always impressed by your composure and equanimity on this show, Andrew. And I feel like, especially in Washington, that’s a precious commodity. I don’t know. After this, maybe you can write self-help books for China Hand.

Andrew: Yeah, that’ll be my second act. You’ve also got young kids. But having young kids, running a business, you got to find Zen anywhere you can take it. So that’s what I try to do.

Jon: Amen.

Andrew: Well, we will touch on all the latest here on U.S. China here in a moment. But first, I also have to quickly go through the housekeeping for listeners. Just a quick reminder to folks 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. 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, 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 subscription options for people to stay on top of ongoing policy developments out of China. We’ve got paid options, free options, options related to technology policy, markets policy, whatever you need in terms of options for staying on top of China policy analysis, China policy intelligence, you will get that on our website, so check that out.

And finally, please do tell your friends and colleagues about Trivium and both about the business and about the podcast. It really helps us grow our listenership and grow our business. And those word-of-mouth suggestions or recommendations really, really help us out.

All right, Jon, with that, you’re ready to get into it?

Jon: I am.

Andrew: Awesome. Well, as I said, so we’ve had a few days to let the dust settle. Out of the meeting initially, there was literally no announcement, right? Or at least when Donald Trump was wheels up from Beijing, I was talking to clients and saying, I’m not trying to make the argument this is a nothing burger. There’s literally been no announcements. There is nothing to say. But as we kind of surmised at the time, there might be some developments or some confirmations of what was discussed in the coming days. That has, of course, been the case.

We, this morning, finally got the Chinese confirmation, for example, around the purchase of Boeing airplanes. Chinese confirmed that they’ve done some stuff on the agricultural side in terms of both purchases and greater market access, both into China and into the U.S. So, it seems like everybody’s pretty much on the same page, which we’ll get into kind of the differing details of the readouts. But let me just start with, now that we’ve had a few days, has your view of what happened at the Xi Trump meeting evolved at all since Friday?

Jon: Yeah, I mean, I think to take one step back, Going into this meeting, I had very low expectations going into it for a couple of different reasons. I mean, I think part of it was just some of the reporting that we saw about how little staffing there was for this, especially on the U.S. side, which I think is unsurprising. I mean, I think especially on this set of issues on China policy, you really see President Trump acting as his own China desk officer. I’m very mindful that even people like Steve Witkoff or Jared Kushner, who are influential on other major foreign policy portfolio items like Russia or the Middle East, don’t really seem to be engaged on this set of issues and were not part of the delegation.

But I think even though he’s so focused on it, a big part of it goes back to my sense of what Beijing was trying to accomplish in this meeting. And I don’t think that there was really a clear affirmative agenda from Beijing’s perspective or something that they were looking to accomplish. People keep talking during this meeting and in the aftermath of it about the focus on stability from both sides. And I kind of think that’s a misnomer. I think what there really is in the wake of last year’s trade war is a stalemate between the two sides. And I think that’s a more helpful way to think about it because the stability, such as it is, it’s pretty shallow and it’s pretty thin.

And I think from the Chinese side, I think what they’re looking to accomplish in a meeting like this is basically try to buy themselves time and space and relief from U.S. pressure so that they can fortify themselves for the next round of the contest. So, I think the game that Beijing is playing is trying to figure out what is the minimum price point for purchasing that. And I think for this meeting, I think that’s why there was such a heavy focus on the optics of this, right, rather than the outcomes. I think that was a lot of what drove the approach and why we saw so little of substance coming out of this.

Andrew: Yeah, that makes a lot of sense and helps to frame sort of, you know, one reason why the Chinese weren’t pushing harder for very concrete deliverables. Would you say, kind of based on where we are today, that you think the Chinese are pretty satisfied with the outcome?

Jon: I think so. I think they probably are. I mean, it is interesting already in the days after you can already see some of those structural friction points start to resurface. So, Secretary Bessent, just this morning, and this is again Wednesday, May 20th, was talking about corralling the G7 to push back against Chinese overcapacity. I think, again, it shows how shallow and tentative this progress is so far. I will say from my perspective as an American, I would say, coming, I had low expectations going in. And then at the end of the summit, my bumper sticker for it was no escalation, no concessions.

And I think at this moment, given the competition that is in fact underway between the two sides and given how fraught the relationship has been, I kind of felt like that was not a bad place to land. It’s hard to land the plane on this. But I will say, I think from the U.S. side, the quality of the outcomes and my assessment of the quality outcomes has actually degraded just over the last few days. I think a lot of that is driven by two things. I think it’s, number one, the interview that President Trump did with Fox News after he got back to the United States, where he said, “We’ll use Taiwan as negotiating leverage with China,” which is a major departure from the six assurances promulgated in 1982 back in the Reagan administration.

And I think sends exactly the wrong signal, not just to Taipei, but I think to our allies and partners in the region. And I think, to its credit, while they were on the ground in Beijing, the administration, like Secretary Rubio and the president himself, they were at pains, it seemed like, to emphasize continuity in American Taiwan policy. And I gave them credit for it. And they didn’t always do the liturgy in the precise way, but that’s fine. I think the main thrust of it was to emphasize that continuity. So, I think it’s been troubling in the days since, that that discipline that they had on messaging seemed to go slack.

So that’s number one. The other thing that was floating around out there, and I think maybe we’ll talk about this later in the conversation, is what the Chinese had proposed, this new vision of constructive strategic stability, right? Which clearly came from the Central Party School and not from Madison Avenue, really just rolls right off the tongue for an American audience. But I think my view is it sounds innocuous, but I think this is one of these Chinese rhetorical traps that looks innocuous on the surface, but it’s really a trap to try to box the U.S. in.

And again, I think it’s about that allies and partners piece of the equation. I think the signal that it sends is that the United States is prioritizing stability with China over the interests of our allies and partners in the region. Right?

Andrew: Yeah. Well, I mean, let’s just dive into that a little bit further because I do think it’s a key point. I’ve been talking with folks because I remember during the Obama administration, actually, when the Chinese came over, they met in California, and the Chinese tried to float this sort of new great power relationship.

Jon: New type of great power relations. Yep. Exactly.

Andrew: Yep. And I remember at the time the Obama administration really pushing back on that for exactly this purpose to say, “We don’t want to sort of elevate China to our status. We’ll deal with them, but we’re not going to say we’re the two leading powers.” It sort of gives China, like I said, some kind of elevated status that the Obama administration didn’t want to impart on them. So, just talk to me a little bit more about kind of why China would want to put forth something like this. What do you think the “constructive strategic stability relationship” means from the Chinese side? And then we can kind of talk a little bit more from the U.S. side about whether or not it was a good or bad idea and how it might impact things from the U.S. framework on China going forward.

Jon: Yeah. Yeah. I mean, I think from my perspective, I think you’re quite right to go back to that genealogy, right? This is kind of a recapitulation of new type of great power relations in a different formulation, right? So, it’s like, oh, you know, same bottle, new wine, or same wine, new bottle, however the saying goes. So, they’re really trying to repackage the same thing. And I think part of it is just reflective of how their system operates, right? Like they like to have put forward these kind of high-minded principles before getting down into some of the nitty gritty and the policy substance, right? Like they want to have some kind of conceptual wraparound to put on the relationship.

And I think it’s a difference in approach from how we approach things in the United States where we want to get down to business right away and talk about things that are front of mind. And I think especially in this administration, it’s even more accentuated, things you can actually touch and feel, like the deals you talked about that MOFCOM had talked about this morning, right? Like purchasing agreements, that sort of thing, fentanyl, other related issues. Some of it is symptomatic about how their system works. And I think they want to have that framing. I think it is about managing the competition with the United States in some ways.

And I think what they want to do with this is I think, number one, they find it beneficial to send that signal to the region that the U.S. is elevating not just Beijing, but stability with Beijing over other interests and consideration. I think they do feel like that gives them, you know, some leverage or juice with other countries in the region. But I think, number two, I think, my understanding is the expectation is Beijing that at some point, maybe sooner rather than later, but at some point down the road, they fully expect there to be some kind of reversion to a more overtly competitive posture from the United States.

Like they can see what’s going on on Capitol Hill, and they can see that, you know, President Trump is an important anomaly, but he’s kind of anomalous in the conventional wisdom in Washington about China policy in particular. And so, I think this is a little bit of a setup, right? The next time the U.S. takes some kind of competitive action, whether it’s a tightening of export controls, or does another arms sale to Taiwan, which was a major topic of consideration, it allows them to put the onus on the United States and say, “You broke our gentleman’s agreement. We wanted to stabilize the relationship, but those nasty Americans undertook these egregious actions, and it puts the onus on us.”

And I think that matters less here in Washington, necessarily. I think it’s more useful for them in terms of signaling to third parties, especially in the global South, where you have a lot of countries that would be more sympathetic to Beijing, but I think also for potentially other U.S. allies and partners in other parts of the globe outside of Asia.

Andrew: Yeah, those are all great points and totally sort of aligns with how I see China approaching this relationship as well. Now, let’s kind of look at it from the U.S. side. I mean, again, dialing back to the Obama administration, I sort of understood at the time and still understand why they would push back on kind of this new framework. I guess my thinking now is that China is sort of a more idiosyncratic relationship with the U.S., a more consequential, more complicated relationship. So, I guess a two-parter. One is, should we be treating China as sort of in a standalone category in terms of our diplomacy with them?

And if the answer to that is yes, does that mean we should go along with something like the constructive stability relationship? Or should we just kind of acknowledge that from a U.S. policy standpoint and not buy into the Chinese framework?

Jon: I mean, I think from my perspective, right, and I know this is more prescriptive than analytical, I think the answer is no, that we should not be treating China differently. I mean, we have other longstanding relationships, especially in that part of the world. And I don’t think we should necessarily elevate China above those considerations. I’m thinking of Japan in particular, the Philippines, Australia, right? people that where we really have deep and longstanding ties and when there is an alignment of interest. So, I think we should absolutely be engaged in diplomacy with China. But I think this is part of the game. And it’s a little abstract. It’s not like war in the Middle East. I think we have to be cautious about accepting their framing.

And this goes back to the earlier comment. So, when the president was wheels up on Friday, we had not accepted that framing. And I thought that was to the administration’s credit. But then when we get to the actual statement, then it was embedded in there. And I think, again, what was striking to me, once the fact sheet was released from the White House about the meeting, it was a very truncated document. It was really focused on trade and commercial issues. And really the only nod to strategic or security issues was the statement about constructive strategic stability.

So, no mention of the current kerfuffle that’s going on between China and Japan. Nothing about any of their other problematic activity, even vis-à-vis Iran, which has been such a priority for the administration in the China context and going into this meeting. That’s part of why my assessment has downgraded, right? I felt like at first it was a do-no-harm kind of summit. And now I feel like there’s actually harm that’s been done. So yeah, to circle back to this particular question, it’s not clear to me that we should be elevating diplomacy with China at this point. That’s just my own view and how I balance out these other considerations. Because it’s not just about what does it mean in the China context, but what is it going to mean more broadly? What are going to be kind of the second, and how is this going to be perceived by other parties around the world?

Andrew: Sure. That makes a lot of sense. And especially, I mean, you’ve been in these conversations, you’ve been in these negotiations and staffed them, as we were talking about before we came on. And so, I take your view on this with a lot of respect. And, you know, having not been in the government myself, I don’t always understand some of the nuances of how these fit together. So, point’s very well taken. I wanted to sort of dive in a little bit deeper in terms of, so there’s the high-level kind of framework we just talked about, but then we’re getting some clarity on what seems to have been agreed between the two.

Can you talk a little bit more about any read on the more concrete developments that have come out? So, it sounds like they have not agreed to extend the Busan understanding, but it does seem that they have decided they’re definitely going to cap tariff rates, for example, at the Busan rate. They don’t seem to have made any headway on critical minerals or export controls, but there is the Boeing purchases that they talked about and the ag stuff. How do you grade that mix of now somewhat more concrete outcomes?

Jon: Yeah, I mean, to the extent that we have concrete outcomes, I think that’s all fine and well and good. But what’s striking to me is that when you think about the broader U.S.-China relationship, even just the economic relationship, I think, as important and consequential as these deals are for the particular sectors that are involved or particular firms like Boeing, in the context of the broader economic relationship and the overall relationship, I have to say this is kind of small ball stuff in the big scheme of things.

And I think this reflects a successful negotiating tactic by the Chinese since Liberation Day. When the Trump administration came in in the first term, they were talking about big structural macroeconomic issues and about how to address those. And understandably, Trump had his own idiosyncratic view about this, but the U.S. side has been griping about these since the George W. Bush administration, almost since China was admitted to the WTO about their non-market unfair trade practices. And I think what the Chinese have done in the ensuing months is whittle down the scope of the conversation intentionally, right? So that we’re not talking about those big imbalances. We’re talking about particular sectors, particular firms, and particular products.

I think the administration has been clear that they’ve kind of jettisoned those bigger ambitions. I think they also would point out too, like I heard Jamieson Greer saying this right after, you know, the U.S. trade representative saying this right after the meeting, pointing out that Chinese exports to the United States are down 33% or roughly a third from where they were a year ago. And I’ve heard this elsewhere, right? They point to this as a sign of progress in remedying those trade imbalances, right? But the problem with that, of course, is that it’s like putting pressure on a balloon. Those goods have all gone somewhere else. A lot of them seem to have gone to Europe in particular, which seems to be the next big turn of the crank.

But in terms of directly negotiating with China, I appreciate why that’s the case. We seem to have given up on trying to address the issues that animated Liberation Day and the de facto embargo that we had in place 15 months ago. And just to dwell on this point, it is breathtaking when you think that 15 months ago, we had just come out of the United States having a de facto embargo on China.

And now we’re talking about how much of our stuff are they going to buy and what the Board of Trade and what the Board of Investment is going to look like. So again, if you think about this from the Chinese perspective, think about how they would have thought about this coming into 2025 and dealing with a new Trump administration, thinking about trade war 2.0. And now we’re on the back end of it. And if the question really is, have they bought themselves time and space? The answer has to be a resounding yes from Beijing’s perspective.

Andrew: Yeah, that’s interesting. It’s funny. Even as you say, the administration bragging about how much less we’re buying from China. As someone who’s generally still one of the few free traders still standing, it just seems like a, you know, what do they say? Weird flex, bro. You know, it’s like such a weird thing to brag about because, A, those goods are just going elsewhere in the world. And B, most of it’s kind of low-end stuff that we’re not buying from China. So, it just seems strange to me. I understand it’s a goal of the administration. So, in some ways, goal achieved, but I just don’t quite get it.

Jon: Yeah. And also, where there are those friction points, it’s not clear that it’s really been resolved. Like on the critical minerals, right? There’s no extension of Busan. Scott Bessent was playing it cool and saying, “We’re not looking for an extension right away.” But, well, I thought it was interesting from the initial readouts. There was zero mention in the initial MOFCOM readout about rare earths or critical minerals, but it was mentioned in the U.S. side. And on the U.S. side, it wasn’t that the issue was resolved. It actually showed that this was still a real problem and that basically when it came down to particular items, basically the Chinese were still playing games, I think was the subtext of that document, which again is remarkable that that’s coming out of a presidential engagement, right? That there’s still a funnel point there and it’s difficult for U.S. companies to get what they want.

Andrew: Yeah, I actually want to come back to the discrepancy piece between the two readouts and the two sort of characterizations of the meeting in just a second. But before I do that, I just want to ask you, I mean, how big of an issue do you think it is that we didn’t extend the Busan agreement? I mean, as you said, Scott Bessent is out there saying, “No big deal. We have plenty of time to renew this.” But that to me was kind of the one thing I personally wanted to see, and I know a lot of my clients, as companies, wanted to have some clarity on their ability to get rare earths and rare earth magnets from China.

To me, it’s a pretty glaring absence because that seems like an easy thing to say, “Okay, we’re just going to extend this agreement from a year to two years or 18 months or whatever.” What’s your thought on why that didn’t happen, or how big of a deal it is?

Jon: It’s interesting because in the final run-up to the meeting, I was hearing that the Chinese side was interested in extending it. And I could see, you know, it wasn’t just the rumors. It’s always about how you contextualize them, too. I could see the rationale for that, that they would kind of want to prop up this fragile stability through the midterm elections and into next year because nobody knows how the political dynamic on these issues could change in the next year or so. But I think it shows just how little of substance was accomplished, because if that is your one… and I think you are not wrong to use that as a benchmark, right, for gauging progress in these meetings.

And if we weren’t able to clear that, just an extension, no new agreement. I mean, that’s a pretty low bar to not clear coming out of a presidential meeting, right? Because this is going to be a real issue going forward, and it’s not going to go away. And I think what it shows, too, is how much leverage China still has given the set of issue, right? Like the administration was saying at some point, “Well, now they’ve played their Trump card, no pun intended.” And now it’s been revealed, and we all know this, first of all, we’ve all known about this, like you said, since 2010 when they did this to the Japanese.

But number two, it doesn’t really seem to be subject to the same kind of half-life that the administration might hope. And I think that’s going to be an important element of how this dynamic plays out through the summer. From my perspective, we’ve got two potential big oil slicks in the road ahead. Number one is the arms sale to Taiwan and what the Trump administration decides to do with it. You know, unfortunately, I think there’s no good options at this point.

Either the Trump administration, now that it’s out there, either President Trump postpones it, and then that sends the wrong signal to Taipei and our allies and partners in the region, and to Beijing as well. Or he goes forward with it and then, I think, we potentially find ourselves in another cycle of escalation and de-escalation, and it’s back to the future. And I think it’s the same thing with the 301 investigation.

Andrew: Oh, interesting. Okay.

Jon: Just a quick bracket. I didn’t see the MOFCOM statements this morning. Did they say they would be okay with it going back to the 45% average tariff rate?

Andrew: That’s how we’ve been reading it, basically. It sounds like, yeah, they have kind of acquiesced to the idea of we’re going to allow the 301s to go forward as long as they don’t go above Busan. That’s how we read the MOFCOM statements.

Jon: Okay.

Andrew: I don’t know. React to that. That’s interesting.

Jon: Yeah. So sliding back in, I mean, I think that that is interesting and that’s notable, right? If that is, in fact, the signal. Because for a while, I was skeptical, right? The Chinese do not tend to be magnanimous negotiators, as you know. And I could easily have envisioned a scenario where they say, “No, no, no, this is different from the tariffs that preceded this,” and that that could end up being an issue down the road as well. So, I mean, if we’re interpreting it the right way, I mean, I think it does show that China does have an interest in at least maintaining the stability, if not advancing things further.

Andrew: Yeah. And just for listeners who don’t know, what we’re talking about here is basically after the Supreme Court shot down some of Trump’s tariffs under the emergency powers, the administration is expected to use a different avenue to raise tariffs back up to that level through these so-called 301 investigations. And the administration has always said, “Well, this just gets us back to where we were with China when we paused the cessation of hostilities in Busan.” But China has said, “No, no, no, those will be new tariffs. And we don’t even want you to go back to the original rate because these are new facilities.”

Seems like maybe the two sides have agreed, “Okay, you can use this new facility to get us back to the Busan level. We won’t push back against that.” But I’m with you, Jon. I thought the Chinese would press that advantage, but it is kind of an easy thing to give, especially, I guess, last piece on this, insofar as at this point in the negotiations, do they really care about tariffs all that much? I feel like they sort of looked into the abyss on tariffs and kind came out relatively unscathed and said, “Actually, we’re not that worried about tariffs anymore.” Do you think that’s right?

Jon: I think that’s right. I think they looked into the abyss and realized they could ford across it. The abyss was not bottomless. Right?

Andrew: Totally. So, speaking of discrepancies between the two sides on how they were going to proceed with things, there have been discrepancies in the communication on the back end of this meeting. That’s, of course, to be expected in a way. Some of the discrepancy, for example, was just even the amount of time it took the Chinese to confirm that they were going to do the Boeing purchase. The language around agriculture has differed from both sides, the language around rare earths, the language even a little bit around Taiwan. And I would say, in previous rounds of negotiations since Liberation Day, those discrepancies on what was agreed to out of these various meetings has caused major, major problems, right?

Because both sides came out saying, “We agreed to this.” And then the other side saying, “We agreed to that.” And like, actually they weren’t on the same page. Our read of this is that both sides seem to generally be on the same page, and the discrepancies are a little bit more about each side kind of choosing to emphasize the more positive aspects for their narrative. But what do you think about that? Is our reading of it right? When I say our, I mean Trivium. Or do you think these discrepancies could lead to sort of another kind of backtrack and substantial misunderstanding on where we are in these negotiations?

Jon: Yeah. I mean, I think it depends on the set of issues in some ways, right? Like I think, especially on the economic issues, it’s so about the particulars, right? So, in terms of potentially disrupting the overall relationship, I think there’s less capacity for that because the two sides can continue negotiating. I think it’s possible that both sides left themselves enough base to kind of tout their victories at home. That’s one theory that I’ve heard espoused. And I think there might be some merit to that. I think some of it might be just be symptomatic, too, of how the Trump administration conducts diplomacy broadly, where you announce the agreement and then the negotiations get underway, which is the reverse of how these things normally go.

But I think there probably is an element of that going on here, especially given just how distracted the administration was and focused on the war on Iran, as we saw with the post moment coming into this. So, I think that’s an element. I think where it could be more consequential and where I worry that maybe the administration heard what it wanted to in some ways was on issues like Iran or on North Korea, where they said the Chinese support denuclearization, which has always been a code word for South Korea and other parts of this, right? That is not what we mean. And I think on Iran, too, in particular.

I think that’s intentional from Beijing’s perspective. And I think it’s no accident just to highlight for listeners that the week before this meeting, Beijing hosted Iran’s foreign minister. And I don’t think that was coincidental or an accident. I think what it allowed them to do was deflect U.S. pressure on this issue because they’ve said for a long time now that they want to see the Strait of Hormuz reopened. So, my suspicion would be that when this issue came up, Xi would have then been positioned to say, “Yeah, we supported opening the Strait of Hormuz too. We’re all on the same page.”

So, I think that that is one of those things where the divergence in substance might be different. But just to dwell on one point, it is really striking as a longtime observer of U.S.-China relations, how far we’ve come in these kind of documents, just in terms of the mechanics of these meetings. I mean, it used to be, in the early days of the relationship, as we were normalizing, we would have joint communiques, right? Like the canonical three communiques, right? And then we did joint statements for a long period of time until basically the middle of the Obama administration, if I recall correctly, where it became clear it was too frustrating and not worth the effort to issue these kind of joint statements.

And then what we had for a long time was parallel statements that were coordinated so that we weren’t talking past each other. And now it seems like we’ve entered the phase of like, we just use statements, but it’s not clear that they’re coordinated. Like the phrase I kept thinking of as I was going through the statements over the weekend was it’s like that old Chinese aphorism about a chicken talking to a duck.

Andrew: Yeah.

Jon: There was a strong element of that vibe in perusing the readouts, right? Especially until we got a little bit more of the details.

Andrew: Yeah. And that does seem to be a feature of, I guess, I mean, you’re saying it’s been happening for a few years now, but the past 18 months in particular. Obviously, both sides are incentivized to kind of play up their narrative. I think for now, it doesn’t seem like it’s going to blow up on us, but we’ll see if there’s any backsliding because of those different communication strategies. I want to talk a little bit about, going forward, what you see kind of over the rest of this year and kind of the rest of the Trump administration at least.

But maybe, obviously, Iran war continues to be the big kind of geopolitical context for this. Can you talk to me a little bit more about China’s perspective on that and what you think, how they would have characterized that in the meeting, and whether or not the U.S. wanted more from China on that? Or how do you think that all played in?

Jon: Yeah, I mean, it’s been really interesting to listen to both the president and Secretary Rubio coming out of the meeting, where they said, “We don’t want China’s help on this.” And they were very explicit about the point. They said, “Well, if we ask them to do something, there’s going to be a cost associated with that,” which is not wrong. I think that’s the way these things usually go. But the problem with that is if you don’t ask them to do something very specific and concrete, then they’re not going to do anything. And again, I think the Chinese tried to position themselves to deflect US pressure, both because of the meeting, but also Trump was touting Xi’s statement that they wouldn’t provide military equipment to the Iranians, but the Chinese have also denied providing aid to Russia’s war against Ukraine.

And there’s been this kind of huge fudge factor about, well, it’s dual use. Is it really military equipment? What is the nature of what they’re really providing? And Beijing is, I think, content to play that kind of game all day long. And I think the real question is, from Beijing’s perspective, are they going to bestir themselves to actually do anything meaningful in reopening the Strait of Hormuz or bringing this conflict to some kind of conclusion? The answer seems to be no. I’m happy to be surprised, but I feel like we’ve seen this movie before, not just in the Russia-Ukraine context, but also with North Korea. What’s really striking to me is that we all in Washington are preoccupied with every gyration of what’s going on in the Strait of Hormuz.

But I think coming into this meeting, I think for the Chinese side, it was more in their peripheral vision than central. And I was actually in a conversation with a Chinese colleague who said, and it was very bracing to hear it, because they said in the run to this meeting that, “It would be a waste of time for the two presidents to spend a lot of time talking about the Iran issue because the U.S.-China relationship is so much bigger and more consequential than this one regional issue in the Middle East.”

Andrew: Interesting.

Jon: I take it with a grain of salt because, of course, they want to deflect attention. But I think it also captured a kernel of truth, right? And this is something you and I have talked about before. It’s always important to think like, okay, how does this look from Beijing’s perspective and how large does this loom? And I think there’s a tendency to think that if it’s on the front page of The New York Times, if it’s blowing up your Twitter feed, that of course it must also be important to China. And I think this just kind of underscores that’s not necessarily the case.

Andrew: I think that’s right. But I think it’s also probably true that they do want the Strait of Hormuz open. And so why do you think they’re not doing more? I know there’s a little bit of a dogleg to the conversation here.

Jon: I think you’re right. I mean, I think they do want it open, right? I think it is a headache for them. And I think the longer this drags on, they’ll start to feel the energy crunch. And my take on this has been it’s less the energy crunch per se, because ironically, the United States and China are probably the most well positioned to weather the energy crisis despite or the energy crunch despite rising gas prices here in the U.S. I think the bigger problem for them is that is if this instigates some kind of global or regional economic contraction or recession, because then that really impinges on their export driven model. Demand starts to dry up in Europe and Southeast Asia, and other parts of the globe as well.

I think part of it is I think what they’ve learned from watching us, honestly, though, over the last quarter century, is that it’s a mistake to get too heavily involved in the Middle East, right? And I have this pet theory, too. This is kind of illustrative how things have shifted just broadly in international relations, that the Middle East is not the locus of great power relations and great power competition the way it was when Kissinger was doing shuttle diplomacy back in the 70s because we were worried about the Soviets and the U.S. brushing up against each other in that part of the world, or even 10 years ago when Russia supported intervene in and we had to do deconflection, right?

I think it’s obviously an important part of the world, but for supply chain reasons. The last thing that I’ll mention, Andrew, just while we’re talking about Iran too, one of the things that’s striking to me is that I do think there is a parallel narrative arc for how the war in Iran is playing out and how the trade war played out with China, which is basically that the administration comes in, you know, metaphorically in the case of China and literally in the case of Iran, guns blazing, right? And they think they have the advantage. And the other side, to use Secretary Bessent’s unfortunate turn of phrase, is just playing with a pair of twos.

And then they discover not that the other side is necessarily as formidable as the United States, but that there’s a lot of resilience there that they didn’t expect and that they can hold out in ways that will be challenging for us to do it politically at home. And then ultimately conclude by seeking some kind of diplomatic denouement, which is where the direction of travel seems to be in the Iran case. Not a Middle East expert, of course, but that seems to be where this is all going.

So, it’s striking to me because it feels like year one was following this narrative arc vis-à-vis China, and year two of the administration is now following the same narrative arc in a different geography.

Andrew: Totally agree with you. Actually, I was thinking a similar thought when you mentioned the rare earths piece and people saying, “Well, China’s not going to pull the rare earths card because then they start the clock and everyone’s going to start diversifying.” But one of the consistent themes between the China situation and the Iran situation is both sides were willing to play their major trump card, rare earths in China’s side and Hormuz on Iran’s side, to their own detriment in some ways, and to stick out the pain of that just to prove their leverage point.

And I think in both cases, the administration underestimated the willingness of both sides to not only play that card, but to stick with it.

Jon: Yeah. Even before the war with Iran, I had a Chinese colleague make a really striking statement to me at the end of last year after the Busan meeting. And we were talking about this very issue of leverage between the two sides. This colleague said, “It’s not that we don’t think the United States does not have leverage over China. You do. The real issue is we don’t think you have the stomach to use it.”

Andrew: Yeah. Interesting. Very interesting point. Yeah. Some of those nuggets from Chinese interlocutors that kind of display how they think are pretty interesting. The one I always use is somebody from the Chinese embassy said to me when we were talking about kind of choke points versus choke points. So, the choke point on the U.S. side being the critical minerals and rare earths reliance on China and the choke point on the Chinese side being chips, right? Reliance on the U.S.

And he said, “We only have to go from 80% to 100% to close the chips gap. You have to go from 0% to 100% to close the errors gap.” And I was like, wow, that’s right. And I think it really gets to something fundamental about how they think about that dichotomy.

Jon: Yeah, I think that’s right. And I’ve heard, you know, my colleague here at Brookings, Kyle Chan, make a similar point. For us to diversify away from China and to remediate these vulnerabilities that we have and these reliances that they have, it’s going to require, in some ways, if not quite starting from scratch, starting from a pretty low baseline.

Andrew: Yeah, yeah, for sure. Well, I’ve got a couple more things I want to get your thoughts on before I let you go. We touched on this a little bit. I want to dive a little bit further onto it is the Taiwan piece. You talked about that there’s no real good options in terms of kind of specifically the potential arms package, arms sale package to Taiwan. I just wanted to run this by you. It strikes me that in phone calls in particular, and in this meeting as well, that Xi Jinping, specifically with Donald Trump, has been a little bit more forceful in kind of sort of trying to grab Trump’s attention and say, “I want to make it clear to you that we are not messing around on the Taiwan piece. That’s the one thing where you can’t do the kind of crazy man theory and keep us guessing. You need to know that is…” It just seems like Trump’s been more forceful on a kind of person-to-person interaction level. Am I reading that wrong? Or do you think there’s something to that?

Jon: Yeah, you’re not alone in that. But I actually think it’s less forceful than what we saw in the Biden administration.

Andrew: Oh, interesting.

Jon: When I was in the Biden administration, we saw this in the Chinese readout from the virtual encounter that Biden and Xi had back in November 2021. I mean, the language in that readout was very striking, where Xi said, “If you play with fire, you’re going to get burned.”

Andrew: Oh, yeah. That’s pretty striking.

Jon: It’s praising. It’s praising when you hear that from the head of the second superpower. And I think it was designed to be, right? So I actually think of anything in general, in aggregate, it seems like Xi may have been a little bit softer in the run-up to this meeting on some of the Taiwan points, maybe until this year. I think they probably felt like they did have to put a very clear marker down, both because the U.S. side put out after the meeting of Busan that Taiwan did not come up, which I pretty remarkable. And then because you had the almost $11 billion arms sale package that was announced after the Busan meeting, which the Chinese were clearly very upset about.

And I think part of what they were trying to do is foreclose the possibility of that happening again in the wake of this meeting. They didn’t want to have a tête-à-tête between the two leaders and then another historic arms sale package announced in the wake of that. I think part of it too is just, again, it’s about choreography surrounding the meeting. This is on Xi’s home turf. And so the Chinese side gets more over the agenda and how to frame things and how to put their own spin on the ball. And so, I think it was always going to be the case that they were going to push very hard on this issue.

And again, this gets to the question of grading the outcomes from the summit. I mean, I was very struck when the president was flying back home. He said on Air Force One, “Well, I listened and I didn’t push back,” which at the very least is a missed opportunity. The better way to handle it would be to reassert firm, longstanding U.S. policy on Taiwan, rather than just let this be a lecture that goes unanswered from the Chinese side. And I think that’s part of what’s been disconcerting, and why I talk about this deterioration, and the outcome is that Trump in some ways is now echoing Beijing’s framing on this issue.

Andrew: How so? Can you elaborate?

Jon: Yeah. I mean, I think it’s not just about talking about the negotiating point, but also talking about, number two, talking about how far away Taiwan is and how hard it would be to fight a war over Taiwan, which seems like it’s more of him thinking out loud on this set of issues. But I think talking about independence on Taiwan. He said, “Both sides have to cool it, but we don’t want people on the island seeking dependence,” which is kind of Trump’s own way, I think, of channeling Xi’s explication of what’s going on, on the island.

Andrew: Were you surprised that Taiwan didn’t play more of a role in this meeting, or is that to be expected?

Jon: I think that’s to be expected. I think it’s not surprising that the Chinese leaned really heavily into this. I think, as we saw with these comments we were just talking about, Trump is not personally invested in this set of issues. And he’s made comments since coming back into office, kind of similar to what he said about other allies and partners, viewing them more as a liability than an asset that they’ve stolen or chips production, and that that’s problematic. So, it’s all consistent. So I’m not surprised, which is why I was really hoping for, and kind of relieved on Friday before these follow-on comments that at least no harm seemed to have been done. So I think that is the big question going forward.

Andrew: Well, speaking of going forward, first of all, thank you for being so generous with your time. It’s been a great conversation. But the thing I want to end on is, you know, what’s next? You know, the Chinese side now seem, I think, to confirm that Xi Jinping will come to the U.S. for a state visit. There’s obviously the also two other opportunities for the leaders to meet bilaterally in November in China at APEC and then December G20 in Miami. We’ll see whether one or both those happens. But beyond just whether or not the two leaders will meet, how do you think China in particular is thinking about the next phase? And if I can just expound a little bit, so the way I see it is China has like played, stuck very, very close to its playbook. Like they had a playbook with Trump coming in a second time.

They knew some tariffs were coming. They may have not known it was going to be global tariffs and the extent of the tariff levels and all that stuff, but they had a playbook, they stuck with it, and it, I think, has been pretty effective. But I’m not sure they had a playbook for where we are now in terms of like, okay, now how do we proactively manage the relationship going forward now that we’ve gotten the stalemate, as you call it? Am I wrong there? Or what do you think the playbook is if they have one?

Jon: Yeah, it’s a good question. I mean, I think part of what’s going on on the Chinese side, I mean, you’re right, they’ve been dealing with Trump or thinking about how to deal with Trump now for almost a decade. I think they did develop a reasonably effective playbook. I don’t know if they feel like it has to change much going forward, maybe more kind of adjusted and recalibrated now that we have entered this kind of stalemate/fragile stability. But I think the key thing from Beijing’s perspective is it’s more on the negative side than the affirmative side. They still feel like they have that leverage.

They have other sources of leverage. Like my colleague Ryan Hass was in Beijing at the end of last year, and he came back saying that he had heard a disconcerting number of references in his engagements in Beijing to the U.S. supply chain that run through China for the pharmaceutical industry. So critical minerals is kind of a beast to take on and get our arms around it on its own. But they have other sources of leverage. I think the playbook right now coming out of this meeting, and I think this has been true ever since the post-liberation day walkdown from the U.S. side, it’s not that the Chinese think in terms of dynastic cycles. They have outlook calendar like the rest of us.

And so the deal in Busan was agreed to in November, and it runs through the following November, which is right around the time of our own midterm elections. And I think that has been a focal point for organizing their negotiations and posture towards the United States. They are working backwards from that moment, which is why I think they conceded so little of substance in this initial encounter between the two leaders. I think Secretary Besson argued that this would be stabilizing for the relationship to have multiple encounters, but it also provided a big disincentive for Beijing to offer much to the U.S. side.

Andrew: Great point.

Jon: Especially because I think what they learned from the first trade war is that as this goes on, Trump is going to get antsy for a deal, especially in the run-up to our midterm elections. And that whatever concessions they do make, Trump will have every incentive then to tout that as loudly as possible as being an awesome sweetheart deal. And so, I think that is their calculation that whatever they do end up giving in that next encounter, they will get more bang for the buck for it. And I think it gets back to this theory that I had at the outset. They are trying to buy time and space and being effective, you know, hardscrabble negotiators. They’re trying to find the lowest price point for doing that. So why pay now when you can get the same or even an outsized impact six months from now?

And so I think that is their playbook through the election at least. And on the point about the other two meetings, I am personally skeptical that those other two meetings and multilateral engagements will happen. These guys are both septuagenarians who I don’t think like to travel much. Xi has, you know, as Neil Thomas has documented, is not traveling as much as he used to. Our president’s going to be 80 next month. And so, it’s a big schlep across the Pacific as you appreciate more than most people. And the other element, too, is that the timing of those meetings are awkward. It’s always hard for U.S. presidents to get away either around election season or in the aftermath.

I mean, I think this happened even during the Obama administration when we were trying to pivot to Asia. And, you know, President Trump is not particularly fond of multilateral forests. So is he really going to make the trip or is he going to be focused on other things? And same thing for Xi Jinping. My suspicion is we’ll probably get one more touchpoint this year. And then I think it’s an open question about how this plays out as we go into next year. I think what Beijing will want, at the very least, is to take a minute to pause in the last quarter of the year, hopefully extend the stability, but try to sort out what’s going on in the United States politically and how this is all shaking out.

They’re not the most politically salient issue in U.S. politics, but to the extent they need to recalibrate, take it from there. But I think that’s kind of the next big pivot point.

Andrew: Yeah. I mean, you make a ton of great points. We can’t expound on them too much. I just want to make a couple of reactions. One is a great point about November/December. I mean, we looked at it, and if Xi Jinping comes back to the U.S., it’ll be the first time any Chinese president, general secretary, has come to the U.S. twice in one year, in one calendar year, which would be pretty remarkable. And I was already thinking around December. It’s just everybody’s in holiday season at that point or holiday mindset. So, you’re the first person I’ve heard say, “I really just think it’s going to be one more meeting,” but I think that’s a good shout and a kind of an out-of-the-money call. So, I like it.

On China, like waiting to press their advantage, I also think that’s interesting because just as somebody who personally does some negotiating just in the life of our business, I have experienced, especially on our own side, people really get uncomfortable. They want a resolution. And so, the longer you’re able to make someone else sweat it out, if you’re willing to be the patient party, you very, very often get a better outcome because people just get antsy, exactly like you said. And so, that’s a really good point. And of course, that’s something that the Chinese, we are the same, we don’t necessarily see the Chinese as thinking in dynastic cycles, but they do have some kind of strategic patience, right?

And so, that might be interesting to see how that plays in. Last question. So, you made a good case that they’re basically thinking backwards from November. Is there a plan for the rest of the Trump administration or beyond? Or is it just kind of like get to November and then see what happens?

Jon: I think there is a plan. I think they do feel like they have leverage and they will continue to use that. And I think this is part of the genesis for this idea of a new vision for constructive strategic stability. I mean, they said, they were explicit, they said this would run through the course of President Trump’s time in office.

Andrew: Yes. Right.

Jon: I think that was Wang Yi’s comments. So ,like that’s pretty clear like — this is the plan. Sign here and we are good to go for the next two and a half years or so. So I think that is kind of the game plan, to keep this locked in as much as possible. And then I think what they need to do with President Trump in particular is they need to do just enough after the midterm elections to keep Trump invested in the diplomatic process and to keep him from lashing out, which is basically what happened in the first term. So, that is going to be the real trick for them. I think that’s already the trick for them. They are trying to find the lowest price point, but the limiting factor is don’t let Trump get impatient or feel like this is never going to come to resolution. Give him just enough so that he’s willing to do the next meeting.

And I think it’s an interesting point about Trump too, because I think it is something, I don’t want to stereotype, there’s something quintessentially American about this, that you just want to resolve the problem and move on to the next thing. And I think the Chinese are willing just to wait a couple of weeks longer and sweat it out a little bit.

Andrew: 100%. Well, and one thing that adds to that is, of course, our sort of media cycles, right? Is we want the resolution, we want the story. What have you done for me lately kind of attitude, which just adds to kind of the political narrative and the pressure. Obviously, the Chinese don’t have that since they don’t have free and open press to be putting that kind of pressure on them.

Jon: You don’t count the whole party democracy that we’re going to experience next year in the run for the party Congress as part of that?

Andrew: No, yeah, well-

Jon: Whole process democracy. Whole process, sorry.

Andrew: Yeah, that’s a debate we can have another time for sure. Yeah.

Jon: One concluding thought in that vein, Andrew, is, as idiosyncratic as President Trump is and as different as he thinks of himself as being from his predecessors and as different as he actually is, there are some ways in which he’s very much classic second-term U.S. president, where he has put foreign policy front and center on the agenda. I was already thinking about this this time last year when it was clear that he was not very hands-on about the one big, beautiful bill that was working its way through Congress.

He is really thinking about… and you see this in Iran, too, right, where he wants to be the president who could fix this problem that nobody else could really get their arms around. And I think it’s the same thing with China. He’s very much focused not just on foreign policy, but on his place in history. And China, I think, for any U.S. president, is an important part of that puzzle. And I don’t want to psychoanalyze the guy, but like I said, he’s going to be 80 in a few weeks. This question of legacy and his place in history, I think that is very much at the forefront of his mind right now.

Andrew: Well, that’s a great point. And I would just say, without making a judgment one way or the other, I am confident that Donald Trump is going to feature quite prominently when historians write about this epic in global and American history. So, maybe he doesn’t have to worry about legacy too much because there’s no doubt to me that he’s going to be prominent.

Jon: Future history textbooks will have the Gilded Age, and then they’ll have the Gilded Pages.

Andrew: Yeah, exactly right. Exactly right.

Jon: Although they won’t have books anymore. They probably don’t already.

Andrew: Yeah. It’ll all just be AI piped straight into our brains.

Jon: Yeah, exactly. It’ll be Neuralink straight to the brain, right? Then we’ll all get our Renmin Ribao that way in the morning.

Andrew: Yeah, exactly. Oh my gosh. Well, that’s a really dark turn. Jon, thank you so much. This has been a great conversation. It’s great to have you on, and I hope you’ll come back soon as well.

Jon: Absolutely. Absolutely. I really enjoy this. I am not just a contributor now. I’m a longtime fan and I’ve got you guys in my earbuds on a weekly basis. Though I will confess, when we get the rundown of the economic stats, it’s really hard to do on a run. I have to actually be on my desk or doing something less distracting to ingest all that.

Andrew: Fair enough.

Jon: But it’s great. It’s great.

Andrew: Well, that’s kind words. We really appreciate it. And I’m actually the same. It’s like when I listen to political podcasts, once they start going through the polling numbers, I just tune out because the numbers, when I’m on our own, it’s hard to do. So, good note. Good note. Jon, thanks so much. Appreciate it, man.

Jon: My pleasure. My pleasure, Andrew. Anytime.

Andrew: And listeners, please stick around for my conversation, speaking of macro numbers, with Joe Peissel, coming up now.

I’m joined now by Joe Peissel, our lead macroeconomic analyst on China, to talk about the latest data from China’s macroeconomy that came out, I guess, just a few days ago. We’re recording May 20th in the morning Eastern time. And this would be the monthly data from April. So, the data is released about two weeks after the month ends. And the big story, Joe, from this last month is that April really showed a downshift in Chinese economic growth, China’s economic trajectory, largely, I think, due to impacts from the Iran war, but also due to some other factors going on in the economy. So, why don’t you just walk us through it? What’s the headline takeaway from this latest batch of data that you saw?

Joe Peissel: Yeah, thanks, Andrew. The headline takeaway is that China’s economy slowed significantly. We actually flagged in March’s data that there was early signs of a slowdown, and this intensified in April. So, industrial output grew at a much slower pace than it has previously. Investment actually declined. Consumption indicators were really, really weak. So, as a general takeaway, the economy performed poorly in April. Most of this is linked to the Iran war. So, there’s a very clear economic fallout from the Iran war. But also, there are some domestic drivers, especially behind the decline in investment as well.

Andrew: Well, let’s dig into all this a little bit. We’ll start with the supply side of China’s economy, particularly looking at the industrial sector. The main indicator we watch there is industrial value added or the growth of industrial value added, which you talked about slowed. But what’s going on? What caused that to happen?

Joe: Yeah, so industrial value added, that grew by just over 4% in April. That’s the weakest reading in almost three years, in almost 36 months. And it’s the third or the fourth consecutive month of slowing growth. So, there’s a clear trend here, which is the rate of expansion of China’s industrial base is slowing. So, for comparison, in March, it actually grew by almost 6%. So, a really sharp drop down to this 4.1% growth we saw in April. And this dropping growth, this is really concentrated in sectors that are exposed to the Iran war. So first and foremost, energy-intensive sectors, things like mining or metal manufacturing, things that have huge energy inputs, production of concrete, glass, things like this.

Output on these energy-intensive sectors actually declined year on year. And then other parts of China’s industrial base, which are also exposed to the Middle East and supply chain disruptions. So we can think of things like plastics, which rely on hydrocarbon inputs, chemicals, they also rely on all different sort of feed stocks, which are sourced from the Middle East. Growth in these areas also slowed really quite sharply, quite drastically. So, this exposure of China’s industrial base to the Iran war, that’s a theme we’re also seeing in the inflation data. So PPI, that’s producer price inflation, that increased in April.

That’s the second month of PPI growth. But the price increases, again, were concentrated in energy and other areas with Middle Eastern exposure, while broader PPI, so PPI in other areas of the economy, which aren’t quite so exposed, grew at a much more moderate pace, or in some cases actually continued to decline. So, I’ll give you an example. Overall headline PPI was, I think, 3.8%, but PPI in consumer goods actually declined 1%. So, we can think about that’s the price that factories that manufacture these consumer goods are selling to retailers or to wholesalers.

And that disparity between headline PPI and PPI at a sub-sectoral level is actually really concerning because for these producers of consumer goods, what we’re seeing is the price of their inputs are increasing, but the price they’re selling their outputs is continuing to decrease. So, we’re actually seeing a real compression in their margins, and that’s going to impact things like investment decisions, production decisions, headcount at the factories, things like this.

Andrew: As a business owner, seeing your costs go up and your sales price go down is definitely not something you want to see.

Joe: Some nasty combination.

Andrew: Yeah. We’ll get into sort of the knock-on effects of that. I’m going to throw you a little bit of a curveball. So, if you don’t have a great answer at hand, that’s fine. I’ve been thinking about this because clients keep asking, “When are the effects of the Iran more really going to show up in terms of China’s overall economic output, industrial output, economic trajectory?” This is the first like big sign in April. But I guess my question is, in terms of the slowdown in industrial output linked to the Iran-linked supply chain disruptions, is this straight-up shortages like industrial producers in China can’t get their hands on the goods that they need?

Or is it prices are going up so they’re just choosing to buy less? Or is it a combination of kind of a preemptive slowdown in industrial output kind of to manage what could be a future shortage? Does that latter one kind of make sense or is it kind of combination of all three? I’ve kind of got my sense of what might be happening, but where do you think we are in that dynamic?

Joe: Yeah. So, I mean, that’s a great question. The data suggests it’s more of a price issue rather than actually that manufacturers can still, or importers can still access these goods, but they’re paying a premium for that. And we see that in China’s import data, like imports have surged. In volume terms, they’re pretty healthy. In value terms, they’ve gone up massively because, well, firstly, importers are kind of scrambling to secure supply chains before there’s any more disruption, but also because the price of imports has also increased for raw materials across the board.

So, the data would suggest it’s mainly an issue of this increase in the cost of sourcing goods rather than actually being able to obtain them. In volume terms, supplies okay. In value terms, that’s where it’s really hurting manufacturers.

Andrew: Cool. That’s great to know because I always talk to clients, and I’m like, “The price action is going to make or going to have an impact and it’ll have one impact. We’re seeing it, right? As costs go up, you’re going to… basically, you can buy less. If you’re a business and you’ve got a pot of money for importing supplies, let’s say, you know, you’ve got a million dollars, well, you’re still going to spend a million dollars, but that’s going to buy you fewer items, right? But the game changes when you actually can’t get the goods.

A supply shortage is way different than a supply disruption that causes increased prices. And we don’t seem to be at the full-on shortage for a lot of these industrial goods yet. Am I hearing that right?

Joe: Yeah, correct. China also has purchasing power or monopoly power as a massive importer, and it’s able to diversify its supply chains as well. So, you think, for example, that energy imports from the Gulf states has absolutely plummeted. But at the same time, China’s increasing import, diversifying, right? So increasing imports from Russia, for example. I’m not necessarily saying that that’s going to replace totally the decrease in imports from the Gulf states, but it helps to mitigate the supply chain disruptions.

Andrew: Super helpful. Okay, awesome. Or maybe not awesome, but excellent explanation. Let’s move on to kind of the knock-on effects of a lot of these movements in the industrial sector, which is kind of, as you pointed out, you’re causing companies to invest less. Specifically, manufacturing fixed asset investment declined 4.3% year on year in April. What’s happening in the broader investment dynamics in China’s economy?

Joe: Yeah, so it’s not just manufacturing investment, although you rightly said that did fall in April, but broader investments, aggregate investment across the economy, fixed asset investment, that fell by over 9% in April, which is a huge decline. And this was primarily driven by a collapse in real estate investment, which we know real estate investment has been declining. That decline accelerated in April. It fell by over 20%. But there’s also a surprise decline in infrastructure investment. Now, on the surface, this is really unexpected because central government has been emphasizing how important infrastructure investment is going to be this year and make commitments to ramp up infrastructure investment, increase the value of investment and also the speed with which it rolls out investment projects and the efficiency of the investments.

So, this decline in April really kind of this was unexpected and markets were surprised by this. There are broadly three factors behind this. So, the first is that local governments, they issue what are called special purpose bonds. So, this is a debt instrument that traditionally was earmarked just to fund infrastructure investments. But the amount of special purpose bonds local governments are issuing to fund infrastructure has actually declined. So, it declined by about 20% in April. And that’s because instead, these SPBs, special purpose bonds, they’re being repurposed for other uses, in particular, paying down hidden debt or purchasing back unused land from property developers.

So, as local governments ramp up or increase these efforts to either pay down debt or buy back unused land, this is crowding out or replacing capital that would otherwise be invested in infrastructure projects. So that’s the first factor here. There’s been a decline in SPBs that are earmarked for infrastructure. The second factor is a decline in a facility, a mechanism used by the central bank that provides cheap credit to policy banks, which then use that to fund infrastructure. So, the PBOC, that’s China’s central bank, they have a mechanism that’s known as the pledged supplementary loan facility, the PSL facility. This provides cheap credit. And in April, lending under the PSL actually contracted by about 200 billion.

So, there’s less of this cheap credit available to invest in infrastructure. And the third factor, which I think is the most significant, and it’s certainly been the one that’s been least talked about, is reforms to the way state-owned enterprises remit profits to the central government. So this is quite archaic. I’ll try and explain it simply. And by the way, I should also add that this isn’t just my research. A colleague of ours, a senior analyst called [Wenyi Sun 01:03:23], she’s done a load of research into this as well. So I don’t want to take credit for this solely. This has really been a joint research project between us.

So state-owned enterprises, they’re obligated to turn a portion of their profits, to give a portion of their profits to central government. And this is used for different purposes. Some of it’s actually re-injected back into the SOEs via equity injections. Some of these remitted profits are transferred to other parts of the government’s balance sheet and used for various spending obligations. And this system has been in place since at least 2007. Now, late last year, in late 2025, the finance ministry reformed the way that state-owned enterprises remit their profits.

So the main thing, the biggest change from these reforms was it ramped up the profit remittance ratios. So, for example, SOEs that operate in strategically important industries like telecommunications or electricity generation or coal supply, their profit remittance ratio increased from 20% to 35%. That’s a huge increase. That’s almost, overnight, a doubling in the amount of retained earnings that SOEs have to turn over to central government. And this has a significant impact on SOEs’ investment decisions because typically they would fund a portion of an investment with retained earnings.

As a general rule, this really varies across industries and infrastructure projects, but as a general rule, infrastructure investments with about 20% equity and the remaining would come from debt. So, we can think every one RMB reduction in SOE retained earnings translates into a five RMB reduction in fixed asset investment. So actually, the increased profit remittance ratio has an exponential or disproportionate impact on fixed asset investment. And our modelling of this issue suggests that the increase in profit remittance ratios implemented by the finance ministry late last year could lead to up to a 1 trillion reduction in fixed asset investment.

That’s about two and a half percentage points of fixed asset investment growth in 2026. So it’s a massive issue. It hasn’t really been talked about much. And we think this is one of the major drivers of this kind of surprise decline in fixed asset in April.

Andrew: Yeah, thanks for walking us through that. I know you’ve been doing that great research. I know you’re going to publish a piece on it soon. We could do a whole pod on that, or at least a segment of a pod. We should get that. Make sure we put that on the book soon so listeners can kind of hear the full story there. And also, we should look at putting out a public piece so listeners can be on the lookout for more details on that. But it really is great work you guys have been doing and kind of at the forefront of an underappreciated dynamic, I think. Just to dig in a little bit on everything you just said, so what I heard was the pullback in manufacturing investment largely impacted by sort of overall industrial activity and impacts of the Iran war.

But then the other parts of investment, infrastructure in particular, and property, of course, both being pulled back for sort of more idiosyncratic domestically related issues. Is that right?

Joe: Yeah, that’s exactly it. That’s exactly it. So, it’s not just when we talk about the slowdown in economic activity in April, to a large extent, that’s due to the fallout from the Iran war. But there are also these domestic issues going on as well. It’s not just an Iran war story here.

Andrew: Yeah, that’s good to know because, I mean, it’s easy to look at it and just say, “Oh, China’s economy is being impacted negatively by the fallout of the disruptions from the Middle East.” But really, there’s a lot more going on. So you’ve got a sort of, I don’t know if it’s cyclical, but some sort of fundamental domestic slowdown on top of an external shock, which is never a great place to be in. But sort of speaking of the domestic part of the economy, we’ve gone through industrial activity and investment. Another big one on the domestic side is consumption. What are you seeing there?

Joe: Also bad. Yeah, sorry, man.

Andrew: I think that’s exactly what you said last month when we talked about this.

Joe: Yeah, yeah. Nothing changes, man. I’m sorry to be such a Debbie Downer.

Andrew: That’s okay.

Joe: Yeah, so I mean, retail sales of consumer goods, I think they grew by 0.2% in April year on year. So, it’s next to no growth. And part of this, again, was due to the Iran war. So, we can think of some retail sales categories which are more exposed to impacts of the Iran war, like the sale of petroleum products, for example. I mean, that declined massively. But there were also other categories which fell. So, for example, the sale of cultural goods or sports equipment or leisure equipment. All of these, in terms of retail sales, were declining year on year, which really suggests just a broader issue with consumer confidence and consumer willingness to spend.

What I found most concerning in the data was actually the decline of big-ticket item sales. So, this is kind of more expensive consumer durables, things like autos, home appliances, furniture. Sales of these goods, these big-ticket items, they fell by double digits year on year. And why that’s so concerning is because these are exactly the retail sales categories which are being subsidized by the central government. So, there’s a central government initiative, the Consumer Goods Trading Program, to boost sales of these products. And they’re falling by double digits. And that tells us that the stimulus impact of this trading program has really run out of steam.

So, this program has been in implementation for several years now. And what it does is, because there’s these subsidies, it incentivizes consumers to essentially pull forward future consumption. So, if I’m a Chinese consumer and I’m planning to buy a car in the next few years, why not buy it now and take advantage of these subsidies? It’s borrowing future demand and realizing it in the present. Well, of course, you can only do that for so long until you run out of future demand, until you kind of exhaust this demand.

Andrew: You’re not going to buy a new refrigerator every year for the next five years?

Joe: I’m not, no, no. Even if it is subsidized. So this is what we’ve seen. Kind of the stimulus has now been exhausted. And so, we’re now seeing a decline in the sale of big-ticket items as well. Now, in theory, Beijing could double down on this. It could increase subsidies even more or expand the program scope. But given the diminishing returns and kind of the fiscal constraints the government faces, this doesn’t look likely. And so, it’s a pretty negative outlook for consumption in the coming months.

Andrew: Okay, well, you know, I gave you a pass for being Debbie Downer today, but that brings up the question, if you’re Beijing, you’ve got a lot of down arrows when it comes to your economic indicators. Basically, nothing on the horizon that looks great. How do you respond to all these headwinds?

Joe: Yeah. I mean, from a policy perspective, it’s really tricky because Beijing’s standard policy response is ill-equipped to deal with this. We can think about what would policymakers, what would they normally do? Well, infrastructure investment is a go-to policy response, right? But we’ve already seen there’s really this gap between Beijing’s spending ambitions, what it said it’s going to do to infrastructure spending this year, and the reality on the ground because infrastructure investment actually declined in April. When we think about infrastructure stimulus, it’s not as simple as central government spends more, economy grows more. As we’ve seen, we need to think about what is the central bank doing in terms of its PSL, its pledge supplementary lending facility?

How much cheap credit is it providing? How are local governments prioritizing paying back hidden debt over infrastructure stimulus? What is the behavioral response of SOEs as they have to ramp up profit remittances? So, there are variables when we think about infrastructure stimulus that are outside of central government’s control. And so, simply to spend more doesn’t necessarily mean that infrastructure is going to grow or it’s going to stimulate the economy. Another typical policy response could be supply-side support. We see this usually when the economy slows down, Beijing tries to support its manufacturing base. But the effectiveness of this support is contingent on manufacturers being able to export what they produce.

And this is now uncertain. And maybe we can talk about why in a minute. But because of the Iran war, maintaining export growth is no longer a certainty. And so, that kind of puts question marks over the impact of any supply-side support. And of course, consumption support, what we’ve just talked about, the consumer goods trade-in program is running out of steam. So, in many respects, Beijing’s hands are almost tied when it looks about what it can do domestically. I think the best economic response it probably has is actually a geopolitical one in trying to leverage an end to the Iran war.

And there’s huge question marks about how much leverage it actually has. But trying to support or accelerate a quick end into the Iran war, this would reduce inflationary pressures and it would remove headwinds against export growth. That’s probably the best thing it can actually do at the moment is rather than thinking about domestic policy, what can it do from a geopolitical one?

Andrew: Yeah, as a policymaker, it’s never good when it’s like your best option is, what can we do to support the economy? End a war that someone else started. That’s not a great policy option to have as your top choice, but I’m glad you brought up the export piece. We should dig into that a little bit as well. I mean, basically, it sounds like what you’re saying is continued reliance on export growth is pretty much the key to navigating out of the current economic funk. Talk us through where we are on exports in terms of the latest data and what the trajectory currently looks like, say, absent any kind of resolution from the Iran war.

Joe: Yeah, I said this, I think, last month when we spoke. When we think about the outlook for China’s economy in the next, say, six months, there are some certainties. We can be sure China’s industrial base will continue to grow, even if there’s been a slowdown; it’s still going to expand. We can be sure consumption is not going to perform very well. The one big question mark, one of the most decisive factors for China’s economic performance this year is exports. And there is a lot of uncertainty about how they’re going to perform. So, in April, they surged, they grew by double digits. I think it was about 14% or slightly over. Really strong growth. And this was received well by the markets because it was a sharp reversal from what we saw in March. So, exports in March grew by about 2.5%.

And so, at the time, there was a lot of panic in the investment and analyst circles that this 2.5% growth in March is evident that the Iran war is starting to weigh on China’s exports. And actually, at the time, I mean, I don’t want to blow our trumpet too much, Andrew, but we actually argued against this at the time and said March’s weak growth wasn’t an Iran war-driven deterioration in trade. It’s a combination of base effects because exports in March 2025 were really high. And so just mathematically, March 2026 growth is going to be a little bit lower because it’s coming off a high base. And there’s seasonal effects because Chinese New Year was longer than normal, and it happened later than normal as well.

So, there’s kind of an impact on factory production. So, April’s rebound in export growth to us was really no surprise. We expected it. What that means over the coming months is less certain. There are clear headwinds, the main one being that China’s key export markets. So we can think about Africa, South Asia, Southeast Asia. These economies are highly reliant on energy imports. And so this explosion in energy prices is hammering household purchasing power. And that’s going to reduce their demand for Chinese consumer goods. That’s a clear headwind to export growth in the coming months.

But there are also potential upsides, which we’ve talked about before. One of the main ones being Chinese manufacturers are more insulated from global energy prices than other countries. And that actually makes manufacturers more competitive relative to foreign counterparts. I’m also expecting a rise in export of Chinese new energy technologies, so things like solar panels, EVs, batteries. I mean, I put my hands up. It hasn’t really materialized in April’s data, but I’m expecting that to happen in the coming months.

Sometimes these things can take a few months to work their way through. But this rise in oil prices is going to provide a clear incentive for governments to accelerate the energy transition, and that means more demand for Chinese clean tech. This is a kind of a long-winded answer, all that to say there’s up and downsides. It’s kind of unclear, but it’s certainly one of the most important factors to look out for when trying to understand how China’s economy is going to perform this year.

Andrew: Yeah. On that last point on the electrification, I’ve got friends in Texas, where I’m from, even talking about buying electric vehicles, which if the Texans are moving to electric vehicles because gas is too expensive, you know something’s changed. But to your point kind of on the relative performance of Chinese exports, I mean, that’s an important thing, I think, to keep in mind. Like there’s a lot of very obvious headwinds to overall Chinese exports because of the Iran war. But if Chinese exporters can still do better on a relative basis, then they can continue to gain market share.

And even in sort of a down market or potentially even sort of global recessionary type environment, they can still do okay compared to other economies, which is kind of all you can do in a situation like that. And improving on a relative basis is still sort of a win in that kind of context, right?

Joe: Yeah, I think conventional economic analysis would tell us a global recession or a slowdown in global economic growth is going to be bad for Chinese exporters. But I agree. I think there are actually potential exceptions this time round, which means exports could surprise to the upside. It’s not out of the realm of impossibility for them to surprise to the upside.

Andrew: Well, thanks for running us through all those dynamics from the latest data and kind of what it all means. We can wrap up here, but I guess, you know, what listeners always want to know is, you know, what’s next? So, basically, does this data fundamentally change or impact your view on what China’s economy looks like six months, a year, two years from now? Where are we headed here?

Joe: I mean, certainly not two years from now. Policymakers have been very consistent in achieving this long-term structural transformation. So, growth of high-value manufacturing and tech self-sufficiency and all this sort of stuff. And the short-term, the cyclical impact from the Iran war doesn’t change any of that. But certainly over the short-term, we’re starting to see that we flagged in March, there were signs of a slowdown, mainly driven by disruptions in the Middle East. And this has become more clear, more concrete in April. So, over the short-term, there’s definitely some turbulence for the economy.

But those thinking about the long-term picture, the short-term cyclical impact doesn’t change that.

Andrew: Yeah, good to know. So, everyone writing about the death of the Chinese economy and the Chinese economic growth model might once again be a little bit premature.

Joe: I’ve heard that before.

Andrew: Yeah. I mean, the medium-term trends do tend to assert themselves over time.

Joe: That’s it, yeah. Well, listen, Joe, this was excellent. Thanks so much, as always, for catching us up on this stuff. I appreciate you taking the time today.

Joe: Yeah. Cheers for having me, Andrew.

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

On the first part 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 the immediate takeaways from the leaders’ summit in Beijing.

The two discuss:

• Why the meeting was heavy on symbolism but light on concrete outcomes

• The significance of China’s high-level diplomatic treatment of Trump

• What to watch for on export controls and a possible extension of the Busan agreement

• The prospects for a future “board of investment” mechanism governing U.S.-China capital flows

• How Iran and the Strait of Hormuz factored into the talks

Andrew and Cory also assess why both sides appear eager to stabilize relations — even if major structural tensions remain unresolved.

Then in the second half of the pod, Andrew is joined by Trivium’s Head of Markets Research Dinny McMahon to break down the PBoC’s latest quarterly monetary policy report and what it reveals about Beijing’s economic priorities.

The two discuss:

• Why the PBoC is signaling greater concern about currency stability

• How the Iran war is reshaping China’s monetary policy calculus

• Why interest rate cuts may now be less likely in 2026

• Potential reforms to how mortgages are priced in China

• Beijing’s intellectual defense of its export-led growth model

Transcript

Andrew Polk: Hi, everybody. Welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium Co-Founder, Andrew Polk, and I am joined today once again by Trivium’s Head of Supply Chain and Critical Minerals Research, Cory Combs. Cory, how’re you doing, man?

Cory Combs: Doing well, thank you.

Andrew: Yeah, good to have you on as always. I have Cory on right now just for a quick discussion on the outcomes of the Xi Jinping-Donald Trump meeting that just wrapped up today. We’re recording at 6 p.m. Eastern time on Friday, May 15th. So, the meeting just wrapped up this morning, U.S. time. Still not a ton of outcomes from it, but I just wanted to get a quick conversation with Cory on the books about our immediate reactions.

Next week, I’m going to have a more in-depth discussion on not only the outcomes of the meeting, but sort of broader U.S.-China and some other interesting elements of the China politics and policy side with John Czin from the Brookings Institution. So really excited about that. So, we’ll do more in-depth next week, but wanted a quick touch with Cory now. And then in the second half of the pod, or what was really more the second 80% to 90% of the pod, I am talking with Dinny McMahon about, again, macroeconomic developments, but specifically the monetary policy report, the Q1 monetary policy report that the PBoC, China Central Bank, put out.

So, most of the pod will be on that. But as this is the big news of the day, I had to get into it a little bit. So, before we get into it, of course, Cory, got to start with the customary vibe check. How’s your vibe, man?

Cory: Mobile. I am currently in a car, not driving, don’t worry. Parked. But I just got back from travel and I had a day with my wife, and I just dropped my wife off at the airport, which is why I’m recording from not my usual location.

Andrew: Nice. Well, good. I hope you get back and have a relaxing Friday with a place to yourself. I’m in the opposite... Well, actually, I’m not the opposite. I’m in the same position. I’m at home Friday, 6 o’clock. My wife is also traveling. She went off to Chicago this weekend, but I am not going to have a quiet, relaxed evening to myself. I am solo dadding. The girls and I, my daughters and I are going to have some fun. We’re going to a baseball game tomorrow, which I’m excited about, the Nats game. So, we got my younger daughter’s soccer game tomorrow as well. So, trying to notch the first wing of the season. So, that’s my vibe. It’s a sports vibe weekend. So, that’s where I’m at.

Cory: Nice. Love it.

Andrew: Well, with those comments and our vibes out of the way, we also have to do the quick housekeeping, of course, just to start. 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 policy towards China out of Western capitals like D.C., London, Brussels, and others. So if you need help on that or on domestic China policy developments, give us a shout. We’re at hq@triviumchina.com. We’d love to have a conversation about how we can support your business through your fund.

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All right, Cory. Trip just wrapped up. Big meeting. Donald Trump, Xi Jinping in Beijing. The Chinese rolled out the red carpet. Really kind of personal touch from Xi in terms of protocol. Han Zheng met Trump at the airport. That was, in terms of protocol, pretty senior person to meet him there. More senior than the individuals they’ve sent in the past to meet U.S. presidents arriving at the airport. They also hosted Trump in Zhongnanhai, the sort of secretive leadership compound where the Chinese government operates, Chinese Communist Party operates.

So, in terms of protocol, they kind of gave them the bells and whistles. Trump seemed to be pretty impressed. But for all the bon ami, not a ton of outcomes from the meeting. In terms of when we’re recording, there’s really been zero announcements in terms of anything that was agreed to, any deals that were made. So we’re, right now, pretty lacking on the concrete outcome side. But given all that, just having set the stage, just tell us kind of your initial reactions on what you thought the key developments were and any impacts, if any.

Cory: Yeah, absolutely. I think, you know, when I asked to describe how the meeting went or how the summit went, I think the answer is good enough. I mean, it wasn’t much to write home about. I love whoever titled today’s update on it, which is the summit could have been an email. That really does capture a lot. And that said, it is really important that a lot of different topics were reportedly covered. Apparently, they did talk about trade. They did talk about investment. They did talk about export controls at some level, reportedly. And we say that because nothing has really been confirmed.

The downside of this is, yeah, it would have been nice to come away with concrete takeaways. Business community could relax. Diplomatic community could kind of take a seat back, a deep breath. That didn’t happen. But the reason I say it’s still good enough is, for me, the real benchmark is, did it set the scene for further meetings to come? The most important single facet or aspect of this, to me, was, do the leaders set the tone for the two countries to meet and speak constructively and to come to terms on deals to come? We’re not surprised that, you know, we didn’t see more concrete outcomes.

But more importantly, I’m not really that concerned that we haven’t seen much concrete yet, because I think it will come in the next meetings. So for me, what I was really concerned about is, are we going to have the next meetings? There was a lot of romance happening, a lot of appreciation, the dinner menu looked great. I saw that YMCA was on the song list, a couple of our analysts liked that. It was good vibes all around. But more importantly, both sides, you know, I think very credibly signaled they want to move forward in a constructive direction. They want to stabilize. That’s all that really mattered to me. They’re going to meet again. That’s the big takeaway for me.

Andrew: Yeah, that’s great. I mean, I think that makes sense. I also agree with you that it’s likely that not only more will come out of subsequent meetings, but we may even get some sort of concrete deliverable, even maybe an extension of the Busan agreement maybe in the next day or so. I don’t know what would be sort of holding them back from announcing that, but we noted that Xi Jinping, in his comments to Donald Trump before they kicked the cameras out, said something about, you know, yesterday our teams made good progress or even like came to a good agreement or something like that, that will benefit both sides and benefit the world.

So, it sounded like there was, based on those comments, maybe even some concrete developments out of the previous meeting, which was Scott Bessent, U.S. Treasury Secretary, and He Lifeng, the vice president or vice premier in charge of the economy/key negotiator on the Chinese side, they both met, those teams met in South Korea just before the Xi Trump meeting. So maybe something was hashed out there and they’re just kind of finalizing some details. We don’t know. Hopefully, we’ll get some clarity here soon. I mean, like you said, something was agreed.

It’s reported that 200 Boeing aircraft will be purchased by the Chinese. The Chinese side did not confirm that officially. So, there’s some reporting that things are there. It’s a little strange that we don’t have concrete announcements from either side, but I’m with you. I think more will come in the immediate day or two, and then we’ll get potentially further outcomes from these other upcoming meetings. The most important to me is whether or not they extend the Busan kind of agreement.

I think from the Chinese side, that’s the main thing they want, basically an agreement that we’re not going to go back to backsliding. We’re not going to continue taking actions on an ongoing basis against each other, specifically on the export control side. And so, I’m quite sure that that’s one of the main things that the Chinese want to make sure gets agreed to. So we’ll be on the lookout for that. I wish we had a little bit more information, but as you said, at the very least, there was no backsliding, right?

We’ve got more meetings on the book. So, I think overall, we’re feeling okay about this meeting. The expectations were low, as we think they should have been, and we didn’t really expect anything. Both sides managed expectations well going into this, that there wouldn’t be a ton of really big concrete deliverables. But also, it seemed like there was good interactions between the CEOs, the U.S. CEOs who were on this trip and the Chinese leaders as well, specifically Li Keqiang. So also, some momentum on the commercial side, again, absent any specific deals. But if we’re grading on vibes, the vibes were good. And at the very least, that keeps us from going backwards, which I know sounds like a low bar, but is actually at this stage quite important.

Okay, Cory, that’s kind of my immediate high-level take. Not a lot groundbreaking. What else are you on the lookout for just quickly?

Cory: Yeah, I mean, first off, exactly, just to summarize, it was a low bar. And I think that’s a perfectly fine summary of the whole situation. Beyond the export controls, obviously, that’s the number one piece, get an extension of the postponements from Busan. And just for anyone wondering, it’s like, you know, why does China want the postponement? China wants stability. And in its view, having the export control situation basically, at least officially speaking, even if it gets undone later, having that on the books is stabilizing. You know, we’ve heard suggestions that they would push for that even through the end of the Trump administration, right?

So, this isn’t just a US needs this situation. China is also very much pushing for that as far as we’re aware. So, we think there’s a very good chance that it happens, high likelihood that it happens. The other piece that I think there’s maybe a little bit more of a question mark around is the board of investments. And for those who somehow have avoided having to think about this constantly for the last months, it’s been proposed, the board of investment is supposed to be an instrument or a mechanism through which the two sides can set rules and basically agree upon what is an appropriate manner, space, form, amount of investment, Chinese investment into the U.S.

Now for the U.S., obviously, there’s a lot of investment the U.S. needs, frankly. And there’s a lot that politically would be a win for Trump. If he gets a bunch of Chinese money into the U.S. economy that, you know, if framed properly and not kind of rubbing up against NATSEC interests, national security interests, could be a huge win. At the same time, you have plenty of forces pushing against that. There are plenty of forces who think the U.S. needs to be less entangled, not more entangled with China. So there is a tension on the U.S. side, even though Trump himself seems to be kind of eager to get Chinese investment in some capacity.

On the flip side, it seems quite clear that China really does want supportive investment, even if it’s going to be conditioning a lot of the investment. It would provide a more stable pathway and say, “Hey, we agree China can invest in XYZ.” That’s terrific for Chinese companies who just need the certainty to be able to make investments, right? And so that’s still unclear exactly where that is, where that stands. You know, publicly speaking, it’s still in the offering, as far as we know. There have reportedly been further conversations around this, but it’s not confirmed what exactly is happening with it right now.

So, to me, that is really beyond the export control piece. That’s the longer term, more than immediate soybean purchases or something like that. That to me is a structural driver of relations to come. If the board of investment comes through, its actions will be kind of the next mechanism to watch in terms of what’s shaping the interactions.

Andrew: Yeah, definitely something to keep an eye on. I think the only other thing maybe to note is the two sides did talk about Iran. It doesn’t seem like they made a lot of progress. Like we said, there were no real concrete outcomes at all from this meeting, including on Iran and potential Chinese support for sort of finding an off-ramp or an end to the war in Iran. That said, Trump did note that he thought that he and Xi Jinping were on the same page when it came to Iran, saying they both do not want to see a nuclear Iran and that they both want the Strait of Hormuz open.

And I think that’s probably right. I think China probably does want both those things. I thought, interestingly, Xi Jinping made remarks like, we want the Strait of Hormuz open and we don’t want a situation where there’s tolls on the waterways. We want a free and open waterway. We basically want back to the status quo ante. And he did indicate they’re willing to help figure out how to do that, but no concrete commitments from either side. The U.S. did, at least Marco Rubio, U.S. Secretary of State, when talking to reporters said, you know, “We don’t want China’s help here. We don’t think we need China’s help.” So, whether that’s Shriver just posturing. It seems like the U.S. side wasn’t trying to negotiate towards that, and nothing really came of it.

That said, China is definitely helping behind the scenes to cajole the Iranians to the table and to try to get an off-ramp together. So, just another interesting piece of this where we thought maybe Iran would be a little bit more… some actual concrete moves by the Chinese might be part of a broader negotiation of outcomes, but that also seems to not be the case. So, I think it sounds like the Chinese will continue to play sort of a background role, and the U.S. will try to talk with the help of the mediation of the Pakistanis to the Iranians, and that China is going to maintain an arms-length distance. I think, as I understand it, the Chinese are doing this on purpose because they sort of see potentially their involvement as just making it more complicated for the U.S. to say yes if they do come to a deal.

But they do play a role in at least getting the Iranians to come to the table because both sides have walked away from the table at various points. And I think the Iranians think that the U.S. political calendar maybe plays in their favor. So, at the current moment, they may try to be buying some time. But Xi Jinping has been clear, at least from his perspective, he would like this thing to be over. And I think he’s not alone there, actually. We won’t get into the specifics.

Cory: Yeah, that’s an understatement.

Andrew: Yeah, yeah, an understatement for sure. Yeah, yeah, yeah. Well, we won’t get into more dynamics of the specific Iran war negotiations between the U.S. and Iran. That’s not really our bailiwick, but just kind of a little color there on how that played into this meeting. I think otherwise we can wrap it up there. Like we said, like a lot of times these meetings happen and there’s a lot of sort of hot takes on, “Oh, this was a nothing burger, or actually the outcome is more impactful than people are giving them credit for.” But at this stage, there are literally no outcomes from this meeting.

So, there’s no spin when we say it was nothing burger. There just is nothing. That said, the goodwill shown at the meeting was positive. In my view, the sort of personal diplomacy between Xi Jinping and Donald Trump seems positive, and in the fact that there seem to be more meetings on the books with eventually some likely deliverables on the way. All bodes pretty well. As you said, good way to sum it up. Low bar, but bar met. So that’s where we are. Cory, any last words?

Cory: Yep. It needed to happen. It’s not the most exciting thing, but it happened. And I think that sets us up for more exciting things to come, hopefully in the positive direction and not the euphemistic direction.

Andrew: Well said. All right. Well, just want to do a quick reaction and we’ll leave it there. Thank you, Cory, for joining me today. Really appreciate it, man.

Cory: Cheers. Always a pleasure. Thanks so much.

Andrew: Thanks, everybody, for listening to this part of the pod. Stick around for my conversation with Dinny McMahon on monetary policy. And also make sure you tune in next week where we will dig into more of these issues with John Czin from Brookings. All right. Up next, me and Dinny.

I’m joined now by Trivium’s Head of China Markets Research, Dinny McMahon. Dinny, how’re you doing, man?

Dinny McMahon: I’m good, mate. Good to see you.

Andrew: Yeah, good to have you back on as always. And we’re going to get into some more China macro stuff. Specifically, we are going to talk about the PBoC’s quarterly monetary policy report. So that may seem dry, but it’s actually super important in terms of how the central bank, China’s Central Bank, is thinking about managing the economy. And we won’t be talking hard data on the economic outlook or anything like that, but more economic policy as through the eyes of the PBoC. I think one of the reasons that this is so important is I often say when I’m talking to clients and potential clients, so what we do at Trivium, at least on the market side of the business, is that what we do is like Fed watching on steroids. So, we’re watching for small changes in language that will, in the conversation among policymakers around that might impact the trajectory for when you’re watching the Fed, interest rates, for example.

And that’s true for the PBoC as well. Of course, they set interest rates, but kind of have a host of other tools. There’s no more activity akin to Fed watching than PBoC watching and pulling apart the PBoC quarterly monetary report. So that’s what Dinny and I are going to go through today. This report came out on May 11th. So, four days ago, we’re recording on May 15th, Friday at 4.45 p.m. So, Dinny was kind enough to come on near the end of the week before we start our weekend.

We’re going to talk about PBoC signaling on the currency, on the yuan, on monetary policies more generally, and on interest rate reform. And we’ll also talk a little bit about trade and property at the end. So, with that in mind, Dinny, let’s just get into it. Start us off on what you saw on currency, because for those who don’t know, maintaining a stable currency is the PBoC’s number one job, right? It’s like written into the PBoC law, the central banking law — kind of like the Fed’s dual mandate is inflation and employment, the PBoC’s fundamental mandate is on the currency. So talk to us about what you saw there.

Dinny: Okay. Well, just to double down on your warning. I mean, this is about to get incredibly weedy.

Andrew: That’s why the people come.

Dinny: Is that what they tell you?

Andrew: Well, that’s what they say. Maybe they’re just, yeah, maybe they’re blowing smoke, but that’s what people tell me when they talk to me about the podcast.

Dinny: Okay. So, what we’re going to talk about, it has a lot to do with expressions that were in this report that weren’t in the last report, and kind of there’s a lot of reading between the lines as well, or kind of reading the tea leaves. So, with regard to currency, the thing that really jumped out about this quarterly report, so it’s a first-quarter report. Comes out about a month and a half. Each of these quarterly reports comes out about a month and a half after the end of each quarter. So, first quarter report came out more or less the middle of May. The big thing that jumped out at us on the currency issue was the reappearance of this expression that the PBoC would create a stable exchange rate environment for the real economy.

Now, that sounds pretty innocuous, but that’s boilerplate wording that had been the PBoC’s reports for a full year from the fourth quarter 2024, all the way to the third quarter of 2025. And then it’s notable because the PBoC dropped it for the last monetary policy report, the one that they published in February. That was really interesting because they got rid of that expression and then there was a real surge of appreciation of the currency. More or less coinciding when that report was published, the renminbi appreciated about 4% against a basket of currencies that Beijing sort of pegs the currency to or manages the currency against, about a 4% appreciation over the space of two months.

And that was far faster than anything we’d seen really in over a year, probably even longer. I think over the previous seven months, the currency had appreciated 3.6% against the basket. So, shooting up 4% over two months, that was a big deal, and it was a real change. And, as I said, that expression, that talk of creating a stable currency environment for the real economy, that wasn’t in the report anymore. Anyway, lo and behold, it’s now back in the report. And so, what we think that is signaling is it’s not telling us anything about the direction of the economy. It’s not telling us if the currency is going to appreciate or depreciate.

But what it says is the priorities of the PBoC has now shifted. It’s going to be less tolerant volatility. It’s going to be less tolerant of a fast appreciation or depreciation. And the focus is now on stability. And I think this comes back very much to what’s happening with the Iran war. Chinese exporters or firms, more generally speaking, are dealing with a lot of uncertainty at the moment with regard to commodity prices, with regard to the availability of the inputs that they need, even in terms of shifts in global demand and whether countries overseas actually will need Chinese exports in the volume that they previously had.

So, given the uncertainty of what’s going on globally, the PBoC is now saying, “Well, one thing that we can do is limit the uncertainty in the currency space.” So, I think that’s kind of what the report was sort of signaling for the next few months, that the Iran war is causing headaches for firms globally. And so, the PBoC is going to do the one thing it really can do to lessen uncertainty for Chinese firms.

Andrew: You mentioned that that doesn’t really give us any clear read on whether there’s a preference for currency appreciation or depreciation, particularly versus the basket. But, you know, what’s your expectation kind of now that the, I guess, initial shock of the Iran war has filtered through? There are obviously may be lingering impacts. And I guess I wouldn’t describe them as shocks anymore. That part seems to have happened. But what do you kind of think is on the horizon in terms of currency direction?

Dinny: Well, my working assumption is that to the extent that Beijing wants to use the currency in a way to sort of advantageously in the interest of the economy, I don’t think they’ve necessarily worked out what they want to do yet. And what I mean by that is that clearly China, as with everybody else in the world at the moment, China’s dealing with imported inflation. I mean, that’s something that the PBoC said explicitly in this monetary policy report. So, on one level, if they allowed the renminbi to appreciate, that would lessen the impact of that imported inflation because it would mean that in renminbi terms, the cost of importing stuff overseas wouldn’t be as bad as it otherwise would be.

But the other side of the equation is that rising energy prices globally are sort of smothering global demand, right? So, a lot of the countries that China is increasingly dependent on as export markets, like places in Africa, South Asia, Southeast Asia, those economies are often very sensitive to changes in energy prices. And so, the potential for that very quickly to sort of feed through into less domestic demand, less willingness for households to spend, that could result in a weakening of Chinese exports.

It certainly didn’t really come through in the trade data yet, but it’s still sort of relatively early days. What’s probably happening is Beijing is taking a wait-and-see approach because on one level, yeah, a stronger currency would help lessen the impact on kind of how firms and households are sort of experiencing inflation domestically. That’s what a stronger renminbi would do. But a weaker renminbi would potentially help protect China’s export markets. So, I don’t think they’ve necessarily made a decision one way or the other at the moment.

They’re going to probably sit back, look, you know, which way things are going, and then kind of decide whether it is worth deploying, trying to deploy the currency one way or the other, depending on where the greater need is. But I don’t think we’re there yet. I mean, typically, I think that Beijing is less interested in guiding the renminbi in a direction these days and more kind of just keeping it within a range. So, I think even that would represent, you know, trying to deploy it strategically, like along the lines I was talking about, that would sort of represent a bit of a shift.

I think that’s kind of the calculus that’s sort of dangling there over the horizon at the moment. But as I said, I don’t think there’s any sign that they’re moving in one direction or the other as yet.

Andrew: Yeah, I want to move to monetary policy, but I have two other items on this currency thing. One is just a comment and then a kind of follow-up broader question, which is to say really throughout 2016, 2017, the PBoC, there was a lot of currency volatility at that time. The PBoC really started talking a lot about how it views its role as a counterweight, to be a counterweight to the market, right? To basically keep the currency from becoming a one-way bet, either towards weakness or towards strength, right? So, if the currency has a heavy pressure to depreciate that can lead to capital outflows. If it has heavy pressure to depreciate, it can lead to very strong hot money inflows, carry trade, all that stuff, which creates different headaches for the PBoC.

It’s got to sterilize those dollar purchases when it’s trying to slow the pace of appreciation, all that stuff. And so, they were just kind of saying like, “We do not want large bets to build up either way. And so we’re going to kind of keep the market off guard to an extent by adjusting the fixing in sometimes unexpected ways.” You characterized it as kind of keeping the currency in a range, but I think that’s a big part of what they’re doing. They never really want a clear view, one way or the other, in terms of a large move up or down, at least vis-a-vis the dollar, right? In terms of the U.S., the dollar China, the USD/CNY exchange rate. So, that’s just something to keep in mind. I think that’s a fundamental principle. And one of the things that it’s a main framework for how I look at the PBoC’s actions and has been for now about 10 years. I think it’s been pretty good at explaining a lot of the PBoC’s actions. That’s just the comment.

The question is, what do you think the main target is now for the exchange rate? Is the PBoC managing the currency primarily against the dollar or primarily against the basket of currencies, trade-weighted basket of currencies? My assumption is always kind of like the dollar is still king, the dollar exchange rate. But am I wrong on that? You think they’ve shifted more towards the basket?

Dinny: I think when it comes to managing it on a day-to-day basis, the dollar is still king because, you know, you look at when the renminbi gets too weak or it gets too strong, all of a sudden it’s very clearly we hit a limit and the PBoC just keeps setting the fixing at the same level more or less at the same level over and over again to prevent it from sort of moving beyond the level that the PBoC is happy with. And it does that with the dollar. And so, I think, yeah, you don’t kind of see that playing out so much with the basket. You see that sort of intervention with regard to the dollar.

But I also think that the basket’s incredibly important because in terms of efforts to drive renminbi internationalization, what they really want is, I mean, when they talk about the value of the renminbi being potentially a good reserve currency or a good global currency, it’s because one the PBoC pursues responsible monetary policy and secondly because the renminbi is relatively stable right. and it’s not just stable against the U.S. dollar, it’s stable against all its other major trading partners. And so, think that’s where the basket is important because they kind of have one eye on like you know in a world where the dollar was less important. Everybody else in that basket, the Singapore and Malaysia and, I think, Canada and Korea, they all kind of have to look at it and go, “You know, our currencies, regardless of what the dollar is doing, are still relatively stable to the RMB. So, I think the authorities probably have one eye on that as well.

Andrew: Good thoughts. Good comments there. Let’s move to monetary policy now. The rest of the world is looking at potentially higher rates, right? Increasing rates to combat inflation. Correct me if I’m wrong, but the Australians just recently raised rates?

Dinny: Yeah, I think they put up interest rates. I’ve got Aussie dollars. I should be paying attention to this.

Andrew: Pop quiz.

Dinny: The Australian government takes half of any interest I get because I’m non-resident. So, I guess that’s why I’m less engaged than I should be.

Andrew: From macro issues to very micro tax and personal issues. Yeah, there’s a bunch of different reasons to watch the markets.

Dinny: Exactly. If anyone wants to mail in with tax advice, please go ahead.

Andrew: So, well, on the monetary side, when it comes to China, so like I said, the rest of the world potentially looking at higher rates. Australians have already moved. But China’s been looking at going in the opposite direction. And we should say, you know, there’s a bunch of stuff. Uncertain people are still potentially expecting the U.S. to cut. It really depends on how all the stuff from Iran filters through. We’re not making a call on developed world monetary policy, but what we do know is that China has been expected to cut, or was expected to cut in 2026, but now those cuts are likely on the back burner for a bit. Tell us kind of where the PBoC’s head is on the interest rate piece.

Dinny: Okay. Tell you what, mate, talking about interest rates on a Friday afternoon is proving harder than I ever would have thought.

Andrew: Oh, yeah. You want to get into that tax discussion.

Dinny: Exactly. Okay, so deep breath. So yeah, you’re right. I mean, the talk for however long is, I mean, China is in a rate-cutting cycle, and it has been forever. I mean, to the extent that renminbi has really sort of gathered appeal as an international currency over the last few years, it’s because interest rates have been as low as they are. They’re so much lower than anywhere else in the world. I mean, we just recently wrote a thing about like demand for foreign issuers. So, sovereigns of panda bonds, which is like onshore, you know, bonds issued on shore in renminbi is the strongest it’s ever been.

I think, you know, last month, Slovenia issued a bond, Kazakhstan’s Sovereign Wealth Fund just did, Pakistan’s thinking about it. Indonesia’s planning to do it next month. And the reason is because interest rates are low. And more importantly, the expectation is they’ll get lower. Right? And so that’s kind of been baked in for ages, except, and we’ve talked about this ad nauseum, is that we had one interest rate cut last year. PBoC flagged that there would be another one this year if they could manage to get banks’ net interest margins up.

And, as I said, we’ve talked about this heaps. The reason the PBoC isn’t cutting is because they don’t want to erode bank profits beyond what they already are. Net interest margins for the banks are well below the critical safety level. And so, the PBoC doesn’t want to cut further unless they can be relatively confident that they’re not further eroding bank profits. And one of the deputies of the PBoC said this explicitly back in January, I think it was, you know, we’re doing everything we can to cut bank funding costs. There’s a lot of forces that we think are working in our favor this year.

Once that happens, then it opens up space for an interest rate cut. Now, it seems that even that cut is less likely. And the change in wording for the monetary policy report was the PBoC is still committed to maintaining a moderately loose monetary policy, which they sort of, I think it was the new wording that they rolled out in the last policy report, which is in February. But the thing that they changed is that their approach to delivering that moderately loose monetary policy will now be flexible as opposed to comprehensive.

And it’s in that one word, flexible, I mean, that sort of, it speaks, you know, it contains multitudes. And what it really seems to be doing, I mean, what seems to have happened is that the Iran war has completely flipped the script so that the goal was to cut rates. And now that inflation is rising and that the rest of the world is potentially going to be raising rates, then maybe an interest rate cut in China doesn’t make as much sense anymore. And again, I mean, going into the weeds of the words that they use in the monetary policy report, the PBoC said it would closely monitor changes in the monetary policies of major overseas central banks.

And again, this is boilerplate. This has been in every monetary policy report for the last two years, except the last one. And so, in the last one back in February, there seemed to be a lot more scope for monetary policy changes. They were a lot less worried about the international environment. They thought that they could focus a little bit more domestically. Iran war happened, and now we’re kind of back to where things used to be. So, I think there’s this reluctance to cut because of the uncertainty. And so, everybody, I mean like all the investment banks, everyone’s saying, “Okay, we’re revising our interest rate cut expectations for the year. We now don’t think there’s going to be a cut.” And so, I think that’s probably pretty reasonable I don’t think a cut is necessarily completely off the table. I think that we’re now in a point where they’d like to have the option of being able to cut.

So, I think all those efforts of trying to reduce bank funding costs, they’ll sort of continue in earnest. But cutting rates is now an option. It’s not an eventuality. And it’s the sort of thing that’s going to depend very much on how the PBoC sees sort of the shifting global environment.

Andrew: Well, how impactful is that sort of rates have moved to from an option or an almost or, sorry, from an eventuality, from basically a certainty to sort of more of an optionality type thing? Will the impact be on the economy and monetary environment and all that stuff?

Dinny: I mean, frankly, it doesn’t matter at all at this. At this point, trying to work out whether China is going to cut interest rates is a parlor game, right? So, even if, back a few months ago, even if the bank’s interest margins had increased and the PBoC was confident enough to cut interest rates, all we were likely to get this year was a cut of ten basis points. And that is not going to move the margin in any way, shape or form. I mean, at the most, it’ll perhaps help improve some firm’s profitability, but it’s not going to do anything. It was never going to do anything to stimulate economic activity. It was just going to make life marginally easier for some firms that had borrowed, wasn’t really going to do anything in the first place anyway.

And realistically, as I said, we had one interest rate cut last year. Rates need to be falling given the state of the domestic Chinese economy, and yet the PBoC hasn’t been delivering. But market rates have. So, if you look at the overnight rates, you look at the seven-day repo, you look at one-year interbank lending rates, they were all at record lows. So, I think, was it this time last year or late last year? I forget when, but we got to the end of a bond bull market and the PBoC did a bunch of stuff to kind of pull yields out of the abyss and they kind of went up a little bit. And then they’ve just, over the last five months, have been going back down again.

And we’re now at, over the last couple of weeks, maybe even just the last week, we’re down at record lows. Now, at the long end, things aren’t quite the same. 10-year bonds, the yield on 10-year Chinese government bonds aren’t as low as they used to be. So, there’s been a bit of a steepening of the curve. But at the short end, interest rates are at record lows. And then you look at the way banks lend as well. When the PBoC cuts rates, the implication is that it feeds through interbank lending rates via the loan prime rates. There were two loan prime rates.

They are, in theory, the rates that the biggest banks in China give their best customers. And yet those loan prime rates have become increasingly irrelevant to the way that banks set interest rates. I think when the five-year loan prime rate was introduced, I think it was in 2019, I think only about 15% of all bank loans were priced below, long-term loans were priced below the loan prime rate. And now it’s something like 50%, which is mind-blowing. I mean, this is supposed to be the rate at which banks lend, make loans to their best clients. And yet pretty much half of the loans they make these days are below that level. So it kind of makes a mockery of what this is.

Andrew: Maybe they’ve got a lot of really good clients.

Dinny: Exactly. You know, you’re right, Andrew. That’s exactly what’s going on here. We’ve completely misjudged the value of China’s property developers and local government financing vehicles. So, it does make a little bit of a mockery of what the loan frame rate is supposed to be in the first place. But it kind of speaks to what’s going on with, with interest rates, even without a cut in a year. Because that’s that was the last time that PBoC cut interest rates. The actual loan, the rates on loans that banks are making, the rates on interbank costs, interbank lending is coming down. So, you know, even if the PBoC isn’t cutting, the market is adjusting to the economic realities that credit costs need to be lower than officially where they should be.

Andrew: Yeah, well, and we won’t get into it now, but that also plays into the whole idea of the balance sheet recession, right? Where, you know, it doesn’t matter how low the cost of credit, people don’t want to borrow just because they either have high debt loads in their balance sheet or they just don’t see economic prospects for borrowing to invest. And typically, in a balance sheet recession, monetary policy is pretty ineffectual. So, cutting doesn’t really make that big of an impact, as you kind of said earlier, but still important kind of dynamics to keep an eye on here.

And kind of stepping back a little bit, you also mentioned, or we talked about it at the top, PBoC also talking about interest rate reform efforts in this monetary policy report. What was going on, on that side?

Dinny: Yeah. So I said at the beginning that this involves a lot of reading between the lines or reading the tea leaves. And I mean, this is really an exercise in that, but I’m still reasonably confident that this is what’s going on. So, in these monetary policy reports, most of it is the PBoC going over key data from the previous three months, and then there’s a section at the back which is a little bit forward-looking, and that’s where this stuff about the currency and you know flexible monetary policy, so much of that’s kind of in this like the final section. But then every one of these reports, the PBoC has these columns or boxes. They’re printed in blue. They’re a little bit different from the rest of the report. And no two columns are the same. Right?

So, it’s something that’s kind of top of mind for the PBoC each quarter. And every quarter, there’s going to be a different set of columns. And one that was particularly interesting, this quarterly report, it was on other countries’ loan pricing benchmarks. And it often does this. It’ll write something up in these columns, which seems to be purely educational. It’s like, “Oh, here’s something interesting about how other countries do something with respect to their currency or managing monetary policy.” But even though it kind of is framed as a purely educational sort of thing, more often than not, what they’re trying to do is lay the groundwork for some sort of reform.

So, this particular column was about how most countries, they’ve got two different benchmarks for pricing loans. One is a short-term interest rate, something like LIBOR or SOFR or whatever that sort of prices, you know, it’s a floating rate for short-term loans. And then they have another benchmark for long-term loans, usually long-term fixed rate loans, which is typically mortgages. And China does have benchmarks. It’s trying to develop what they call the DR007, which is the seven-day interbank repo rate as kind of like a benchmark for pricing short-term floating rate loans.

But when it comes to long-term loans, particularly mortgages, China does it very, very differently from the rest of the world. So, in most of the world, well, particularly places like the United States, and I think Japan as well, I think also the column shouted out the UK, I’m not entirely sure — long-term fixed rate mortgages, or at least the portion of a mortgage that’s fixed rate is typically pegged to a 10-year government yields. That’s certainly the case in the United States. And that is a constantly changing price. It is a market price. And although it’s influenced by the policy rate, so you’ve got the Fed funds rate, which is an overnight rate, and whenever the Federal Reserve changes that, it trickles through the entire system and all interest rates sort of adjust accordingly.

But even though that’s the case in these sort of longer-term rates that are influenced by the short-term fed funds rate, it still kind of has a life and a mind of its own. And sometimes the spread between short-term and long-term rates are wide and sometimes it will narrow. And so there is a real reason why you price long-term mortgages against a long-term interest rate rather than a short-term thing. Now, as I was saying, in places like the United States, mortgage pricing, interest rates are benchmarked on a 10-year Treasury yield.

But in China, the benchmark for mortgages is the five-year loan prime rate, which I was talking about a minute ago. Firstly, a five-year rate isn’t that long-term. If we’re being generous, it’s kind of a medium-term. But the other thing is it is not a dynamic market rate. It is a fixed rate which never changes unless the PBoC changes its policy rate. And so, when it changes its policy rate, which is a seven-day reverse repo rate, the five-year loan prime rate moves a comparable amount. And so, it’s not a market rate. It’s based of a short-term rate. It very rarely changes.

And it does not reflect credit conditions at all. And so what my guess is, is sort of reading between the lines is that the PBoC might be laying the groundwork for changing the way that mortgages are priced in China. That sort of they get rid of the sort of the absurdity of pegging them to the five-year loan prime rate, and they start using the 10-year Chinese government bond rate. Now, a few years ago, that might not have made a lot of sense because maybe Beijing didn’t feel confident enough that Chinese treasuries, Chinese government bonds properly were probably sufficiently representative of market rates.

But, was it last year or the end of the…? I think that may be in the end of 2024, the PBoC started intervening in the government bond market, buying and selling bonds on a month to month basis to properly ensure that the yield curve, to sort of smooth out the yield curve and do whatever it thought was necessary to ensure that at any given tenure along that curve properly reflected what the market rates were. So, I think the government or the PBoC is now probably more confident that the 10-year yield on government bonds probably is now a high functioning rate that you could start pricing mortgages off. And I think the other thing here as well that’s worth considering is making the shift to 10-year Chinese government bonds. Is that you’d potentially now reduce the interest rate on mortgages.

And the reason I say that is that over the last five years, I think, the spread between the yield on 10-year Chinese government bonds and the five-year loan prime rate has been getting bigger and bigger, right? So as 10-year government bonds have kind of declined and got lower and lower, the loan prime rates barely moved at all. And so, I think by sort of shifting to the 10-year government bond rate, there’s a potential for mortgage rates to be lower. And particularly if those yields, if those market rates continue to fall as well, that kind of opens up the potential to kind of stimulate demand for mortgages as market rates fall without needing to cut interest rates.

So, I think there’s a lot going on there. But I think the significance of this fairly educational column about sort of talking about, “Oh, isn’t it interesting how other countries price mortgages different from China?” I think reading between the lines there, the PBoC is sort of laying the groundwork for shifting how mortgages are priced.

Andrew: Great explanation of what’s going on there. We’ll obviously have to see as to whether they make those reforms on kind of a concerted basis going ahead. But as you know, this is often where moves like these first start to show up before they get enacted. So, it’ll be a long-term thing, but we’ll keep an eye on it. You just talked about a key piece of the potential interest rate reforms being on the mortgage side. Talk to us about property because there was an interesting development in terms of how property was characterized or not in this monetary policy report?

Dinny: Yeah, the really interesting thing about property is that it just didn’t come up for discussion at all, which is mind-blowing because it’s always in the quarterly monetary policy reports. The PBoC always has something to say about the development of the new real estate model or relending quotas or something, but this time just crickets. And I think, more than anything, it just reflects the reality that the PBoC has kind of become quite irrelevant to sort of reviving the fortunes of the property sector. You know, they’ve rolled out relending facilities in the past to kind of stimulate purchases of certain types of houses, and they’ve never really worked. In previous times, they’ve used the pledged supplementary lending facility, which is…

Andrew: We need to start doing cold opens, and that would be the cold open this time.

Dinny: I thought you were going to say we need to start drinking when we do this.

Andrew: Well, that too, but that would be the cold open — You trying to say the word supplementary. Anyway. Sorry, keep going.

Dinny: Yeah, but anyway, this particular facility is when the PBoC lends to the policy banks, and the policy banks traditionally played a really big role in trying to support the property sector, whether it be affordable housing construction, urban village redevelopment, dual use, public infrastructure, all of this sort of stuff. But, in the fourth quarter of 2025, the total amount of outstanding funds lent under that facility shrank by over a trillion RMB. So, the reality is that the tools that the PBoC use for supporting property sector, they’re just kind of irrelevant at the moment. It’s not that the central government isn’t doing anything meaningful to deal with property sector stresses.

I mean, over the past year, the degree to which local governments have deployed special purpose bonds to buy back land from developers and local government financing vehicles has been really quite aggressive. I mean, I think over the first four months of this year, it’s already up to, I think, 130 billion RMBs worth of SPBs have used to buy back land. So, it’s not that the central government has completely washed its hands of it. It’s just PBoC has kind of been irrelevant, and the tools that it’s used in the past just haven’t really worked at all. So, I think that’s where it’s at.

I think it’s just a recognition that there’s no real point in the PBoC concerning itself with or talking about property sector anymore because it’s a complete sideshow as far as the central bank’s concerned.

Andrew: Yeah, well, it’s certainly an interesting development. I mean, you know, just another in the long line of evidence, pieces of evidence that property’s less, far, far, far less central to the economic growth model because, I mean, the PBoC managing credit policy to effectively manage the property cycle has been the main action for a long, long time. I mean, it’s a pretty big deal that the PBoC is seemingly sort of saying a hands-off the wheel on this one, but we’ll see. I mean, you never know what the future monetary policy reports and future monetary policy thinking will yield on that front. So, it could just be a temporary thing, but interesting things for that. Let’s wrap up by, you know, there’s another really interesting section in this report on trade, right?

The monetary authorities don’t usually talk all that much about trade. Yes, they manage the currency, which impacts trade and vice versa. But they specifically spoke about the trade surplus. And that’s kind of been in line with some of the other commentary we’ve seen from officials on China’s trade surplus. So, walk us through what you made of their comments there.

Dinny: Yeah, I found this really interesting because what the PBoC argued is that this is effectively the line, it’s like, don’t worry about China’s trade surpluses. They’re actually good for the world. Because what they were arguing is like, look, we don’t simply accumulate trade surpluses. Those surpluses then, by their very nature, recycled out into the global economy again as foreign direct investment or outward direct investment, as cross-border lending and portfolio investment. So, investments in other countries, government debt, stock markets.

And this is specifically what the PBoC said. “This sort of outward investment promotes employment growth and industrial development in other countries, and it provides funds and liquidity support to foreign financial markets.” Now, of course, that’s sort of the corollary of any country’s trade surplus. If you’ve got a net inflow of funds via the trade surplus, it’s got to flow out again through the capital account and more importantly through the financial account. Now, traditionally, the massive trade surpluses that China used to accumulate would go straight into the foreign exchange reserves, and they were then mostly invested in U.S. treasuries or other countries’ government bonds.

And so there was kind of a very limited sort of global impact on that. But what the PBoC has now changed… but that’s not the case anymore. So, China’s foreign exchange reserves have barely increased for years now. And what that means is that the foreign currency or the earnings from China’s exports, they go into the banks, the commercial banks, and then the banks themselves make a decision as to how those funds are used. Do they exchange them for another currency or for renminbi? Do they invest in foreign securities themselves? Do they use them to make foreign currency loans? Do they give them to Chinese companies that are investing overseas?

And what the PBoC is arguing is that, look, the way China manages this sort of inflow of funds from the trade surplus is so radically changed over the last few years that now the way China deploys those funds back into the global environment, a net benefit for the rest of the world.

Andrew: Convenient.

Dinny: It is. I mean, the argument’s a little bit, I mean, they’re not wrong, but it’s a little bit self-serving. But I mean, any country that’s sort of been in this position, I mean, you look at the Middle East countries, I mean, this is what petrodollars are, right? Earning massive trade surpluses from the sale of oil. The quid pro quo is that they then invest in U.S. government debt. Or if you look at the British economy during, what, the 19th century, you know, running a big trade surplus, what did they do with the funds? Well, they invested in things like railroads in the United States, railroads in Argentina, sort of opened up the Pampas and the cattle raising districts.

When you kind of have those resources, you then use them to invest in infrastructure or factories or do something overseas that generates return. And now the PBoC is going, well, that’s what China’s doing. And you see it with Chinese firms setting up factories overseas. You see it in Belt and Road Initiative. I’m not exactly sure as to exactly what sort of the breakdown is or where these funds are going. But as far as the PBoC is concerned, this is like this is creating jobs and it’s providing financial stability for countries overseas.

But as I said, I mean, at the end of the day, it’s pretty self-serving because the criticism of China’s trade surplus is that China set up a growth model that is structurally tilted towards overproduction. And that leaves global demand, foreign demand to absorb that excess output. Or, I mean, the Michael Pettis argument that this is effectively a better-than-neighbor sort of strategy. And so, I don’t think anyone’s arguing that, yeah, once you run a trade surplus, the money’s got to go back, and invariably it ends up in productive investments in the rest of the world.

The argument is that China shouldn’t be in that position because the way that it’s managed to build up these trade surpluses in the first place.

But I think, regardless of the merits of the argument, what this sort of represents is that the PBoC or China, Beijing writ large, is sort of building an intellectual scaffolding to defend its continued reliance on export-led growth. What it signals is that it’s not about to pivot anytime soon. It’s not like, oh, this aggressive export growth is an anomaly and things will go back to normal soon. No, what they’re sort of developing is the arguments to say, “Not only are we going to keep doing this, but doing this is actually a good thing for a whole lot of countries in the world. And so, we’re going to stick with it.”

So, I think that’s kind of what the subtext is here. It’s like they’re trying out arguments to justify why they’re going to stick with this approach.

Andrew: Yeah. I don’t even know if it’s subtext. It feels like it’s basically a text.

Dinny: Yeah, I think you’re right.

Andrew: I mean, we’ve talked a lot about this. We’ve seen this in many different ways, including having talked on the pod about at the China Development Forum. And I think I mentioned it even a couple of weeks ago where senior officials are saying, “It’s an export model, get used to it, like it or not.” And that maybe they’re trying to soften the edges a little bit by saying, “Oh, and by the way, it’s good for you.” So, it is interesting that they’re just being so overt and not in any way trying to say, “We’ll take other countries’ concerns into account.” It’s like, “No, not only are we going to stick with a plan, but your concerns are invalid because this is actually good for you.”

So that’s going to go exactly nowhere in terms of like, you know, alleviating trade tensions with trade partners, but still interesting to see it happening. And just, yeah, interesting that the system is kind of moving in this direction on that issue. I mean, it only just, certainly, to me, reinforces the conviction that they’re going to try to actually push the export model as far as they can, like to the breaking point, unless anyone or any group of countries really push back. And so far, no one’s really pushed back. I mean, the U.S. has put on tariffs, but that’s mostly just diverted low-end exports from the U.S. to Europe. It hasn’t fundamentally changed the way China approaches global trading.

So, interesting, really interesting that showed up in the report. Thank you for walking us through that. Thanks for walking us through all of it. A bunch of interesting stuff in there. Dinny, as always, thanks for the thoughts. We’ll continue to sort of monitor all of these issues and see how it plays out, how these developments affect the economy, property market trade, and everything else, monetary policy, etc., going forward. So, thanks a bunch for your time today, man.

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

Andrew: All right, buddy. Have a good weekend.

Dinny: Same to you, dude.

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

For months, Trump’s visit has been billed as a critical opportunity for the US and China to pursue stability and build on recent bilateral momentum.

• Understanding the stakes (and their guest), Beijing pulled out all the stops, treating Trump to upgraded protocol, pageantry, and pomp in hopes of putting him in an amenable mood.

To be sure, the vibes were immaculate:

• Trump repeatedly expressed his appreciation to his hosts and his “fantastic relationship” with Xi Jinping.

But man cannot live on atmospherics alone and the world wants to know: Where’s the beef?

• What tangible deliverables have emerged from this crucial summit between the world’s most powerful men?

At the time of writing, we’re having trouble pointing to much of anything in the concrete outcomes department.

• There’s no indication that the two sides found common ground on the trade issues at the heart of the relationship, including tariffs, export controls, rare earth licensing, or even a commitment to a continued trade truce.

• We have slightly more color on potential Chinese purchases of American goods with US officials indicating that China plans to buy American ag products and some 200 Boeing planes, though the Chinese side has not confirmed this.

• On geopolitics, everyone stuck to their guns. Both sides said their respective piece on Taiwan with no indication of a policy change either way. Likewise, on Iran, China doesn’t appear to have committed to offering any additional help in reopening the Strait of Hormuz.

• On the tech front, US Trade Representative Jamieson Greer said the two sides didn’t discuss chip export controls. We also haven’t heard any word on AI safety coordination, which Treasury Secretary Scott Bessent previously said was in the offing.

Disclaimer: It’s fully possible that the two sides have agreed to a big, beautiful bundle of deliverables and are just getting their respective ducks in a row before announcing them.

• But for now, the eerie quiet suggests that this visit was more icebreaker than grand bargain.

• And while the trip clearly generated positive feelings, a relationship as complicated and consequential as this one needs some institutional anchoring to keep things on an even keel.

Consolation prize: So far, the most interesting outcome has been Xi Jinping’s unveiling of a new framework for managing US-China relations.

• Xi said that he and Trump had agreed to establish a “Constructive Strategic Stability Relationship” to serve as the “new positioning” to guide US-China relations through the rest of Trump’s term.

• As far as we can tell, this is a new formulation in Chinese diplomacy, specially crafted for China-US ties.

Xi characterized the relationship as being centered on:

• “Positive stability centered on cooperation”

• “Benign stability characterized by measured competition”

• “Normative stability where differences are manageable”

• “Enduring stability where peace is attainable”

As with many Chinese political slogans, we’re confident that the exact meaning and functionality of this framework will become clearer over time, but at a minimum, it signals Beijing’s commitment to keeping relations predictable and grounded.

• That said, it takes two to tiaowu, and it’s unclear whether Washington feels the same way about keeping ties stable.

More to come? In theory, Xi and Trump could see each other as many as three more times this year.

• Xi has a standing invitation to pay Trump a reciprocal visit in the US, and it’s possible they could also meet either at the APEC Summit in Shenzhen in November or the G20 in Miami in December.

• These events potentially provide more opportunities for the two leaders to further develop their special relationship.

The bottom line: It’s too soon to call Trump’s visit a success or a failure, but we’ll take our Sino-American dialogue where we can get it.

• Even if the other deliverables prove underwhelming, face time between the two big kahunas is a deliverable in itself.

Joe Mazur, Head of Geopolitical Research, Trivium China

What you missed

U.S.-China

On Thursday, the Chinese customs (GAC) portal briefly updated registrations for hundreds of American beef processors to “effective.”

• Hopes were high that the US and China had struck a deal to restore market access for the large swath of US meat exporters that have been shut out of China’s market since last year.

• But within hours, the portal reverted the registrations to their previous “expired” status.

• It’s likely GAC got a little trigger-happy, and the update went live earlier than intended.

Foreign affairs

Top diplomat Wang Yi called Pakistani Foreign Minister Mohammad Ishaq Dar less than 24 hours before Trump’s scheduled arrival in Beijing on Wednesday.

• Dar briefed Wang on recent negotiations with Iran, and Wang urged Islamabad to “intensify its mediation efforts” and help ensure a “proper resolution of the Strait of Hormuz opening issue.”

• Around the same time, US Defense Secretary Pete Hegseth revealed he would join Trump’s trip, making him the first defense secretary to accompany a US president to the People’s Republic.

Econ and finance

Per data released by the stats bureau (NBS) on Monday, producer prices grew 2.8% y/y in April – the second consecutive month of growth, marking a definitive end to China’s three-and-a-half-year deflationary spiral.

• The driver is clear: Surging energy and commodity prices in the wake of the Iran war.

• Oil and gas mining prices shot up 28.6% y/y, while fuel processing costs rose 14.2% y/y.

China’s export growth bounced back strongly in April. Per trade data released by the –customs bureau (GAC) on May 9:

• Exports grew 14.1% y/y in April, reversing March’s sluggish 2.5% growth.

• Imports surged 25.3% y/y, broadly in line with the previous month.

• China’s trade surplus came in at USD 84.8 billion, down 11.5% from April 2025 levels.

China’s monetary policy is being increasingly guided by international events.

• In its Q1 Monetary Policy Report the central bank (PBoC) noted that the Iran war had driven up commodity prices – putting an end to domestic deflation – and that: “The impact of externally driven inflation on the domestic economy warrants close attention.”

• It also said it will “better coordinate domestic and international priorities” – phrasing often used by Xi Jinping to refer to aligning domestic development with foreign policy interests.

• The PBoC hasn’t previously used the phrase when discussing monetary policy.

Corporates

China’s automakers are accelerating their push to conquer European markets.

• On May 5, Spanish media reported that Geely was closing in on the purchase of an assembly line at Ford’s Almussafes plant in Valencia, Spain.

• On May 8, Stellantis – the largest shareholder in China’s leading NEV Leapmotor upstart – announced plans to increase production of Leapmotor EVs at two existing plants in Spain.

• On Wednesday, the FT reported that leading NEV startup Xpeng was in negotiations with top shareholder Volkswagen and other automakers about acquiring a European manufacturing plant.

Tech

On May 8, four central government agencies – led by the energy regulator (NEA) – jointly released an action plan on deepening synergies between the AI and energy industries.

• The plan calls for: clustering computing facilities in renewables-rich regions, developing renewable energy projects dedicated to data centers, and exploring models that use nuclear and hydrogen energy to directly supply power to data centers.

• The plan also aims to expand AI deployment across the energy sector, including by developing industry-specific LLMs tailored for energy subsectors.

On Tuesday, the market regulator (SAMR) conditionally approved Tencent’s acquisition of Ximalaya, China’s largest online audio platform, through its music arm Tencent Music Entertainment (TME).

• For the first time, SAMR explicitly linked the approval to Beijing’s anti-involution campaign: “This case is of significant importance for maintaining fair competition in China’s online audio and music streaming markets, preventing involution-style competition in the platform space, and promoting innovation and healthy development of the platform economy.”

• This marks a stark contrast with the tech crackdown era, when regulators were deeply concerned that big tech acquisitions could undermine competition.

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.

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.