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.

Otherwise, if you’re interested in receiving more Trivium content, check out our website, again, triviumchina.com, where we have a bunch of different subscription options in terms of regular updates on policy developments out of China. We’ve got tech policy, policy that will impact markets, general China watching policy. We got free options. We got paid options. Check out the site.

You’ll definitely find the China policy Intel option that you need there. And finally, as always, please do tell your friends and colleagues about Trivium and about the podcast. It helps us grow the business, grow the listenership so we can keep bringing you these weekly podcasts and other great content. So, we really appreciate those word-of-mouth recommendations. Super helpful for us.

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.

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

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

• Not so fast.

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

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

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

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

There are two major headwinds I want to discuss.

The first is consumption.

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

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

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

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

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

And the property slump continues to erode household wealth.

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

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

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

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

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

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

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

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

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

And things could get a whole lot worse.

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

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

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

So what should we take from all this?

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

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

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

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

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

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

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

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

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

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

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

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

Joe Peissel, Senior Macroeconomic Analyst, Trivium China

What you missed

US-China

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

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

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

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

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

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

Econ and finance

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

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

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

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

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

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

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

Business environment

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

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

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

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

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

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

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

Tech

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

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

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

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

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

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

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

Net zero

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

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

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

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

Agriculture and rural affairs

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

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

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

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

As always, it was a busy week in China.

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

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

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

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

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

• US-China strategy as the leadership meeting approaches

• And more!

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

Transcript

Andrew Polk: Hi, everybody, and welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium Co-Founder Andrew Polk, and today I am joined, once again, by Trivium’s Head of Supply Chain and Critical Minerals Research, Cory Combs. Cory, how are you doing, man?

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

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

Cory: Cheers.

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

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

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

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

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

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

Cory: This is not a sponsored podcast.

Andrew: Yeah, exactly. Maybe we should get a sponsorship. But anyway, I’m relaxed coming off of spring break and glad to be back in the podcast seat here. So, we will dive into it. Of course, though, we also have to do the housekeeping quickly as well. So, a quick reminder to everybody out there, we’re not just a podcast here. Trivium China is a strategic advisory firm that helps businesses and investors navigate the China policy landscape, which includes policy towards China out of D.C., London, Brussels, and other Western capitals. So, if you need any help on that front or on the domestic policy front, please reach out to us at hq@triviumchina.com.

We’d love to have a conversation about how we can support your business or your fund. Otherwise, if you’re interested in receiving more Trivium content, check out our website. Again, that’s triviumchina.com, where we have a bunch of different subscription products, both free and paid. You’ll definitely find the China policy intel option you need on our website. And then finally, please do tell your friends and colleagues about Trivium, both about the podcast and about the company, generally helps us to grow our listenership, grow our business, so we can keep bringing this content to you all.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Andrew: Perfect segue.

Cory: … is…

Andrew: Go for it.

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

Andrew: Yeah. Walk us through it.

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

Andrew: Love it. Sounds better in Chinese.

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

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

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

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

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

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

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

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

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

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

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

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

Cory: I agree.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Cory: The straits should be open.

Andrew: Yeah.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Andrew: So you’re adding further supply pressure.

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

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

Andrew: We already gave Dollywood a shout-out.

Cory: That’s true.

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

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

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

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

Great.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Cory: Oh, God. No excursions, Andrew.

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

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

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

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

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

Cory: Yeah.

Andrew: I mean, I don’t know.

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

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

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

Cory: Sure.

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

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

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

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

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

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

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

Andrew: I think it’s buying time.

Cory: It’s buying time. Yeah.

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

Cory: I think it’s right.

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

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

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

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

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

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

Cory: Absolute pleasure. Thanks so much.

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

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

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

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

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

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

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

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

But this time could be different:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Joe Mazur, Head of Geopolitical Research, Trivium China

What you missed

Econ and finance

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

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

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

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

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

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

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

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

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

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

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

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

Corporates

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

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

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

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

Business environment

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

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

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

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

Tech

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

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

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

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

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

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

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

Politics

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

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

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

Foreign affairs

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

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

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

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

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

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

As always, it was a busy week in China.

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

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

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

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

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

Throughout March:

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

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

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

The energy shock is feeding through to consumers, too.

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

• Major Chinese airlines hiked domestic fuel surcharges sixfold.

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

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

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

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

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

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

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

And yet, the squeeze is still coming through.

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

• Staff at other brands echoed similar expectations.

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

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

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

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

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

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

Joe Peissel, Senior Macroeconomic Analyst, Trivium China

What You Missed

Econ and finance

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

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

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

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

Business environment

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

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

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

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

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

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

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

Tech

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

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

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

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

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

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

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

Politics

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

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

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

Foreign affairs

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

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

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

U.S.-China

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

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

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

As always, it was a busy week in China.

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

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

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

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

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

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

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

Helium is non-substitutable in semiconductor fabrication.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And mainland Chinese chip fabs are at a serious disadvantage.

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

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

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

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

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

Can anyone fill the gap? Not really.

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

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

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

So, what’s next?

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

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

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

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

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

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

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

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

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

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

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

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

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

What you missed

Econ and finance

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

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

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

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

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

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

Business environment

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

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

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

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

Tech

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

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

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

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

Politics

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

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

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

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

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

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

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

Agriculture and rural affairs

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

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

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

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

Foreign affairs

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

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

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

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

As always, it was a busy week in China.

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

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

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

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

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

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

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

But only before proceeding to state that:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Andrew Polk, Partner and Co-founder, Trivium China

What you missed

Econ and finance

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

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

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

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

Corporates

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

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

• Leapmotor, China’s bestselling NEV upstart, saw 2025 annual sales quadruple from 2023 levels and posted its first-ever annual profit of RMB 540 million.

• Xpeng and Nio, though still loss-making, both recorded their first quarterly profits in Q4 2025, driven by a surge in sales volumes.

On Wednesday, state-owned COSCO Shipping announced it is resuming new bookings to the UAE, Saudi Arabia, Bahrain, Qatar, Kuwait, and Iraq — sparking speculation it would become the first major carrier to resume shipments through the Strait of Hormuz.

• Within hours, COSCO clarified that it will not be transiting the Strait.

• Instead, it will route containers to two UAE east coast ports outside the Persian Gulf and then move goods overland via bonded land transport corridors for onward shipment.

• European shipping giants CMA CGM and Maersk announced similar multimodal alternatives on March 11 and March 18, respectively — putting COSCO weeks behind some of its largest Western competitors.

Commodities

On Monday, the macro planner (NDRC) announced temporary price controls as part of its updated national fuel price ceilings, limiting gasoline and diesel price increases to roughly half of expected levels.

• Folks still face an over-10% price hike at the pump — but that’s a far cry from the roughly 25% increase that the NDRC’s pricing formula would usually dictate.

• This is the first time the NDRC has used this power — including in 2022, when oil prices soared following Russia’s invasion of Ukraine.

Business environment

On March 22, Han Wenxiu, the senior official overseeing day-to-day operations at the Central Commission for Financial and Economic Affairs (CCFEA) — the Party’s top economic policymaking body — told the China Development Forum (CDF):

• “After years of effort, China’s indigenous innovation capacity has passed a critical inflection point, making it difficult for external forces to derail our development”

• That’s a big change in framing — as recently as 2023, Xi Jinping warned that U.S.-led technology restrictions posed “unprecedented severe challenges” to China’s development.

• Han’s remarks follow a broader uptick in official messaging highlighting progress in overcoming foreign technology chokepoints. For example, on March 5, Minister of Science and Technology Yin Hejun stated that China had made “new breakthroughs” in core chip technologies — though provided no details.

Foreign affairs

On Wednesday, China’s Ministry of Commerce (MofCom) released its final determination in its trade investigation against Mexico, finding that: “The measures under investigation…constitute trade and investment barriers.”

• China launched the investigation in September after Mexico announced plans to hike tariffs on imports from non-free-trade-agreement (FTA) partners.

• While the tariffs — which took effect on January 1 — don’t single out any individual country, China, by far Mexico’s largest non-FTA supplier, bears the brunt.

• The tariffs landed ahead of Mexico-U.S. discussions on reviewing the United States-Mexico-Canada Agreement (U.S.MCA).

U.S.-China

On Thursday, Commerce Minister Wang Wentao met with U.S. Trade Representative Jamieson Greer on the sidelines of the WTO’s 14th Ministerial Conference in Yaoundé, Cameroon.

• The discussion looked largely steady-as-she-goes following the last round of China-U.S. trade negotiations in Paris on March 15-16.

• However, Wang raised “serious concerns” over Washington’s recent Section 301 investigations into multiple trade partners — including China –regarding overcapacity and forced labor concerns.

• Beijing also fired back with two trade probes of its own — one targeting U.S. measures that disrupt global supply chains, another targeting restrictions on green trade.

On Thursday, U.S. President Donald Trump announced on Truth Social that he had rescheduled his long-awaited China trip to May 14-15.

• Trump’s visit was originally scheduled for March 31-April 2, but he postponed it to focus on Iran.

• Trump said that he also planned to host Xi Jinping and his wife, Peng Liyuan, for a “reciprocal visit” later this year and that he: “Look[s] very much forward to spending time with President Xi in what will be, I am sure, a Monumental Event.”

As always, it was a busy week in China.

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

To discuss the latest dynamics driving the economy, and the potential…erm…hiccups it may face in the coming months, Trivium China Podcast host Andrew Polk is joined this week by two seasoned economists:

• Beijing-based China Economist at the Standard Bank Group, Jeremy Stevens

• And Trivium’s own lead macro-econ analyst, Joe Peissel

The three run through the latest monthly macro data, discuss where key vulnerabilities are lurking, and look ahead to how the Iran situation may upend things, if and as it drags on.

Transcript

Andrew Polk: Hi, everybody, and welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Tribune co-founder, Andrew Polk, and I am joined today by our Head of Macro Research, Joe Peissel. Joe, how are you doing, man? Good to see you.

Joe Peissel: Hey. Good, Andrew. Glad to be here as always.

Andrew: Yeah, great to have you on. And we have a very special guest with us today, a pal of mine from my Beijing days, where I am currently, and a very seasoned economist on China. He is a China economist for the Standard Bank Group, which is South Africa’s biggest bank, partially owned by ICBC, been based in China now for about 16 years or so. It’s Jeremy Stevens. Jeremy, how are you doing, man?

Jeremy Stevens: Hi, thanks for having me today. I’m really excited to be joining you guys. I’ve been watching your podcast for a long time, and I have been pretty annoyed that I haven’t been invited until now. So, I’m pleased to finally get the nod.

Andrew: Well, it’s good to have you, Jeremy. We are going to talk with these guys about the general state of China’s economy now that we’re three months into the year, and we finally have a little bit of data to understand what’s going on. So, take our monthly check on the state and health of the Chinese economy. I thought Jeremy would be a great person to discuss that with. Of course, Joe walks us through his views about once a month. And so, that will be the main part of the conversation. And then at the end, we’ll also do a little bit on kind of implications of, of course, the biggest geopolitical story of the past several weeks, which is the war in Iran.

So, what kind of implications that has for China’s economy as well but before we get started with content of course we have to start with the customary vibe check. Jeremy, you’re one of the few external guests who we have on early enough in the pod to do the vibe check, so I’ll start with you. How’s your vibe today, man?

Jeremy: Apart from this thrilled invite, which I’m grateful for I would say, so yesterday, I’m obviously going to South Africa tomorrow to see some clients for about 10 days. And so, this morning, my wife asked my son, who’s nine years old, “Will you miss your dad?” And he thought about it. And he said, “I’ll miss kicking the ball with him.” And then my wife then said, “Is that all you’ll miss?” And he said, “Yes, that’s all.” And then I said, “Well, then just kick the ball against the wall.” And then my son said, “Yeah, actually, that’s the same.” So, I feel domestic relegation and then I feel, as I’ve said, umbrage at this; it’s your millionth podcast, and I’m only finally getting invited. So, it’s a bad start. I’m on the back foot here, but I’m open to see how this thing goes.

Andrew: Well, that’s a perfect vibe check — very classic Jeremy Stevens for our listeners who know him, and so well executed. Joe, how about yourself, how’s your vibe?

Joe: Yeah. Also, Jeremy, it speaks volumes about your football skills as well. My vibes are good, Andrew. I don’t have any kids, so I’m shielded from the humiliation of children, thankfully.

Andrew: For now.

Joe: I’m in sunny Brighton in the UK. The weather’s getting warmer. So, my vibes are pretty good, man. Enjoying the warm weather.

Andrew: Great to hear. My vibe is super upbeat. I’m in Beijing. It’s been a super short trip. I’m about to head off. But I’m seeing a couple of my business partners in Balmy, Bali, Indonesia next week. So, excited about that. A nice strategic retreat in Bali, can’t beat it. So, it looks like we’re kind of all over the place on the vibe, but I think we’re bringing some good energy here. So, last thing we have to do before we get into the full meat of the discussion is the quick housekeeping.

Just a quick reminder up top that we are not just a podcast here. Trivium in China is a strategic advisory firm that helps business and investors navigate the China policy landscape. That, of course, includes domestic policy in China, which we’re going to talk about today in the form of macro policy. But it also includes policy towards China out of Western capitals like D.C., London, Brussels, and others. So, if you need any help on that front, please reach out to us at hq@triviumchina.com. We’d love to have a conversation about how we can support your business or your fund. Otherwise, if you’re interested in receiving more Trivium content, check out our website.

Again, triviumchina.com, where we’ve got a bunch of different options, both free and paid in terms of subscription products for China policy and intelligence, whether it’s markets, tech policy, or general China watching. You’ll definitely find the China policy and intelligence option you need on our website. And finally, please do tell your friends and colleagues about Trivium, both about the company itself and about the podcast, so we can continue to grow both our listenership and our business. We really appreciate the word-of-mouth recommendations.

All right. So, with that, let’s get into it. Joe, I’m going to start with you. You just wrote a note beginning of the week that laid out the story on where China’s economy is after the first couple of months of the year. We got, for listeners who don’t know, January data never really comes out because of the Chinese New Year. Makes it volatile from a seasonal perspective. So, mid-March, we get January, February data combined.

So, Joe, you took a look at that, and what’s your headline takeaway in terms of what the data tells us about where the economy started off in 2026?

Joe: Sure. Thanks, Andrew. I mean, big picture takeaway based on the first two months of data is really China started this year much as it ended last, but just a little bit better, which by that I mean growth has picked up pretty much across the board. I think every single metric from industrial activity to investment to consumption metrics, everything’s improved a little bit relative to what we’re seeing towards the end of 2025. But we’re still seeing the same structural challenges. They still all exist — The supply-demand gap, sluggish consumption, huge reliance on exports, declining property sector. So, very much similar to what we’ve been seeing, but slight improvement in terms of economic momentum.

Andrew: So, picking up in the beginning of the year, Jeremy, you’ve been talking with clients over the past few days, I know. What’s your headline takeaway when you talk to clients right now about what you’re seeing in the data?

Jeremy: Yeah, I totally agree with Joe. It’s pretty much more of the same. I think it justifies from what I sort of read from the Two Sessions as well is that Beijing seems to have made the… They’ve adjudicated that even though the economy is facing downward pressure and is sort of operating at a relatively low level, the challenges aren’t rising. And like Joe said, I think that the latest data very much confirms that.

It’s granted weak by historical standards, but I think for them, this would be arguably within what they’re calling that relative stability or that operating range that they’re comfortable with. I think when you look at consumer sentiment, business sentiment, they’re stable. It’s kind of like we’re accepting a new reality and moving on. And I think that’s why macro policies adopted this year have been relatively conservative.

And I think that recognizes that both monetary and fiscal policy space is more limited than before. And I think the fundamental point, Andrew, is that probably for the first time, I mean, the most since I’ve been here, is that Beijing’s threshold for subdued economic activity and weak data has probably never been higher. And they remain very, very focused on shifting resources, both labor and capital, from mature sectors towards these emerging sectors.

And they’re betting that this will deliver producer power, this will deliver global leadership, this will indirectly restructure our incomes and wages, and profits are distributed, and that’s how they’re going to restructure the economy towards consumption. So, nothing that’s happened in the first two months changes that. And I think it really does justify where they are in terms of their relative ease at which the economy is slowing down.

Andrew: Yeah, I want you to pick up on the point you made on business and consumer sentiment because that’s something authorities have been sort of worried about or focused on. And certainly, people outside of China, you know, the weak consumption story. But you said they’re sort of settling into this new environment. Previously, when you and I were talking before the podcast, a couple days ago, you kind of made the observation that you feel like people have just adjusted their lifestyle and they’re kind of fine with the new normal. Can you speak a little bit more about kind of how you think about what’s happening on that side in terms of consumption and sentiment overall?

Jeremy: Yeah, sure. So, I think for the last 10 years, and obviously Joe and yourself and your team has been reporting it for a while, I mean, basically consistently, is that the economy is on a structural downtrend, which is largely manifesting in the sort of traditional drivers of economic growth have matured. And in the process of trying to find new avenues of growth, the transition towards that’s not particularly easy. And so, there’s like an issue with the climate. 10 years ago, when I used to speak to Chinese clients about the Chinese economy, the vibe was always, well, China’s different, and you don’t really understand how China’s economic model is different.

And gradually, what’s happened is a lot of the issues that we’ve been speaking about for a long time have manifested in weaker and weaker economic growth. And so, the climate is one where upward social mobility is slowing down, the pace of change has slowed down, the idea that you can never have a bad year and every year gets better, albeit at different speeds, that’s no longer the case. And I think people have learned to realize that. And then at the same time, you have the climate that’s declining, and then you have the weather patterns and the hurricanes from the housing crisis, COVID, Iran, the trade war. That’s all impacted on sentiment at the same time.

And I feel like the fundamental adjustment, the recognition that rapid economic growth and every year is going to get better for everyone, that’s now settled. And now we’re seeing behavior change accordingly. And I think that that process is sort of three years in. And I think that right now we’re at a stable point where nobody’s expecting things to improve very quickly. They’re expecting this to be a gradual grind.

Andrew: And they seem to be increasingly okay with it, I guess. Once you adjust your lifestyle downwards to, I’m not buying the new phone or whatever every six months, and instead, I’m going to only buy one every couple of years, you kind of realize, actually, this isn’t so bad. This is an adjustment I can make. Joe, I want to bring you in. What are you seeing in the data on the consumption side in terms of where we are? Is your view in line with what Jeremy said? How are you thinking about the consumer piece of this?

Joe: Yeah, totally, totally right. So, as Jeremy said, I mean, the signals in the Two Sessions show policymakers have an appetite or a willingness for lower growth. And there’s no real ambition in the short term to juice consumption. There’s no exciting policy dynamics going on at play. There’s nothing at the Two Sessions. I mean, it’s quite telling that the consumer goods trading program, which is like one of the main consumption boosting measures, was actually scaled back in terms of funding. So, Beijing has a willingness, particularly at the short term, to accept sluggish consumption growth. And if we look at the policy dynamics, there’s actually very little upside for consumption in the short to medium term. I think over the longer run, I’m slightly more bullish.

I think there’s a very slow policy movement to lay the administrative or bureaucratic infrastructure to expand the welfare state. So, slowly, slowly, we’re seeing things like increases in minimum wages, expansion of pension, expansion of healthcare coverage. But these sort of measures take years to implement and to extend full coverage. So, in the short term, consumption is going to remain sluggish. If we look specifically at January and February data, there was a slight pickup.

So, retail sales of consumer goods grew, I mean, close to 3%, which is hardly anything to shout about, but massive improvement from what we’ve seen towards the end of 2025 when there’s a sharp slowdown in consumption. But nevertheless, 3% is hardly anything to shout about. On the consumption picture, I think the one area where I do feel more bullish is expenditure on services. So, retail sales of services have grown much faster. That’s somewhere between 5% and 6% every single month.

And we see this in terms of consumers’ willingness to spend on consumer durables has dropped massively, but consumers’ willingness to go things like traveling, spend on education or healthcare has actually grown pretty well. And we saw that in the Chinese New Year spending data, which was also quite robust. So, overall consumption picture, not particularly positive. It’s going to remain slow and sluggish for the foreseeable future because the nature of the policies Beijing is rolling out take time to have an effect. But there are pockets of strength, particularly in the services side of the consumption picture.

Andrew: Yeah. So, I mean, and consistent with what you said at the top, which is the overall picture is basically the same as last year, more of the same, but slightly better. I was having a meeting today with someone from one of the embassies in town who was talking about just how wildly things have changed over the past five years since the pandemic, just how everyone’s saying, “Oh, great, 3% growth in retail sales of goods. That’s a really good picture to start the year.”

Whereas, you know, in 2019, that’s dismal, like, you know, low, single-digit growth. So, it speaks to kind of the new world we’re in quite a bit. But let’s pivot a bit now to, we kind of covered the consumption piece, the parts of the economy that are particularly strong. You talked about how, Joe, how the data for January, February has shown this ongoing supply-demand mismatch. And the supply side of the economy is still doing really, really well. We’ve got industrial production really humming, 6.3% year over year growth, and industrial value added. Talk to us about what you’re seeing on the industry side in any specific areas of positivity within that.

Joe: Yeah. So, what’s quite interesting on China’s industrial side, but particularly manufacturing, which I’m going to talk about, and that manufacturing specifically grew by 6.6% in the first two months of the year. That’s pre-pandemic levels of growth. So, when we think of the structural slowdown that China’s facing, that’s only happened on one side of the economy. Consumption is structurally slow in consumption growth. But manufacturers continue to increase their output at the same rates as before the pandemic. And this is exacerbating this huge supply-demand gap we’re seeing, which leads to all these issues like overcapacity, deflationary pressures, and over-reliance on exports.

But nevertheless, I mean, manufacturing is a really strong point in the data. So, as I said, 6.6%. That’s the same sort of growth we’d have seen five, six, seven, eight years ago. And as always, it’s concentrated in these high-value-added goods, things like industrial equipment, rail, shipbuilding, electrical machinery. And what we’re seeing is this seems to be spilling over into the investment data. So, as I’m sure our listeners will know, China’s investment data was terrible last year. This kind of unprecedented decline in fixed asset investment. That seems to have reversed in the first two months of this year.

And part of that reason is because of the surge in manufacturing. So, as manufacturing in these specific areas has increased, which I just mentioned, rail and electric machinery, industrial equipment, and so forth, we’ve actually seen an increase in manufacturing fixed asset investment in these exact same sectors. So, that suggests to me, looking at the data, that this surge in manufacturing is actually having a positive spillover into China’s broader investment economy. So, in that sense, it’s a really good thing, real positive. That said, there’s this strong correlation between investment data and manufacturing data. It suggests that this is a cyclical pickup in investment.

And that also means it’s highly vulnerable if there’s any sort of shock, like, I don’t know, a war in the Middle East, for example. I mean, this cyclical pickup could quickly peter out and we could see a decline in the manufacturing investment again.

Andrew: Yeah, that’s a great point. We’ll circle back to the Iran piece and how that may impact the short-term cyclical picture in China. But Jeremy, let me throw back to you. What are you telling your clients on the industry investment side? I mean, obviously, investment was terrible last year, and your clients, many of whom are funds in South Africa, are very attuned to commodities from industry. What’s your message on that side?

Jeremy: Yeah, I’m slightly less optimistic. I mean, everything Joe said is totally right. When you look at where the growth has been, even in the first two months of this year, the fastest-growing sectors have been those sectors where the proportion of their revenue coming from external markets is the highest. So, there’s a clear correlation there. And I worry it’s now $32 trillion in manufacturing investment, up from $21 trillion in 2021. Now, purely just maintaining the speed at which that has been expanding has become very, very difficult. And even the sort of one-third of manufacturing that you could consider sort of advanced manufacturing after years of double-digit growth, they started to slow last year to a crawl. I am watching the interbank markets, the DR77, that’s climbed. And some are arguing, at least some in the sort of domestic economist space, they’re saying that banks are starting to tap the interbank markets because enterprises are finally starting to borrow. At this juncture, I don’t fully buy it yet. I think that it’s got a lot to do with front-loaded policy stimulus and seasonal factors, and the fact that depleted bank excess reserves, they’re currently at about 1.2%.

So, I think that it’s more a seasonal thing that’s caused that. I note that the profit recovery that we saw in the industrial sector last year in Q3 was really just base effects, and those dissipated as the year unfolded. You also look at loss-making enterprises that accelerated through the second half of the year. Inventory growth accelerated across the board.

When you look at loan demand coming from the PBOC surveys, they’ve stabilized, but they’re well below where they were a couple of years ago. And so, I think it’s still going to be this new productive forces part that’s growing at an okay speed, but slower than before. So grid, high tech manufacturing, EV, that stuff. And then I think that the traditional manufacturing base is likely to sort of flatline and continue to struggle. That’s at least where I’m at, and I’ll wait and see how that plays out as the year unfolds, I think.

Andrew: So, what you just said reminds me of the balance sheet recession type argument that a lot of people made trying to say that China is effectively facing a balance sheet recession. And it sounds like maybe you buy into that idea a little bit, although you’re saying that some of those dynamics would have alleviated. Do you think China’s in a balance sheet recession, or do you think that some elements of that are holding back investment growth in industry and profitability like we were just talking about?

Jeremy: Well, I think that what we’re seeing is a feature, not a bug of China’s system. I think the policymakers, like I mentioned at the start, they really are trying to mobilize resources to those parts of the economy that they think can generate productivity gains, right? And what they’re trying to do is make sure that those productivity gains, rather than cascade, or those surpluses that they created, rather than cascade to shareholders and into profits, they want them to cascade down to households through an adjustment in value to cost, better quality, better featured, cheaper products.

Or they want those gains to be reinvested into equipment upgrades and automation and R&D. And so, this supply-demand mismatch is a natural byproducts. And I think that it’s very, very clear that even though the rhetoric speaks to boosting consumption, I think that how they understand boosting domestic demand has to do with, yes, it means proportionately more resources will go towards helping social services and trying to unlock the large share of savings that households tend to accrue in China. But at the same time, it means less roads, bridges and ports, but significantly more investment in renewable energy, for example.

And then it also means within sectors, more investment still. So less in ICE vehicles, but more in NEVs. And I think this is the model that they’re embracing. And like I say, I think that when you think about what they’re trying to do, it’s almost like we see consumption as a part of the GDP composition, but they see it as a byproduct of success elsewhere. So if they can incentivize and rejig the allocation of resources pre-production and incentivize those areas where They think they can generate high-skilled jobs that university graduates can eventually be employed and absorbed by. And then those people who are getting paid a lot can then go and travel and cut their hair, and go to restaurants. This is a 10, 20-year program to restructure their economy.

And I think that’s what they’re trying to achieve. Whether or not they get there or not, it’s going to be tough. But I think all of that lends itself to pushing harder on the supply. And when you look at previous years in supply-side structural reform, which you guys will all know about, 2015 was much more about cutting out capacity. Whereas this time, and I know you guys have written about it, a number of the sort of thought leaders here in China are saying, “We’re going to be much more gradual this time around,” because I think that they believe that crowding in resources and that cascading effect in those sectors is what will deliver the breakthroughs in the technological leadership.

And so they can’t pull back. And so you’re just going to see more and more push from that side. And that’s why the supply overhang and the deflationary pressures are so problematic is because I don’t see anything that’s saying, “We’re walking back the supply side orientation,” even when they talk about boosting domestic demand.

Andrew: Yeah, all great points. And I actually, I want to come back to that in a minute, because the China Development Forum was this week, and kind of your point about their commitment to the model, the message very much out of the China Development Forum, as far as I understand it, I wasn’t there, but from people who were there and were sort of, was that the message of the government was, this is the model, get used to it. We’re not going to change. We’re focused on innovation and tech upgrading or industrial upgrading and technological innovation.

And that’s going to result in exports, and that it is what it is. So, I just thought that was an interesting change in rhetoric that underscores that they are saying, not only… they’re just saying more forcefully, “This is the model and we’re committed to it, get used to it.” We’ll come back to that, but I do want to pick up on something you said on the manufacturing side-

Jeremy: Before you move on, sorry, Andrew, can I just jump in there?

Andrew: Yeah, please.

Jeremy: Because one of the things that we’ve seen recently is there’s quite a strong conversation domestically around the fact that even though household consumption per capita is reasonably low, they’re starting to argue quite forcefully that the reason China’s consumption as a share of GDP is low is largely because of healthcare, for example, is much more expensive in the United States. And if you carve that out, that’s about a third of the difference. Along with homeowners in the United States, they have that paying themselves rent, which is excluded from China’s household consumption data. There’s also a conversation that they’re saying, if you compare, yes, per capita spending compared to the United States is maybe 20% or compared to Germany.

But when you look at individual product ownership of shoes, of protein, of all of that stuff, actually China’s catch-up potential is much more limited than the data would suggest. And so, the reason they’re pushing that conversation, and I agree with Joe and Dini’s analysis that they do think that there’s latent demand in the services sector, but one, you’ve already said previously many, many times that Xi Jinping has said he’s not going to allow the Latin Americanization of China.

And so, they can’t use debt to fund social welfare, and it has to come through the tax system. But at the same time, they don’t think that there’s that much catch-up potential as it stands right now. And so, they are looking at how the economy restructures in a different way to how a number of Western or offshore analysts are seeing the problems facing China.

Andrew: Yeah, I think that’s a great point. And it’s something I’ve actually been talking with folks a lot about this week, which is just understanding how Chinese leaders are diagnosing their own economic challenges or economic opportunities and trying to understand exactly what they’re trying to achieve. To your point, they are thinking about consumption in a very different way. And so we’ve been banging on like the whole rebalancing toward to consumption conversation. It’s just kind of a non-starter when you talk to people on the Chinese side about it for not only the reason that you talked about, but for many others.

The problem, though, of course, is the supply-demand, even though they’re not focused as much on raising domestic demand, raising consumption, the supply-demand mismatch persists. And what that results in, Joe, is a ton of exports on them, you know, flooding the global market. I want you to talk to me about the export data from January, February, and just what you’re seeing on the export side. I’ll front-run you a little bit by saying the numbers were huge in terms of export performance. But I will say, I was talking to somebody earlier this week, he has some insight into the shipping industry. He was saying that his perspective on one of the reasons that exports might have done so well at the beginning of the year is because of the very late Chinese New Year.

A lot of companies try to get as much inventory out the door ahead of the Chinese New Year as possible. So, the Chinese New Year moving around always mess with the year-on-year numbers. Having a particularly late Chinese New Year meant you had a particularly long period to front run as much production as you can as an export. So anyway, I just wanted to throw that little anecdote in there to maybe color what you’re about to say. Tell us about the export numbers and what we’re seeing there, Joe.

Joe: Sure. I just want to circle back really quickly to the conversation you and Jeremy just had about the consumption stuff. And I mean, totally agree with what you guys are saying. I think understanding how Beijing views consumption is really important and is very different from a typical Western economic analysis.

And I think what’s really interesting is, and we see this in the policy talk coming out of Beijing, Beijing almost wants to stimulate consumption through supply-side stimulus, which is very non-conventional. And I think they kind of see this in two ways. The first is, if you can increase supply of good-quality goods and services, you unlock what’s called latent demand. So, policymakers in China are convinced that households have this huge amount of latent demand, which is essentially households want to spend, but there isn’t the supply of goods and services to spend on.

And so, we see things like policymakers encouraging investment in the silver economy. So, building care homes, increasing the provision and quality of elder care. The idea being loads of people want to spend on elder care. It’s just the supply doesn’t exist. And so, the approach is, well, if we increase investment, if we have this supply side stimulus, by doing that, we’re going to increase consumption. The other way of supply side stimulus can increase consumption is through industrial upgrading because this creates well-paid jobs. And so over time, you see an increase in salary and then households have stronger purchasing power.

So again, it’s unconventional compared to what we’re used to. It’s just a very different approach to consumption. And understanding that approach helps us see why, particularly in the short term, there’s very little upside for consumption. Just by the very nature of Beijing wants to go about stimulating it. And of course, one of the consequences, as you say, is you’re going to have a huge, if you try and achieve consumption through supply side stimulus, guess what? You’re going to have too much supply, which leads to these exports. Yeah, so exports surged.

I mean, it’s again, it’s really a continuation of what we saw in 2025. Huge reliance on external sector to offload excess production. The Jan-Feb data was particularly, I think it’s about 22% growth in exports But as you rightly point out, it’s really hard to discern any sort of trend behavior across January and February because there’s seasonal impacts. The timing of the Chinese New Year really matters as well as the length. So, this year is a day longer than last year. 21.8% in the first two months of the year doesn’t mean we’re going to see 21.8% in the rest of the year. But I think the dynamics are still important. It signals to us still this really huge reliance on the external sector to offload this production because the domestic sector isn’t consuming it.

Maybe the one interesting thing to talk about is the diversification in export markets. So, exports to Africa during the first two months of the year grew by 50%. To the U.S., they dropped by 11%. Total change in where exports are going. And of course, Some of this is about reshipping to U.S. markets to try and avoid tariffs. But there’s also a genuine structural shift in who China is selling to. And this diversification, as a general rule, is a good thing. And what we’re seeing in China’s policy, especially in Africa and parts of Latin America, is to try and lock in export supply by accompanying exports with investment. So, for example, take Africa.

China’s building all the infrastructure in Africa. And by doing so, it’s increasing exports of everything from raw materials to intermediate goods to capital goods, as well as consumer durables. So, it’s quite a sustainable way of re-diversifying who they export to. Maybe the last thing I’ll say on this, the one potential downside from this diversification or exposure to developing economies is, as a general rule, developing economies fluctuate much more in terms of the business cycle and economic growth.

And so, if we see a continuation of this diversification, then at some point we may find that China’s exports are even more vulnerable to global changes in the economy. Because developing economies, their economies shoot up and shoot down a lot more than you’d expect from advanced developed economies in the West.

Andrew: Yeah, I’ve said it before, I’ll say it again, you know, I think I’ve been writing or saying every month for 10 years, they can’t keep pulling out the export, you know, trick, and yet they keep doing it even in the face of a global trade war, in the face of a trade war with the U.S. And so, they clearly have more capacity to diversify than many people thought. The question continues to be, how long is that runway? Jeremy, what is your thinking on sort of the export diversification generally? But also, you know, Joe just talked about some of the stuff going on with trade with Africa. I mean, you do a lot of China-Africa analysis. What are you seeing in that space particularly… a key question I keep getting is, what is the global south?

So, we’ll talk about Africa specifically. What is their capacity to continue absorbing this massive amount of Chinese exports? Joe just said China is trying to maintain that capacity through investment. Does that work? What is your thought on all that?

Jeremy: So, I think that’s an important starting point for this is that previously exports used to be foreign-owned companies that were sort of employing, you know, embracing China’s first world infrastructure to build labor-intensive goods. And then those products were being designed almost entirely for the developed market. And they really crossed over into the domestic market. But this new era that we’re seeing, it seems to me it’s being driven by private companies, by domestic brands. It seems like product’s being designed for the domestic market, and then the secondary priority is exports. And increasingly, that’s going to the developing countries because China’s price point is so competitive.

We’ve seen this in the trade surplus. We mentioned it in dinner the other day, but China’s trade surplus with emerging markets has gone from 150 billion to 500 billion since 2022. It shows us, and like Joe said, I mean, China’s exports to Africa up 50%, but also I think half of China’s fastest growing export markets since basically the pandemic have been in Africa. They’re gaining crazy market share. It’s like 40% of Nigeria’s imports, 40% of Kenya’s imports are coming from China. Just over a quarter of everything Africa imports is now coming from China. They’re gaining market share because, in part, because of the productivity gains that we’ve discussed already. They’re also designing these products for 1.4 billion price-sensitive Chinese people.

They’re benefiting from a weaker currency. So, over the past five years, you would say that on a trade-weighted basis, China’s currency has been relatively weak. There’s been aggressive pricing. There’s been falling PPI. They’ve had domestic subsidies. And so, all of that has meant that they are managing to carve out massive positions in the global south, in emerging market countries. And I did a presentation last week to the European Union because obviously, you know, the idea is that, are they hollowing out Africa’s manufacturing base? Probably not, because outside of South Africa and Nigeria, we don’t really have a manufacturing base. But what it is doing is it’s hollowing out European sales to Africa.

And so, I looked at the data. And when you look at heavy industrial goods, so machinery and equipment and so on, China’s share has gone from 15% in 2015 to 30% last year. And the EU’s share has gone from 18% to 12%. And like Joe’s rightly said, the move is calculated. So, what wasn’t on my bingo card this year was China’s construction contracts were going to accelerate. Because, you know, with the end of checkbook diplomacy, de-risking the financial sector, what they did in Belt and Road, there’s actually been a paring back of lending into Africa. And obviously, Africa has also run into its own sovereign debt fragilities.

And so, there was a narrowing of China’s focus that was sort of predating the pandemic. But last year, construction contracts hit, I think, $62 billion, which is up 40% from year on year. And why that matters is because obviously that means construction, machinery, exports, which are Sany, Zoomlion are all killing it in Africa. And it also advertises China as a development first partner and juxtapose itself against the chaotic West. Remember, you’ve spoken about this in the past, but China’s trying to pivot away from a sort of universal value international relation order to a sort of economic growth jobs income kind of agenda.

I would say that what’s interesting, though, because on this trip to South Africa now, one of the things I’m doing is talking to our chief executives about their strategy. And so, I’ve tracked the top 200 Chinese companies’ revenues in Africa over the last five years and their growth rates. And all the big players, the biggest guys are all in construction, infrastructure, and so on. But they’re growing the most slowly, despite what I’ve just said, they’re growing slower, apart from financial services, they’re basically growing the slowest, even though it’s relatively fast. And when you compare it to autos, ICE autos, pharmaceuticals, e-commerce, household appliances, those things are growing even faster.

And so, it’s not only about this construction, sort of exporting capsule goods. It’s actually they’re finding their ways into our markets and gaining an amazing market share. So, it’s real.

Andrew: So, follow-up question, two-parter. One is, what is the ongoing absorption capacity of Africa for these goods? Are the economies growing quickly enough to continue supporting ongoing growth in Chinese exports from a macro level? Or can China eat further into European and U.S. market share and move European market share from 12% down to 15%? And then thirdly, is there any pushback among African countries from the state leadership of Chinese goods?

Jeremy: Yeah, so I’ll be brief. Africa is growing at a decent clip, nothing special, around 4%. So, okay, in the context of Africa. Your question around whether this is sustainable and speed at which China’s exports are growing, I would say probably not. But I’ve fallen into the trap you’ve fallen into before as well, where I’ve said this has to slow, this has to slow, and it continues to expand. The game is definitely market share, and that’s going to continue. So, the degree to which they can continue to gain market share, I think, is still quite large. The biggest issue is obviously this geopolitical story.

We saw pushback before the pandemic from the African side. We saw Xi Jinping came out in 2019 promising to triple imports from Africa precisely because of the trade deficits were becoming problematic. Since then, imports have stayed flat, and it’s only going to continue to be the case when you think that shifting away from oil, for example, the economic model shifting away from the kinds of drivers that used to push them towards the kinds of commodities that Africa could export, with the exception of critical minerals.

So, structurally, the China-Africa story has that limitation, I would argue. But at the same time, they are continuing to find their way into African markets and gaining this incredible market share. So, the trade deficit went from 66 in 2024 to 102 billion last year. It is going to be on the radar for all the African leaders because it’s the most visible and obvious imbalance. And it does undermine Beijing’s bona fides as a sort of development partner in Africa.

And clearly, they want to have these relationships that at least give the veneer of being win-win. But bear in mind that it’s very difficult for a president of South Africa or Nigeria to fight with Donald Trump and Xi Jinping at the same time. And so this sort of more tense environment geopolitically that Trump’s generated since that April Independence Day tariffs has really given China more time to continue this model. But at some point, the pushback is going to come. And we saw Mexico, Turkey, South Africa putting up some barriers before the pandemic.

And I think that that will come back as the year unfolds. And obviously, the sensitivity of China’s economic activity is gradually moving towards the global south, which is new. So, how they navigate, it’s going to matter.

Andrew: Yeah, well, and I guess the story that you’re talking about in Africa has also been replicated in South America, a market share game, along with investment that supports Chinese exports to the continent. Joe, Jeremy mentioned something interesting in terms of the European displacement in Africa. I know you’ve done a little bit of work on China versus European exports globally, and did Japan a little bit in that regard. Any thoughts on what you see happening there?

Joe: Yeah, I mean, it’s not just Africa. Yeah, we did some research about this for a client. So, China’s displacing European exports in every market, including China’s domestic market. So, EU exports to China are dropping because China’s producing a lot of the goods domestically, and vice versa. Consumption of EU-manufactured goods is declining because they’re importing Chinese goods. So, yeah, it’s not just an Africa phenomenon, it’s global, so around the world. Specifically on the exports to Africa and the sustainability point, I mean, as Jeremy says, There’s a structural ceiling at some point, right?

Particularly because of the asymmetry because China exports so much more to African buyers. One thing in China’s favor, and this isn’t just an Africa story, this is a general global export story is … the proportion of exports which are intermediate goods, these are goods involved in the manufacturing process, they’re not final products, nor are they raw materials, that’s shot up. I can’t remember the exact figures, but it’s something like 40% to 50% of what China now exports is an intermediate good. It’s involved in the manufacturing of something else.

And a lot of the time, China’s the only economy in the world that has the scale to produce these intermediate goods at such a vast scale and a competitive price point, which essentially locks them into supply chains. So, even if we do see some of these trade frictions re-emerging later in the year, we talked, again, Jeremy mentioned things like Mexico and Turkey trying to push back, and a lot of the case, or in some instances, these countries don’t really have a choice. They have to, they’re locked into Chinese supply chains. And I think that’s kind of one upside for China’s export story, which suggests that maybe growth to an extent can continue for the foreseeable future.

Andrew: Great point. I want to touch on one other big weakness in the economy before we talk about potential shocks from Iran, which is property. It seems like we write it every month. And by we, I mean me and Joe, that the big drag in the economy is the property sector. What’s the latest on that front?

Joe: I mean, yeah, so it’s still the biggest drag on economic growth. I don’t have a whole lot of interesting stuff to say about this. I think maybe there’s two points. So, the first is one of the major issues with the property sectors, this kind of supply-demand gap, it mirrors broader structural economic challenges China faces, but the property sector still has a huge surplus of stock of unsold properties. Until they can start shifting those, the sector is going to continue to decline. The second thing is these dynamics are really going to be guided by the price. So, as long as house prices keep falling, households are going to have these deflationary expectations and they’re not going to jump into the market.

Why would they buy a house now if they think in six months’ time it’s going to be even cheaper? So, the dynamics we’re really hoping to see is at some point, prices bottom out because the market hits a low. At that point, consumers adjust their deflationary expectations and then they buy back into the market. At that point, the property sector can then start to shift all this surplus stock. Once that happens, then property developers have the confidence to start investment and construction, and the property sector can start to grow a little bit. Obviously, we’re never going to get back to the heydays of double-digit growth. But at some point, in years to come, the property sector can be a slow, sustainable part of China’s growth story. That’s not going to happen in 2026. I can tell you that.

The only positive story we saw in the data is that a lot of the key real estate metrics, so prices, sales, investment, the decline has slowed for two or three consecutive months. It’s way too early to conclude that the sector’s actually bottoming out. We’ve seen this before. We’ve seen a slowdown in the decline and then it’s accelerated again. So, from my perspective, it’s unclear whether or not this is a genuine sustainable slowdown in the decline. But it’s something we’re keeping an eye on. And if we get a few more months of data of this consecutive slowdown, then maybe we can readjust our assessment of the sector. But for now, it’s really the same old.

Andrew: Yeah, this slog just seems like it’s going to continue for the foreseeable. I was talking about this with another person throughout this week in the media. Just saying they obviously are not in a hurry to do much about this. In the 15th-5-year plan, they had moved basically the housing policy section from the growth section of the plan to the social section of the plan. So, housing seemed more as a social good rather than a growth drive. But also my comment to the person I was talking to about this recently was the majority of the pain has already been experienced. So, why panic now?

You know you can make the adjustment, 90% or 80% or whatever if the adjustments are even made. Jeremy, how are you thinking about property and how it fits into everything you’re seeing?

Jeremy: Yeah, it’s funny. What Joe said resonates with me. I also don’t have particularly much news simply because I think that the Party is reasonably happy with the manner in which they’re metabolizing this correction. I think if you had asked any analyst five years ago, what’s the biggest risk to the Chinese economy? Everyone and their dog would have said, you know, real estate collapse. And now they’re sort of four or five years in, and I feel like they’re reasonably comfortable with the manner in which that it’s being eaten up by the broader economy.

And I think that they’re not really showing any signs of changing their property playbook. I would just say that I do think that tier one markets are likely to see improvement this year and stabilization. And why I watch it so closely, because one of the issues that China’s had is that when you look at sort of sentiment indicators from the household sector, you see the biggest hits from the pandemic was to low-income households, but they were the fastest to recover and every year their outlooks improved. And as you move up the income cohorts, that hasn’t actually been the case. The wealthier the households, actually they’ve seen deterioration in sentiment.

And so, what you’re seeing in the spending data is that poorer people are spending, but the wealthier people are holding back. And I think that if the stabilization can occur in tier one markets, as well as potentially a sort of rallying, gradual rallying in the stock market, where it’s predominantly wealthier families that have exposure to that, you could see a slight improvement in their sentiment, which would make quite a big difference in the consumption story because I think the top 20% income owners have about 50% of household consumption and about 65% of household wealth. And so, you just need a small change in their movements to actually see it in the data. And so, I do think there’s a reasonable chance, but I agree.

I think 80% of new starts after 2015 were in tier three and four cities. I mean, those places are dead forever. And so, the idea that construction can come back online like it had in the past is just not realistic. And I agree with what Joe’s saying in terms of his overarching analysis of where they are and how they’re handling it.

Andrew: Yeah, not a pretty picture. So, I think we’re all agreed that we’re pretty pessimistic on properly for the foreseeable. We’re getting closer to sort of time here. So, I want to make sure we spend a little bit of time on kind of vulnerabilities that we see from news of the day, which is the ongoing situation in Iran. Jeremy, again, I know you’ve kind of been thinking about this. Let me start with you. What do you see as the big vulnerabilities that China either has currently or that might sort of become more and more or larger and larger potential issues as and if the confrontation drags on?

Jeremy: I thought it was basically over. I thought President Trump had started his negotiations and it’s basically done.

Andrew: Yeah. I mean, well, just on the off chance that the Iranians decide…

Jeremy: So, a couple of points on Iran. I think it certainly reinforces Beijing’s instincts to focus on making China strong and more resilient and self-sufficient, right? So, it doesn’t do anything from that point of view in terms of undermining where they’re going. I had a conversation with a client in Hong Kong not that long ago. I said, “If America wants to compete with China they have to be willing to send their kids to do 12 hours of maths a day for 12 years, and if they’re not willing to do it, they’re going to lose.” So, there’s a vibe here of clearly we’re competing and we’re competing to win.

And so, I think that you know this just reinforces their instincts to look inwards and make sure that they’re competitive and that they’re doing the right things. It also makes it, again, referring to what we spoke about earlier, it makes it pretty easy, position yourself in the global south as a partner that’s stable, that’s constructive rather than chaotic. And I think that that serves China long term. I mean, of course, I think that China would rather a benign external environment and not a contested one with the United States or with the European Union. But as it stands right now, then the next best is for them to look good and the rest of the Western world to look a little bit more chaotic.

I think that the degree to which Trump is undermining the Western institutions is profound and meaningful, and it makes a big difference in the global south. So that’s not nothing. From an economic point of view, I think you guys have done a lot of good research on the vulnerabilities as it relates to oil and the most immediate shock. So, I won’t rehash that. I would just say that obviously beyond oil disruptions for other agricultural inputs, industrial chemicals, and those things, aluminum, those are all real. But I would just say that given what we’ve spoken about already, if you imagine a situation where suddenly oil’s at $130 or something, it’s going to cause an additional cost squeeze at a time where firms don’t yet have pricing power.

And that obviously means more margin compression. Then obviously, given the importance of exports, if import demand from Europe and Asia and Latin America and Africa is all impacted, that’s not going to help China at all. And then exporters will have, sort of they’ll have falling volumes, or they’ll have to further cut prices, which is obviously going to dent capacity utilization rates, add to the deflationary pressure. So, there’s a lot going on there that makes a lot of the vulnerabilities that China is trying to, as Joe said, they’re gradually trying to grind their way out of those situation. This would make it a hell of a lot more difficult.

And then at some point then, the Chinese leadership have to choose between market clearing bankruptcies, which you know they’re not going to do, or sustaining excess capacity and zombie capacity through forbearance. And that obviously eats into the sort of viability of the financial system, which is something that’s already reasonably vulnerable, which is why the central bank, for example, doesn’t want to cut interest rates because the banking sector can’t really accommodate it. So, there’s that. And then you add, given the climates and the hurricanes that we spoke about earlier, you add, this doesn’t help consider sentiment, right? So, then suddenly you have households that were maybe starting to feel like, okay, maybe we should go travel or whatever. Maybe they say, “No, let’s save.”

And that makes things even worse. So, there’s a lot to digest in terms of the impact. But of course, from a direct point of view, in terms of vulnerability, they’re reasonably self-sufficient and reasonably comfortable.

Andrew: Yeah. Joe, pick up on Jeremy’s comments there. You sort of intimated earlier, talking about the potential fragility of the industrial cycle and investment cycle that the next real shock of your challenge. Where do you think the vulnerabilities are?

Joe: Yeah. I mean, it’s a stress test at the worst possible moment for China’s economy. I mean, and Jeremy’s talked about the two big macroeconomic implications.

Andrew: Let me just say, I think we just got our episode title. Nice work.

Jeremy: Yeah, I also think Joe did really well there. Well done, Joe.

Joe: There’s obviously the energy hit. Jeremy’s talked about that. And then maybe the less obvious, but still pretty obvious channel is to China’s export base. So, China ships a lot of goods to the Gulf, to Southeast Asia, lots of consumer durable to Southeast Asia, to Europe. And households, their purchasing power is going to decline because of the energy crisis. So, I think to make all this worse, fiscal tools, which would generally be the best policy tool to try and manage this issue, are limited because China has constrained fiscal space. And we see that not only through things like really sluggish tax revenue growth, but also policymakers are prioritizing trying to reduce hidden levels of debt, not generate even more. So, it’s like a perfect storm of bad things. Sorry, that’s not quite so articulate. I don’t think that’ll-

Jeremy: No, I prefer that one.

Joe: It’s a perfect storm of bad economic outcomes coming from every angle. So, it’s the worst possible moment for China, I think.

Andrew: Well, and an interesting one is, so obviously everything you just said, both of you, just kind of the stakes and the compounding potential impacts grow and grow and grow as the conflict drags on. So, it does matter how quickly it’s resolved, although as many people pointed out, the global economic ramifications of the conflict will be long lasting, even just if everything stops tomorrow and everybody ceasefire tomorrow and everybody puts down their weapons. But one thing that I was just talking to Cory Combs, who is also in Beijing this week and is our Head of Supply Chain Research, he was mentioning a lot of people are asking us about helium coming out of the middle East, which is also shipped through the Strait of Hormuz.

About, I guess, a third of global helium, I believe, comes from, I believe, Qatar, and definitely is shipped through that channel and it’s one of the things that’s used in the production semiconductors. And he was saying one thing that people don’t think a lot about, I’m just going to steal his thunder, is inventory bugs. And what he means by that is when have an inventory of something, if there’s a buffer, it takes a certain amount of time for you to see this disruption So, for example, if you need a part, but you’ve got two months’ worth of it, and that part is suddenly unavailable, you don’t see this shortage for two months later.

And that moves all the way down the supply chain. So, if you have something that’s very high upstream and you’ve got inventory buffers at one level, it takes a couple of months or a couple of weeks, however much inventory you have for this shortage to show up, and then however much before you to have it. The next part of the supply chain takes a couple months, and then the next part of the supply chain takes a couple months. So, his point was helium is very far upstream when it comes to semiconductor production, and so we may not see if there’s a shortage of helium tomorrow, which, I mean, the prices have gone up.

I don’t believe there’s a global shortage yet, but to the extent there is a shortage of some of these key materials, we’re not probably going to see it for six months, And then it’s just going to kind of slam everything all at the same time. So, I think that’s another sort of element of this that China feeds into the idea that you both said, where China’s like pretty well placed now. But the trickle down effect of some of these disruptions may come in unexpected times, may come in unexpected places. Again, no one would, I think, automatically think, oh, semiconductor production is going to be disrupted because of helium in Qatar. So, I don’t know if either of you has any thoughts on the back of that.

Jeremy: I mean, I was really worried because Jasper’s birthday is in January. And so, I just wanted to make sure there were going to be enough helium balloons for his birthday party. Sounds like he should be okay, I think.

Andrew: Well, actually, we were laughing because, you know, helium is kind of one of these things, it has a bunch of these like low value uses like that. But then it just so happens that it is also a very high upstream piece and a very critical part of the technology supply chain. But I’m glad to know that Jasper’s birthday is going to be okay.

Jeremy: It should be fine. I want to ask you, Andrew, before you go, about two meetings, right? Because a lot of what we’re talking about is the shock, the bad news, etc. And I think that this pain threshold story from the authorities matters quite a great deal because how they interpret and what they’re willing to do and prioritize as data maybe deteriorates through this shock, if it plays out, I’m arguing that I think that they’re going to be conservative. And like Joe said, part of that’s because of fiscal and monetary policy space is more limited. And what they’re prioritizing is different to in the past. But I did notice that the stock market in the two meetings, as a result of this Iran war, were down.

Can you remember any time that there’s been two meetings where the stock market has fallen off the top of your head?

Andrew: No, not off the top of my head. But to be honest, I don’t think I’ve been following the correlation all that closely. I mean, is that unusual in your mind?

Jeremy: Yeah, I always thought that they did something to prop up the market around the time of big meetings. And I can’t recall a time where that hasn’t happened, but I haven’t actually gone and checked.

Andrew: But what do you read from that?

Jeremy: I just think that they are accepting that they’re not sort of the be-all and end-all controlling all outcomes like they thought they were in the past. And actually because people’s tolerance for accepting bad news or weaker data is now higher, as long as the wheels aren’t absolutely falling off. I think that they’re deciding to be more conservative and more constrained.

Andrew: And not sort of freak out at every little thing, I guess, which I think is right. I mean, again, part of my consistent sort of theme, one consistent theme of my meetings this week has been kind of saying, you know, maybe the authorities are wrong. But I watched the reaction function, and I’ve been in Beijing when they are worried about growth. And what do they do? They stimulate. And so, you know, they know how to do that. And so maybe they’re wrong for not being worried. But I think that’s a really good way to put it is their pain threshold is much higher. And I think that it’s permanently higher. And that has fundamentally changed how they manage the economy going forward.

Jeremy: Andrew, last point. You said years ago, and it stuck with me, where you said that Chinese policymakers are really effective when they’re on the front foot and they’re less effective when they’re on the back foot and reacting. And I think that if they pivoted towards being more... And it seems like when you look at the plenum last year, if you look at the two meetings, if you look at the 15-Five year plan, it seems like there’s a coherency and coordination and a focus around what they need to prioritize. And everything else is not a distraction, but they’re not actually that eager to kind of pivot away from what they’re actually trying to achieve.

And so, that kind of lends itself to, you know, I think that you should expect continuity, and you should expect them to continue to focus on the things that they’ve been prioritizing for the past two or three years, basically irrespective of the cyclical economic data. And I think that that puts them in a better stead than previously when they were reacting to everything with the national team to support the stock or whatever it was, which just doesn’t really help them in the long term.

Andrew: That’s a great point. It’s interesting because the way I’ve been sort of characterizing the 15th five-year plan and the government work report for this year is that it is kind of all over the map when it comes to economic growth, like there’s not a clear plan, like, is it 4%, is it 5%, is it more? It just doesn’t seem like they’re sending a clear signal. And so, I’ve kind of talked about it in that context like policy is usually better when they’re very clear on what they want to do. Buti hadn’t tied it to that point on innovation which is they’re absolutely clear that innovation is the number one thing. And it’s sort of like, when you think about it that way, they’re very clearly saying, “Listen, if we get the innovation piece, the growth will take care of itself.”

And maybe they’re wrong about that. But I think that is how they’re thinking about it. And I think you nailed it there by saying they have very, very clearly said there is one clear top priority. That’s — we’ve got to continue innovating, close the innovation gap with the West generally and the States. And we’re not going to worry about growth. We’re not going to worry about the property market, at least not to the same extent. And so, when policy is geared like that, it does tend to produce the outcomes that they want. So, I think it suggests that they’re going to be pretty successful on the innovation front. Joe, any last thought from you before we wrap up?

Joe: Yeah, really quick. I mean, to just kind of jump into what you guys are saying, it does seem like Beijing’s willingness to accept lower growth gives them the space to focus on either national priorities or these structural issues. Yeah. So, it makes sense. I kind of totally agree with what you guys are saying. It makes a lot of sense to me.

Andrew: Well, listen, guys, this has been great. Really appreciate the time. Joe, thanks for joining us as always. And Jeremy, appreciate your time. You’ve been very generous with your time. Great to have you on and hope to have you on again sometime soon.

Jeremy: Thanks for having me. It was nice to be part of it for a change.

Joe: Yeah, it’s been fun.

Andrew: All right. Thanks, guys. Look forward to doing it again soon. Thanks for listening, everybody. Bye, everybody.

In case you missed it: The economy slowed significantly in Q4 last year.

• Quarterly GDP grew by 4.5% y/y — the slowest rate since the pandemic.

• Retail sales grew a measly 1.7%.

• Fixed asset investment (FAI) posted seven straight months of decline.

Ouch.

The first two months of 2026 tell a different story.

• Activity picked up across the board — with stronger industrial output, a rebound in investment, and tentative signs of stabilization in consumption.

At first glance, this looks like a solid recovery.

• But scratch beneath the surface, and things get more complicated.

Let’s start with what’s driving the upside.

First up, China’s supply-side is surging.

• Manufacturing output grew 6.6% y/y across the first two months of this year, marking the fastest pace of expansion since mid-2025 — driven by gains in general equipment, rail, and electrical machinery.

That strength is feeding into investment: Manufacturing FAI grew 3.1% y/y, snapping a six-month losing streak — with the sectors where production surged posting the biggest gains.

• FAI in rail and shipbuilding jumped 31% y/y, while investment in industrial equipment manufacturing rose 7%, and investment in electrical machinery increased 6%.

Meanwhile, price dynamics are becoming less of a headwind to China’s manufacturing sector.

• Producer prices fell 0.9% y/y in February, marking the slowest decline in 19 months, while month-on-month, producer prices rose 0.7%.

• As producer price deflation bottoms out, profit margins for manufacturers should gradually improve — giving firms more room to ramp up production even further.

The second upside is China’s external sector, which remains a major source of strength.

• Exports surged 21.8% y/y in value terms in the first two months of 2026 — the fastest pace in more than four years.

• Shipments to the US fell 11% y/y, while exports to ASEAN and the EU grew by close to 30%.

• Exports to Africa soared 50%, continuing a remarkable expansion in China’s trade with developing markets.

There are also signs that domestic demand is stabilizing — but only just.

• Retail sales of consumer goods grew 2.8% y/y across January and February, up from just 0.9% in December.

But let’s not get carried away: That growth rate is weak by historical standards, and well below overall growth of the economy.

• Meanwhile, geopolitical uncertainty from the Iran war — along with a spike in energy prices — may incentivise consumers to reduce spending and increase discretionary savings in the coming months.

• If the manufacturing of consumer goods durables continues to outstrip demand, China’s economy will be forced to offload surplus production to foreign markets or suffer renewed deflationary pressures.

Despite these risks, Zhongnanhai seems pretty chilled.

• At this month’s Two Sessions, officials outlined a policy toolkit largely unchanged from 2025, suggesting Beijing is comfortable with its current growth mix.

• Authorities are extending the consumer goods trade-in program and rolling out targeted interest subsidies to support household borrowing — incremental measures that will help stabilize spending but won’t drive a rapid rebound in demand.

This suggests continuity in China’s macroeconomic strategy — and a relatively steady growth trajectory this year.

Over time, policymakers hope that improved household income growth and a gradual expansion of public services will strengthen domestic demand.

• But for the foreseeable future, China’s economy is likely to remain characterized by the same imbalance visible in the latest data — robust supply-side activity alongside cautious household spending.

Joe Peissel, Senior Macroeconomic Analyst, Trivium China

What you missed

Commodities

China’s aluminum inventories topped 1.34 million metric tons on Monday – the highest level since the 2020 pandemic.

A few factors are contributing to soaring supplies.

• China’s upstream alumina refining sector is bloated, and set to grow further in 2026, fueling overproduction at smelters.

• The Spring Festival holiday dampened demand from domestic manufacturers, many of which idle around the holiday period, allowing inventories to build up.

• Aluminum prices have spiked worldwide, driven by shutdowns and shipping disruptions in the Gulf, which further dampened demand across value chains.

Business environment

On Tuesday, the macro planner (NDRC) announced a new batch of 13 “landmark major” foreign direct investment projects totaling USD 13.4 billion.

• Since 2018, the NDRC has led a program to facilitate signature foreign investment projects over USD 1 billion, periodically announcing new batches as part of Beijing’s broader push to attract FDI.

• While the latest batch is still manufacturing-heavy, state media stressed Beijing’s expanding focus on services — highlighting that logistics projects have made the list for the first time.

Tech

On Tuesday, Baidu held a launch event in Beijing unveiling its strategy to launch a suite of products built around OpenClaw, the open-source AI agent framework that has taken the developer world by storm.

• OpenClaw is a local-first framework that turns AI models from chatbots into action-oriented agents.

• The company is rolling out a whole family of OpenClaw-powered agents, including DuMate, a desktop AI agent for office automation, and Home Lobster, billed as the world’s first home-environment agent, integrating online and offline task execution across devices.

• Alibaba, Tencent, ByteDance, Xiaomi, Zhipu, Minimax, and many others are rolling out OpenClaw powered tools.

Agriculture and rural affairs

Beijing just released a long-awaited policy that will shape rural land use for decades.

• The Party Central Committee and State Council’s March 18 guidelines instruct localities to extend the term of soon-to-expire rural land contracts by another 30 years, with pilots beginning in 2026.

• The policy will affect the roughly 160 million rural Chinese households whose contracts expire over the next five years, giving them confidence that their most valuable asset will remain in their hands for the long term.

Foreign affairs

On Monday, top diplomat Wang Yi, Public Security Minister Wang Xiaohong, and Defense Minister Dong Jun met with their Vietnamese counterparts in Hanoi for the first 3+3 Strategic Dialogue on diplomacy, defense, and public security.

• The 3+3 dialogue emerged from Xi Jinping’s trip to Vietnam last April, his second state visit to the country in two years amid a major Chinese diplomatic blitz toward Hanoi.

• The Chinese delegation said that, as “friendly socialist neighbors,” China and Vietnam should have each other’s back including by cooperating in international trade frameworks, properly addressing maritime issues, and guarding against “color revolutions.”

U.S.-China

On Monday, U.S. President Donald Trump told reporters that he planned to delay his long-awaited trip to China by “a month or so.”

• Trump said he needs to focus on Iran: “I’d love to [visit China] but because of the war, I want to be here.”

• Treasury Secretary Scott Bessent, fresh off talks with Chinese Vice Premier He Lifeng, said the postponement was down to “logistics,” not hardball diplomacy.

On Thursday, The Paper reported that an anti-drug taskforce in Hubei province had arrested seven people and subjected 12 more to “criminal compulsory measures” in a crackdown on the production and export of fentanyl precursor chemicals.

• Hubei established the taskforce in December 2025, shortly after Xi Jinping and Donald Trump agreed to deepen fentanyl-related cooperation during their summit in Busan in October.

• This is the first publicly reported action in China involving arrests related to fentanyl precursors since the summit.

• An unnamed U.S. official told Reuters: “We want ​to ⁠see seizures and convictions, not just ⁠arrests.”

The U.S. Intelligence Community (IC) has changed its tune on Taiwan.

• In its 2026 Annual Threat Assessment, released Wednesday, the IC states that Chinese leaders: “Do not currently plan to execute an invasion of Taiwan in 2027, nor do they have a fixed timeline for achieving unification…[and] prefer to achieve unification without the use of force.”

• The 2025 report was much more skeptical: “The PRC calls for a peaceful unification with Taiwan…even as it threatens to use force to compel unification if necessary.”

As always, it was a busy week in China.

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

Now in its third week, the war increasingly looks likely to be a protracted engagement, and as the conflict grinds on, the implications — both political and economic — for the many countries not involved in the fighting will become clearer.

• China, of course, has a wide-range of interests — both short- and long-term — that will be impacted by the situation.

To unpack the thinking around all of this in Beijing, Trivium China Podcast host Andrew Polk is joined on this week’s episode by two of Trivium’s lead analysts on all things geopolitics, trade, and commodities — Joe Mazur and Even Pay.

The trio gets into:

• China’s most immediate concerns — largely revolving around resource security

• How Beijing’s patient buildup of commodity reserves over the past decade has now been vindicated

• Whether Xi Jinping and company see any strategic upside from the confrontation

• What, if anything, Beijing can do to influence the outcome

• And what it all means — in China’s view — for the longer-term evolution of the geopolitical system

It’s another banger folks — you won’t want to miss it.

Transcript

Andrew Polk: Hi, everybody. Welcome to the latest Trivium of China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium Co-Founder, Andrew Polk. And I’m joined today by our Head of Geopolitical Research, Joe Mazur, and our head of, well, I always introduce her as a Jack of all trades, but head of Ag Research, Head of Trade Research, head of sort of minerals and all other manner of things that other people don’t cover research, Even Pay. Even, welcome to the podcast. How are you doing?

Even Pay: I’m doing well. Always fun to try to explain what I do at work.

Andrew: Yeah, we got nailed out of your title. But yeah, a jack of all trades is good. Well, welcome. Good to have you on. And Joe, how are you doing, man?

Joe Mazur: Yeah, doing good. Looking like spring finally in Beijing, which always makes me happy.

Andrew: Yeah, that makes a big difference for the psyche. Well, we are going to talk today about China’s view on the whole Iran situation. I’m sure listeners will be aware that there is a war in the Middle East between the U.S., Israel, and Iran. And so, we’re going to talk about China’s perspective on all of that. We’re not going to get into our views on the war or how it’s going or any of that stuff. Well, we’ll touch on it only insofar as we need to, to explain kind of how China might be reacting to various stuff. But we’re really going to focus on the China piece of it, of course, because this is Trivium China.

But before we jump into the conversation of the day, we got to start with the customary vibe check. Even, I’ll start with you. How’s your vibe today?

Even: Great. Yeah. Well, the vibe on my end of things is that it’s been very full on. I think it’s been nonstop since coming back from the Chinese New Year holiday from, you know, straight into the Two Sessions, and then around that, dealing with the conflict and the implications across a whole bunch of different sectors. So, I feel like I haven’t logged off. I haven’t looked up from my screen for like three straight weeks now, and I don’t really see any end in sight. Not sure about you guys.

Joe: Yeah, I’m going to say that my vibe or the vibe, I think, in the Beijing policy community is jaded just because, you know, we just finished up with the Two Sessions and then we kind of turn to the war in Iran and go, “Oh, God, what now?” Especially in the context of Trump now having postponed his trip to China. So, just, I would say, maybe resigned acceptance that it’s going to continue to be crazy all the time. So, that’s the vibe I’m getting from people.

Andrew: Yeah, that’s kind of not sad, but it’s a, I don’t know, bit of a depressing way to live your professional life. But I mean, I kind of feel like since the first trade war and then the pandemic, so since 2018, basically, it’s just been one major geopolitical shock after another. And I keep thinking, well, maybe this year we’ll have sort of a “normal,” whatever that means, or more of a chill year. And it just hasn’t happened now for eight or nine years running. So, I guess this is just the new normal. So, we should get used to it.

Although, as everyone often points out, it does help a bit with job security. I think I’ve said it before in the pod, mild chaos is what one of our clients told me we need. You don’t want too much chaos because people then start to become conservative. Companies become conservative, and they don’t want outside consulting and counsel. But mild chaos is good. So, anyway, we are going to analyze what I think is slightly more than mild chaos today. I will say, I got to do my vibe check, I’m in Barcelona this week on my way to Beijing. And Barcelona is amazing. It’s great to be traveling on the road again. So, my vibe is very upbeat. So, I’m going to bring that personal energy at least to the pod, even if our professional energy is a little bit more suspect.

Joe: We’ll take it.

Andrew: All right, good. Well, hopefully that brings a little bit of levity to what we’re doing here, since we’re talking about some very serious stuff. But before we do talk about that, we also, of course, have to do the quick housekeeping. First, a quick reminder, we’re not just a podcast here. Trivium China is a strategic advisory firm that helps businesses and investors navigate the China policy landscape. That, of course, includes domestic policy in China on a range of issues, as well as policy towards China out of Western capitals like D.C., London, Brussels, and others.

So, if you need any help on those fronts, please reach out to us at hq@triviumchina.com. We’d love to have a conversation about how we can support your business or your fund. Otherwise, check out our website, again, triviumchina.com to check out more of our content. You can find a range of options in terms of China policy analysis, China policy intelligence on our website. These are subscription-based products that you can check out, either purchase, or there are free options as well. So, you’ll definitely find the China policy option that you need on our website.

And then, finally, please do tell your friends and colleagues about the podcast. Those word of mouth recommendations really help us to grow both the listenership and the business. All right guys, let’s get into it. I think let’s start with just sort of China’s immediate reaction once everything kicked off with the U.S. and Israel sort of first kind of preemptively attacking Iran. Obviously, for many of us, it sort of came out of nowhere. I’m sure for the Chinese it came out of nowhere. So, Joe, I’m going to start with you if you’re sitting in in Zhongnanhai, which for those who don’t know, is the leadership compound where all the Chinese leaders stay.

In the first sort of day or two of the escalation or the initial military action, what would you say would be the single most immediate concern that Chinese leaders had at the outset? Would it be oil security, regional stability, U.S. military distraction, or something else?

Joe: Yeah. So, I mean, I think when it comes to China’s response, we break down kind of the public facing response versus what people were privately probably worried about among China’s leadership. So, publicly, China’s whole foreign policy is predicated on sovereignty and that no country has the right to intervene in the affairs of any other country, let alone try to affect regime change sort of on a whim or really just ever. So, some of the initial statements that China put out were to that effect, saying we condemn this gross violation of Iran’s sovereignty. Realistically, though, yeah, I think overwhelmingly the number one concern in practical terms is energy security, is the disruption to global energy systems that was going to happen and now has happened as a result of the conflict.

And I think we can get more into the specifics of that later. But China’s always been very preoccupied with its energy security for reasons like this and scenarios that they’ve gamed out, which are similar to this. And then probably secondary practical concern is regional stability.

China’s footprint in the Middle East, like its footprint in a lot of places, is kind of based on a strictly business approach where it seeks economic partnership sort of above any kind of other factor in its relations. So, the extent to which American and Israeli intervention makes business difficult, it brings business uncertainty, provokes Iran to retaliate against other Gulf states, that’s also a broader concern. So, yeah, I would say that despite the kind of high-minded concern for Iran’s sovereignty in the official statement, the two primary concerns are very practical ones — energy security and regional stability.

Andrew: Yeah, I think that’s right. Even let’s get your take on kind of the same question. And, insofar as energy security ranks on the list, I’d also like you to weigh in on kind of how that’s fared so far as China seems like it’s done well through the early stages of this crisis, at least in terms of energy security. So, talk to us about, if you could, their concerns, how they’ve managed those concerns, both on kind of a short-term basis, and then what they might be increasingly worried about in the medium-term, if that makes sense.

Even: Yeah, absolutely. So first off, I tend to agree with Joe’s assessment that really early on in the aftermath of understanding that there had been strikes and retaliation in the Gulf, what top leaders were almost certainly talking about in Zhongnanhai was that economic security piece. And I use economic security as a wider frame because it’s not just energy security, although, of course, so petrochemicals is a huge part of this equation, but it’s also access to the other raw materials that come out of the Gulf.

And that includes, I mean, really crucially for China, it includes certain fertilizers. And it also includes a whole bunch of other raw materials that feed into metals and plastic supply chains, not just in China, but around the world. So, immediately, there would be questions about, okay, what is this going to mean if it lasts a day, a week, a month, a year for Beijing’s ability to manage the economy in a way that delivers sort of a sustainable, stable domestic environment? Which we know is something that top leaders are very, very concerned about. There’s almost an obsession with the kind of gray rhino supply crises and how they can be managed among party leadership.

And we’ve seen that repeatedly. It comes from somewhere. It comes out of sort of historical supply shocks with the vast majority of China’s leadership class having personal experience of famine. And we see that reflected in food security policy, you know, a huge focus on self-sufficiency. We see that focus in energy policy with a very substantial self-sufficiency direction in energy policy as well, including relying on coal for as long as necessary because that’s something China can self-supply, including the efforts towards electrification because that is both technology that China supplies, at renewable energy technology and also a way of generating power without needing to rely on an external input.

And we also see that obsession reflected in the very large strategic reserves that China maintains. Over and over again, we hear from Western economists about the drag or inefficiency or even kind of unfair price management that might happen as a result of these massive strategic stockpiles that China likes to maintain and hang on to, whether that’s in rice and wheat or whether it’s in pork or whether it’s in fertilizers or nickel or crude. But repeatedly, over certainly the past decade, I can name four or five different examples of circumstances in which top leadership felt extremely vindicated for the strategy of holding on to really, really sizable reserves.

And this is another one of those where the fact that China is sitting on very substantial oil reserves, very substantial minerals and metals reserves and very substantial fertilizer reserves, as well as food reserves, you know, grain reserves, are going to insulate the domestic economy to some degree, less as time goes on, but to some degree against the worst of a crisis that is having pretty significant effects on global prices. China’s price management tools and its ability to access state reserves are already insulating it from some of the worst of those effects.

Joe: Yeah, I’ll really just piggyback off of what Even said. I think the word vindication is absolutely correct. I mean, if you’ll indulge me, I’m reminded of that episode of The Simpsons where there’s an elephant rampaging around and it’s headed straight towards a peanut factory. And the foreman says to the workers, “I told you this day would come. You said it was insane to practice elephant drills every day for 20 years.” And I really kind of feel like that’s sort of where China feels that it’s at. And so, when I hear people talk about, “Oh, this is going to turbocharge China’s energy diversification push, and it’s going to turbocharge its green energy push, it’s almost like, I don’t even know, because those were already kind of going full steam ahead for reasons that-

Even: Yeah, there’s no more turbo here.

Joe: Exactly. So, I mean, certainly it’s a vindication. It’s a massive argument against ever changing that strategy. But really, they were already completely all in on these risk management and built-in energy cushions that are now, again, making China better able than most, not fully immune, but better able than many other major economies to weather these shocks.

Andrew: Yeah, I totally agree with you both. I think that’s a great observation, Joe. And I was going to say that it kind of, just to tie this to a broader theme that I often think about, is, you know, the West currently, and over the past decades, often the West, broadly speaking, Western economists, Western observers, tend to criticize China for the inefficiencies in its economy, right? China has always opted for sort of greater inefficiency with the trade-off of lower volatility, right? That’s the same in its banking system. Basically, the entire way the economy allocates resources is not towards maximum efficiency.

It’s towards sort of maximum stability. And we, people from the West often look and say, “Well, that’s inefficient and that’s China’s not growing as much as it could or this or that.” But it seems to me the world is moving more and more towards China’s point of view on that, especially when you think about how the U.S. and other Western countries are reacting on the critical minerals front now that we know that Beijing has this very strong chokehold and weaponized chokehold on that stuff. And now, of course, we’re trying to create our own critical minerals supply chain, which is totally inefficient and wasteful, but we need to for economic security reasons. And so, I think vindication is the right word that both of you used. Go ahead, Even.

Even: I mean, that raises a great point, which is that there is reason why there’s been so much energy and resources and policy development focused on this strategic reserves management and price management and sort of pursuit of a certain kind of stability. And for lack of a better way of putting it, it’s, in many ways, because Beijing really struggles to respond to or to deal with extreme uncertainty and extreme volatility. And so, the flip side of this conversation where, you know, we’re saying that in the first 48 hours, there would have been a lot of focus on, okay, how is economic security going to go? The flip side of that equation is economic security might be well seen to, but that doesn’t mean that top leaders are breathing a sigh of relief. Right?

If anything, the extreme uncertainty coming out of an active conflict that is still escalating, you know, it’s not what the system would prefer to be dealing with. Even if China is better positioned at the moment in a number of respects to navigate it than many, many other places, I think on balance, nobody’s celebrating, nobody’s taking a victory lap in Beijing.

Andrew: Yeah, well, Joe, I want to bring you in on that point. And maybe this is good pushback a little bit, controversy here. I think that’s right, Even. But at the same time, we all know that like Beijing’s number one priority is stability, stability, stability, you know, top three priorities. But they have no control over the geopolitical hand that they are dealt, really, in terms of external events that don’t involve them. Obviously, they play a role in managing their own geopolitical presence. But something like this, they really have very little, I think, immediate influence on.

And the question is, so yes, short term, they’d prefer for this not to be happening. They prefer stability. But Joe, is there a longer-term strategic thinking in China? And this kind of gets back to this sort of public line versus private assessment that you spoke about earlier. Is there a thinking about what the longer term benefits or lack thereof might be for China from this action from the U.S.? Because my thinking, it’s a leading question, I’ll just go ahead and say it. I agree with your general point, Even, but is there a part of Beijing that says actually some level of chaos is good because it makes the U.S. increasingly look like an unreliable actor and that moves more and more towards putting Beijing on the map as a stable, reliable partner for many of the rest of the world?

So, sort of a short-term problem, but a strategic win. I don’t know. Joe, react to everything I just said.

Joe: Yeah, yeah. I think there’s going to be a pros and cons column here from Beijing’s perspective, right? So, cons, we’ve kind of been over a little bit already, the immediate impact of the energy shock, right? And a lot of these, what these end up being pros or cons depend on how long the conflict drags on and how, to what extent the Iranian regime emerges intact or does not, right? I mean, I think that let’s say that Trump with the midterms coming up decides, okay, this was a mistake, and he does a taco. He ends up talking to the regime. And yes, there was a big disruption, and yes, there was loss of life.

But he ends up basically kind of bailing on it because, as we all know, Americans are incredibly sensitive to the price of gas as an economic indicator. And given the unpopularity of the war in Iran among the American public and including his base to whom he promised no more wars. So, let’s say all of that combines and Trump says, “Okay, we’re going to declare victory and status quo ante,” basically. I mean, I think that that, from Beijing’s perspective, is kind of the best possible outcome, because then the U.S. will have appeared ineffectual on the world stage. It was very publicly not backed up by its allies after the Trump administration having berated them for months and months, and then kind of calling them in for help makes them look faintly ridiculous, or maybe more than faintly ridiculous.

And, you know, it’s just another kind of indication that the U.S. is a feckless power in the eyes of the world. I mean, I think that Beijing wouldn’t necessarily be unhappy with that outcome. But on the other hand, let’s say that Trump doubles down, the war intensifies, there’s more disruption in the Gulf. Iran itself potentially loses its central command and then kind of breaks into a series of Islamic Revolutionary Guard Corps command structures kind of around the country. The term that they use is the mosaic defense, which I think by its very nature is meant to be a destabilizing war of attrition.

That’s obviously a very bad outcome, right? And possibly there’s going to be more energy disruption that goes along with that. So, I think to what extent this ends up making China look good by comparison and to what extent that’s worth it to China depends on the future trajectory of this conflict. It’s not fully clear yet.

Andrew: That’s a great point, Joe. And I think it’s in a way a simple one, meaning we’re not going to know what the outcomes are until we know more of what the outcomes are. But it’s so important because I feel like the snap or the reaction, the snap reaction is to make an immediate judgment. We saw this in the wake of the Venezuela action by the U.S. People saying, “Oh, China has lost an ally in Latin America.” That was the immediate reaction in the China world, right? And my reaction was, well, we don’t know. We don’t know who’s going to end up ultimately in power in the long term.

It’s Delcy Rodriguez for now. And the Venezuelan regime is mostly still in place, which China still has ties to. So, maybe it’s just like they lost their guy, but they still have plenty of other guys. But then in Venezuela, but then what does the U.S. action in Venezuela say about the larger sort of U.S. strategy towards the Western Hemisphere? And if it’s part of sort of a much more aggressive ongoing stance by the U.S. in the Western Hemisphere, then yes, that could impact China’s presence in the Western Hemisphere. But everyone wants to make a snap judgment on winners, losers.

We’re doing the same for this Iran situation. But actually, we don’t know. It could go a bunch of different ways. So, I don’t know. Do you have further thoughts on that?

Joe: And if I can add one more point, I mean, you know, I got asked about regime change, and I think this is an unlikely outcome. But let’s say, for example, the U.S. ends up effectively conducting regime change and the next government in Tehran is pro-U.S. or at least neutral, then China, in theory, has a party it can do business with without the risk of U.S. sanctions. Again, I don’t think that’s a likely outcome. And it’s tempting to say, “Oh, well, they lost their allies in Tehran and now that’s definitely a bad thing.” But like, is it? And not to be too like, oh, Joe, it’s too soon to tell. But I think that because China is more a business-oriented partner than it is an ideological partner, any outcome that restores stability is probably going to be the preferred outcome.

Andrew: Yeah. Yeah. I think that’s a great point. Even, I want to throw this over to you now, kind of comment, A, on everything we’ve just talked about, if you have a different perspective on it. But also wanted to ask you, you brought up before the pod kind of what other countries in the Asia region in particular may be thinking about sort of this action. Obviously, China’s looking at it and trying to game out where it stands, strategically, if it stands to gain or lose. We’ve already said sort of time will tell. But what are other countries in the region? I will point out, you know, I’m in Europe and at my meetings this week, people have very notably said the Europeans are standing up to Trump on this one.

It took them a while, but they’re finally standing up. They are not backing him in this war. They’re not sending military support. And so that must be kind of raising eyebrows among both U.S. allies and non-allies in the Asia region. Talk to us about all of it.

Even: Yeah, absolutely. I actually want to jump off from what Joe was just discussing, which is that it’s very difficult to understand what China’s exposure is and what might be in the pros or cons column until we understand how the conflict is resolving. But at the same time, there is this chance that if we return to a stable Iran and under any kind of leadership, that that will always be good news for China, who will find a way to be a development partner, as China consistently has with all kinds of regimes all over the world. Just to sort of double down on that thesis, repeatedly, we’ve seen sort of circumstances where the U.S. has paid lip service toward a certain kind of development aid, but ultimately developing countries have kind of felt like what the U.S. has had to offer in terms of actually building infrastructure, actually helping get commerce and trade going, actually helping the financial system achieve sort of a base level of stability hasn’t kind of been sufficient to move the needle from like least developed to developing or emerging economies, right?

And over and over again, we’ve seen sort of a different story where developing countries have been interested in constructive partnerships with China, even in cases where China’s ideological or political positioning has been quite far from the national government of the third country because China shows up with a massive market, a whole bunch of infrastructure investments, the technical know-how and the companies to sort of bring financing and bring technical know-how to build out that infrastructure. And looking at what’s happening in Iran, and not just in Iran, but around the Gulf, if there’s been a whole bunch of destabilization and a whole bunch of critical infrastructure that’s been impacted, a whole bunch of industrial facilities that have been impacted, if and when there’s an opening for China to go in and acquire assets and invest in the reconstruction effort, I think that’s something we’re likely to see Beijing first in line to do that.

And you’re kind of thinking about the sort of long-term outcomes or directions, depending on how things go, there is a world in which even a totally regime-changed Iran that has been rebuilt in the U.S. image, or what-have-you, would still end up in an economic partnership with China. So, I think that’s absolutely right. And I guess pivoting a bit to how the conflict is being viewed across Asia, to the extent that it’s reasonable for anyone to speak about, the strikes in Iran and the war that’s resulted has a real like painful impact across all of Asia. There’s fuel rationing across Southeast Asia.

There was fuel rationing immediately day one in Myanmar. Now across both Thailand and Cambodia and also Vietnam is, depending on where you are in the country, you might have to line up to fill up your motorbike. You certainly would have to line up to fill up… you know, industrial facilities are kind of clamoring for making sure that they can keep their fuel supplies stable. That’s also true in places like Australia, where there were significant export dependencies on China for certain types of jet fuel, for example, on both the Middle East and a number of economies in Asia for fertilizers. And so, you have all of these national economies across Asia that are suddenly dealing with real supply disruptions with very significant price spikes and not a great deal of consultation or answers from the U.S. about what’s happening here.

What’s the timeline for getting this resolved? Forget like the lack of notice that it was even going to happen in the first place, right?

Andrew: Well, to be fair, it’s hard to answer the timeline question when you don’t know the answer to the timeline question.

Joe: Yeah, yeah, yeah, absolutely. Absolutely. But I mean, there certainly isn’t an answer for the timeline question, but there could at least be some kind of like firm commitment to a specific off-ramp or something like that. And in public, we hear Trump sort of talking about like, oh, we’ve won it, but only about another week or maybe a month or now it’s five weeks till the Xi meeting can happen. So, we know the timeline’s all over the place. We know that whatever is actually being discussed is probably no longer credible behind closed doors. And into that, you have China, which has these stockpiles of all kinds of strategic materials, right? And also has this massive industrial base where it can produce a lot of things. And in the short term, China has clamped down a bit on certain kinds of exports.

It’s restricting exports of a whole bunch of fuels. It’s restricting exports of a whole bunch of fertilizers in the interest of making sure supply and price can stay stable at home. But if this conflict continues for a while and once Beijing feels like it has a handle on the domestic supply and price situation, what I think is likely to eventuate is that that will actually as a strategic tool. China has an interest in its neighbors not having massive economic collapse as a result of fuel shortage or a complete sort of lack of supply. China also has an interest in global food prices not going to the moon because China imports a great deal of stable crops from everywhere in the world, right?

So, once conditions get back to sort of a relative level of stability, there will be an opportunity for countries to approach China basically and say, like, “Hey, can we get some fertilizers?” And we’ve already seen India do that. We’ve already seen the Philippines do that. That’s been made public, that government officials have approached Beijing to discuss keeping fertilizer supplies moving. I would expect that something similar will be happening across fuels in fairly short order. That might not be public, but I bet the conversation is already starting. So, then the question becomes, does this become yet another example that Beijing can point to and say, “Here’s Washington, you’re out there acting alone to decapitate a sovereign nation’s government without discussing with you, and it’s upturned your economic conditions this year. Meanwhile, here we are, we’re going to offer you fuel and fertilizers at state-controlled prices, we’re not even going to gouge that bad,” right?

They’ll gouge a little bit. They’ve got to do something because the SOEs are going to be bleeding to keep the prices low domestically, right? So, they’ll get a little back. They’ll get a little back. But there’s a strategic opportunity here for Beijing to look after its own interests, you know, in neighborly stability and food security and to burnish its reputation as a peacemaker and as a collaborator and as a force for good and a force for sort of multilateral managed markets, etc. So, it really plays into that narrative that we’ve seen across Chinese diplomacy and has the potential to become a really salient and concrete example of Beijing showing up in a crisis that Washington created, right?

Andrew: Yeah. I mean, I feel like that could be on a bumper sticker in Beijing. Beijing shows up to fix the crises that Washington created. That’s well put, I think. Joe, let me bring you in. any thoughts on kind of the wider regional perspective based on what Even said?? And then also want to bring in a very timely point about the fact that, you know, the Xi Jinping-Donald Trump meeting, which was supposed to take place at the end of this month, early next month, so end of March, early April in Beijing has now been postponed. Double barrel question. Talk to us about both of those issues.

Joe: Yeah, I mean, I generally agree with Even that Beijing will take any chance it can get to portray itself as kind of not just an anchor of stability for its own reasons, but kind of, you know, the term we always use is adult in the room, but just sort of the constructive partner. But one thing I will say, though, is that China’s response to the war in Iran has also kind of cemented a trend that we’ve seen a lot in recent years in terms of China’s response to international crises, which is that China kind of releases a statement, calls on all parties to exercise restraint, maybe dispatches an envoy to talk to various kind of interested parties, but then really doesn’t do much beyond that. I see some takes on X and elsewhere, which is already a mistake to be looking at takes there. But, you know, “Oh, well, China has failed to defend its allies in Venezuela and Iran.” I think that’s a complete kind of misreading of how China views these partnerships.

As I’ve said before, they’re primarily transactional, and they’re primarily strictly business. And so, on the one hand, there’s no meddling, right? China’s not going to say, “We don’t like your form of government, and therefore we demand that you change it to get development aid from us.” But equally, they’re not going to certainly not going to respond with military force to support these countries. And really, they’re not even going to do that much, I think, diplomatically to throw their weight around. So, I think that’s probably fairly well understood by most of China’s partners by now. But anyone who’s expecting China to do anything more than write a strongly worded letter to try to calm tensions, maybe you don’t need more than that from China. Maybe you know that going in if you’re a Chinese trade partner. But certainly, you’re not going to expect China to kind of go to bat for you in really concrete sort of ways.

Andrew: Yeah, actually, before you move on to the U.S.-China, I just want to follow up on one thing there because this is also something I wanted to throw in later, which I’m glad you brought it up. So, someone asked me yesterday, why isn’t or will China use its influence in Tehran to try to sort of tamp things down? And my thinking was like, I think that’s the wrong question because I actually don’t think Tehran’s driving the train here. I mean, in my kind of strategic view of the situation, like the Iranian leaders have to just kind of fight it out. As I understand it, like the smartest minds say, this is just a sort of a survival situation.

If Iranian leaders can sort of ride out the storm, then basically wait for the U.S. to get exhausted, then maybe the two can start a dialogue. But Tehran, like if they start to dial things, they have no interest in dialing things down because that’s like basically full capitulation. There’s really no strategic calculus that would say they would do that. And to the extent that China has influence, it could potentially maybe convince Iran to do some de-escalation, but that just isn’t on the table, right? So, I guess how much influence does China even have in this situation is my question.

I think people think Beijing can ride it, much like with Russia, Ukraine. I think Beijing has influence over Russia or influence on Russia, but I don’t think Vladimir Putin is going to stop the war at the request of Xi Jinping. So, I guess, what’s your thinking on that?

Joe: Yeah. So, I’ll caveat this by saying I am not an Iran expert nor a Middle East expert in general. So, kind of take everything I say with a grain of salt as far as that goes. But I think, yeah, first of all, it seems to me that for the Iranian regime, the worst has kind of already happened. I think that maybe if there had been space for China to do some back-channeling between the U.S. and Iran prior to the war breaking out, that would have been one thing. But I mean, the U.S. and Iran were already negotiating. So, that probably wasn’t even the issue. I’m not really even sure what the role would have been for China there.

And now that sort of the war is ongoing, yeah, I don’t really think that China is, A, going to be interested in intervening and kind of putting itself in the crosshairs if something goes wrong. And B, I’m really not sure, given that hostilities have already broken out, how much leverage it realistically has.

Andrew: Yeah. The framing we often see, and this is actually in my notes, so it’s on me for having it in there, but it’s often put out as the limits of strategic partnership with China, right? Like, oh, China’s not going to show up when push comes to shove. But I think you made the right point, which is I don’t think these countries expect China to. That’s not the type of relationship they have. It’s not a NATO-style relationship. It’s more of a business alignment sort of relationship.

Joe: I mean, that’s also why China refers to them as strategic partnerships and very much not alliances, because alliance implies a certain sense of military solidarity that China has not agreed to and will not agree to.

Andrew: Yeah, totally. All right. Talk to us about implications for U.S. China and the moving of the Xi Jinping-Donald Trump meeting.

Joe: Yeah. So, I think that it could go either way. And again, not to say again, it’s too soon to tell, but here’s the two ways that I’m thinking about it. On the one hand, we know that in the run-up to this meeting, which was originally scheduled for the very end of this month and beginning of April, that expectations were pretty low, partially because the U.S. side was not receptive to planning overtures. They really hadn’t done a lot of planning by all reports and including insider sources. And so, I think China was very disappointed with that because they had hoped this could be sort of a grand meeting that could really help to extend the life of the trade truce that was agreed to by the two leaders in October in South Korea. That was the goal, I think.

People ask, what was the primary outcome, the baseline outcome that China was looking for? And it would be codifying those understandings from the Busan meeting and putting U.S.-China trade relations and relations in general on a more even keel. And so, you won’t see the kinds of ups and downs, peaks and valleys that we saw all through 2025. And so, I think that hopes there were kind of diminishing from the Chinese side. So, maybe now, maybe the planning, the lack of planning was partially due to the administration being preoccupied with plans to go to war with Iran. I don’t know. That’s speculative.

So, an optimist might say that now, when it finally happens, assuming that there’s a little bit more clarity on the timeline for Iran, then maybe that will allow the Trump team to focus more on putting together a more kind of robust set of outcomes for the China visit. Maybe. The pessimist would say that the longer this trip is pushed off, first of all, the whiplash in planning, I think, undermines whatever trust that China still has in the U.S. in terms of that dialogue. But equally, it creates more space for something to go wrong, for a blowup to happen. We’ve got to remember that the last big blowup in U.S.-China relations happened because commerce imposed a 50% rule at the Bureau level, at a relatively lower level, which seems to kind of flew under the radar of senior U.S. officials until China responded very angrily to that.

So, that’s not to recapitulate the whole course of the trade war last year. But it’s very possible that sort of as U.S. government organs are kind of left to their own devices to devise trade policy, that there can be a misstep like this, especially given the Trump administration is trying to reimpose the tariffs that were struck down by the U.S. Supreme Court, right?

So, for those who maybe weren’t following that story, the U.S. Supreme Court ruled that Trump had overstepped his power by imposing the Liberation Day tariffs, so-called. And so now we’ve got the U.S. trade representative and other bodies trying to find other legal channels to reimpose those tariffs. And while their stated goal is continuity, getting tariff levels back to where they were before the Supreme Court made that ruling, you know, the question is, is China going to see it that way? If USTR is launching a bunch of new probes into China with this explicit goal of reimposing tariffs, will China view that as a violation of the spirit of the Busan Agreement, right?

Maybe China’s incentivized to not react too strongly, especially if the overall effective tariff rate is down or the same as it was before. But I mean, frankly, I think that if they were so inclined, that would be, I think, in their mind, a reason to retaliate against the U.S., whether or not that’s strategically smart from China’s point of view is maybe another question. But my point is, it’s kind of a long-winded way of saying the longer that we go without this dialogue, the more we’re creating space for something bad to happen.

Andrew: Yeah. I’ll just briefly say, and this is probably an unhelpful thing, but I’m just going to throw it out there, that if Xi Jinping is anything like me, I had, a couple of weeks ago, it was a Friday afternoon, I had a meeting on the books that was supposed to be a negotiation with a potential client. We were going to talk about price, all this stuff. But at the last minute, the client emailed and said, let’s kick this to Monday or Wednesday the next week. And I was relieved because it was a Friday afternoon and I didn’t want to go into a big negotiation. So, maybe Xi Jinping is just happy that the Zoom meeting was pushed back a month if he’s anything like me.

Joe: Yeah.

Andrew: He’s probably less conflict-averse than I am. So, I don’t know, Even, what are your thoughts to the back of that unhelpful observation.

Even: Yeah, you know, I tend to agree. I think that I can only imagine that for these senior leadership folks are always operating right on the edge of burnout and getting just a little bit of a break is always going to come as a relief. But I want to throw some more kind of outside scenarios onto the table off the back of Joe’s discussion of whether China could have a role somehow in persuading Iran to sort of chill and come back to the table. I’m actually pretty interested in how that could unfold, particularly watching how the U.S. and how Trump in particular have been reacting as the conflict intensifies, like seemingly beyond his plan or control.

So, we know some things about Trump, right? He’s a vocal guy. We know he likes the G2 concept. He likes power. We know he’s been asking for help. He’s been asking for China to send ships, help ensure trade can move smoothly through the Strait of Hormuz. That’s not exactly happening, but he’s certainly open to the idea that China would intercede in some way, which is pretty neat, right? We also know that the U.S. and Iran were negotiating right up until just hours before these strikes. And as a result in part of that, Iran has said that it won’t come back to the table without third-party guarantees, right? And in Iran’s, I believe, foreign minister referenced specifically China and/or Russia as countries with seats on the UN Security Council as a potential sort of third-party guarantor that only with the participation of a third party would Tehran think that it could get someplace, right? That there would be actual security guarantees.

There’s no longer trust that the U.S. will negotiate in good faith and will not just use it to stand up another strike. And we also know that China has some leverage, right? China buys most of Iran’s oil. They’re not likely to sort of cut that off. It’s totally outside China’s playbook and it’s really not in their interest either. But that kind of an economic relationship creates a certain sort of pull. And so, there are some reasons to believe that China could, with Trump’s blessing and potentially also with support from Tehran, insert itself into a negotiation process that did actually turn down the temperature in the conflict.

And if you ask me, that could be kind of interesting in the context of what’s happening between the U.S. and China. It would lay some groundwork for maybe what a G2 relationship would look like and why there would be some benefit to collaboration, sort of a strategic conversation there. But I also agree with Joe that as much as the delay of the Trump-Xi meeting and Trump’s China state visit, as much as it buys time maybe for some more progress around how the two countries might frame out some agreements, that it also buys time for a lot more risk of a blowup. And whether that’s new Section 301 investigations or weapon sales to Taiwan or whether it’s just additional weakness and uncertainty that’s emanating out of the conflict in Iran, I think everybody’s pretty jittery.

And the U.S. has spent tons of military resources. It’s moved key components of its missile defense system out of South Korea. It’s moving military equipment out of Asia to relocate over into the Gulf. And all of that means, in theory, if this conflict comes to an end, there will be a moment when Washington likely tries to move that stuff back, which is also, again, going to bring up a defense conversation with China that I think has a potential to raise some risks as it happens as well.

Andrew: Yeah, obviously, it’s hard to know the ultimate outcome benefits or costs for Beijing before we know the ultimate outcome of the action, right? What ends up happening in Iran itself. So, I mean, that’s plainly evident. And like I said, we’ve said it many times, but it’s worth repeating simply because so many people are just trying to put their stamp on, well, these are the implications. But what you just said, Even, I think certainly, as Joe pointed out, there’s a pros and cons list in Beijing. And under the pros list for certain is the fact that the U.S. is focused elsewhere other than China. And it is, I don’t know if distracted is the right word, but at least putting its attention elsewhere. And not only its attention, but its actual military hardware, moving it out of the Indo-Pacific and into the Middle East.

And that’s, I think, from Beijing’s perspective, kind of an unqualified positive in their thinking. I do want to wrap up, though, by stepping back a little bit further and just asking both of you, I’ll start with Joe, how all of this kind of plays into China’s broader geopolitical thinking of how sort of the geopolitical system is evolving. I think they’ve thought for many years that the system is sort of moving more in their favor. It’s moving more towards real politic, might meets right, kind of a transactional, or might makes right, kind of a transactional perspective where countries act in solely their hardcore national security interests as opposed to some larger ideological kind of framework or allied network.

And we talked on the pod a lot about how Xi Jinping talks about this whole notion of changes unseen in a century, which I talked with Jude Blanchette on the pod about before. But my kind of back-of-the-envelope way of explaining it is that it’s kind of the rise of the East and the demise of the West. There’s a lot more involved in that. But I guess two things. One is, Joe, do I have all that right? And is what’s happening in Iran feeding into that perspective in your view? And then a specific one, I noted that Wang Yi, the top Chinese diplomat, talked about, “the accelerated evolution” of changes unseen in a century when he was talking about the Iran situation. And I was just wondering, like that really struck a chord with me. This does seem like an accelerated evolution. So, maybe, again, a leading question, but is that a phrase you’ve seen before, the accelerated evolution? So, kind of a very specific question and a bigger one.

Joe: Yeah, I’m trying to remember. I feel like I may have seen it elsewhere at some point in time. But I mean, certainly, even if I hadn’t seen it before, even if it’s not something that the Chinese sort of diplomatic machine has said before, it’s certainly something they must believe.

Because it is. I mean, really, I think Trump, in a lot of ways, is, not to put too fine a point on it, speed running the end of American hegemony, right? He’s sort of not quite at the stage of dismantling NATO, but pretty close in terms of threats to Greenland. He’s revived the so-called Don Roe doctrine. And it’s interesting because now the Trump administration is effectively echoing this sort of the, not the inverse, but like, whereas China’s saying, “Oh, the world is becoming more anarchic and that’s a bad thing.”

I think a lot of the signals we’ve got coming out of Washington now is like, “Oh, well, the world is anarchic and we’re going to be sort of the dominant player in this anarchic world.” So, in some ways, the official U.S. line, or at least the official Trump administration line, is becoming slightly more aligned with the Chinese view of an anarchic world, right? And so, I think there’s two points. On the one hand, I think, again, to use the word vindicated, it does sort of vindicate China’s view of the world and the precautions that a country needs to take to ensure that it’s not on the menu, so to speak.

But equally, you can bleep this out if you want, but I think there must have been kind of an oh shit moment in China where you see the intensity and the number of US interventions that have happened in the past few months, right? So, first, Venezuela, then Iran, now threats to Cuba, and who knows, maybe after what’s going on in Iran, maybe Trump will have gotten his fill and there won’t be any more. So, I mean, it’s one thing to be able to say, ha-ha, we’re rhetorically correct in the U.S. is… You know, it was always just about hegemony and naked power politics.

That’s fine as far as it goes rhetorically. But if you’re any ideological or geopolitical rival of the U.S., part of you must be like, “Uh-oh, this isn’t good,” especially when a lot of the policies seem kind of reckless and ill-conceived. So, you can talk about, oh, well, it wouldn’t be in the U.S. national interest to begin a conflict with China, but arguably, a lot of this is not in the U.S. national interest if you think more than a step or two ahead. And so, I think that while China might be grateful for the rhetorical victory and to look like the good guy, they’re certainly probably also concerned that like, well, all right, does this mean that the U.S. is going to be more bold about intervening in areas that are much closer to our interests, right?

What about Southeast Asia? What about Taiwan? What about Korea, right? And so obviously right now there’s a focus on the Middle East. And if the U.S. gets bogged down there, I think that’s a strategic positive for China. But who knows who’s going to be next?

Andrew: Great points. Even. What are your thoughts on the broader implications from China’s point of view?

Even: Yeah. So first, I mean, completely agree with Joe, like from Beijing’s perspective, being right about this is cold comfort because you now have to live in the world where there is extreme instability and sort of rising geopolitical chaos and challenge. And nobody likes that, right? Nobody’s having a good time, or at least very, very few people are having a good time operating in this context. It’s a big shift from the international rules-based order of just a few short years ago. But when I think about how I will, as a China analyst, will look back on this moment, I think what I expect, one of the things I expect that’s fairly concrete and discreet that will come out of this conflict is in the wake of a crisis, Beijing always brings out as many lessons and takeaways as possible.

And I think that one of the takeaways from this is going to be that developing China’s “strategic hinterland” is absolutely the right course of action here. And that strategic hinterland is a line from the decisions that came out of the 3rd Plenum back in summer 2024. And it jumped out to us because it felt like a revival of Mao’s third front, right? The effort to shift a whole bunch of industries into, you know, out of China’s coastal regions and further westward and into the mountains and into areas where capitalist invaders would have a harder time getting at them, right?

And when we first saw that back in 2024, it was kind of like, okay, well, yeah, it makes sense that China wants to develop its central and western regions more. That’s been a long-term priority. But like this rings as a very security-oriented to us. And in the intervening time period, now looking at a crisis like this, a part of what we’re doing, sadly, is the old analyst trick of looking at a map. And what you can see is that all of those industries that are reliant on seaborne imports coming through the Persian Gulf to eastern China are going to hit some bumps, and are already hitting some bumps in these weeks and months, because their primary source of supply has been disrupted.

But those industries that are situated in central and western regions, along the extensive pipeline networks that are energy pipelines coming out of Central Asia and out of Russia, and sitting along rail lines that are linking to these areas, or in not so distant future that could be served by pipelines and rail networks coming through Pakistan, there are these signs of why it might make strategic sense in an increasingly geocomplex world for China to be able to have these overland routes to see to its energy and raw materials security.

So, I think when we look back at this moment, we’ll talk about it as sort of a watershed, an effort that was already ongoing to move industries further west for all kinds of reasons. More land, cheaper labor, common prosperity, and better sort of development prospects for less developed regions of China. We’ll also get this, we’ll say, why go? And that’s what supercharged them is because these industries were able to locate along energy pipelines and not need to rely on seaboard and cargoes and crude.

Andrew: Yeah, that’s an interesting observation. And that would be, yeah, not a big shift, but certainly an accelerant in terms of a certain strain of thinking in terms of Beijing’s economic security goals.

Even: Yeah, exactly.

Andrew: I think you guys both made really great points that I just wanted to sort of reemphasize one last time, which is, you know, just for some reason had never occurred to me that this is sort of a careful what you wish for kind of thing for Beijing, which is Beijing thinks the world is moving in its, I don’t know, in its favor, which is slightly more chaos. Like I said, more real politics might makes right world. But that is in an inherently more volatile world, an inherently more volatile geopolitical environment. And arguably, China has been, maybe not even arguably, China has been one of the biggest beneficiaries of the past several decades of U.S.-led global system with relative stability, emphasis on rule of law and kind of an agreed trading system.

Now people will say China gamed the system. But I don’t know. I just never really thought about it. China might end up in a world where it kind of gets exactly what it wants, but then realizes, oh, but we just lost all the stability that we also loved. Is there an irony there? I mean, there’s obviously, in my view, an irony there. Does either of you have thoughts on that? I mean, you guys both made the point that I just wanted to kind of foot stomp that and see if there are any more thoughts on that particular observation before we wrap up.

Joe: I think of kind of one specific episode, which has to do with the American withdrawal from Afghanistan in, what? Was it, 2023? Am I remembering that right?

Andrew: Somewhere in there. Yeah.

Joe: Yeah. Time is really just kind of blurring together for me. Anyway, whenever that happened, China had for years and years kind of railed against American interventionism and lack of respect for sovereignty and kind of crowed about the American retreat from Afghanistan. But then had to deal with the Taliban on its doorstep. And there’s no specific love for the Taliban either as kind of a fundamentalist regime and one that maybe doesn’t have the chops to tamp down on security threats on China’s border. And so, there was kind of an uncomfortable several months up to maybe a year or more of silence where China didn’t really know how to...

It got kind of what it wanted in the sense that it got to be right about the Americans having gone into Afghanistan and having messed it up. But then what came next was also not great from China’s perspective. So, I do think there is an element of that where just China being reaffirmed in its view of the world doesn’t mean that that’s a world it necessarily aspires to live in. I mean, obviously, the strictly business approach that China does take with its partners, it does keep it free from entanglement. But I do think it also reflects the fact that China’s not, you know, it would say it does not seek to be a hegemon, but also it doesn’t really have the chops to be a hegemon in the same way that the U.S. has been.

We can argue whether or not that’s morally right or wrong or good for the world or whatever, but there is a certain, yeah, I mean, this is a very kind of rambling, a long winded way to say I think you’re right. I think that China can criticize U.S. hegemony, but what comes next is at the very least uncertain and possibly even less in China’s interests.

Andrew: Yeah.

Even: Yeah, I think China might actually be leaning into that challenge in certain kinds of ways. And it’s easy to not pick up on this stuff because the way that discussion of sort of multilateral initiatives is framed sort of broadly, particularly in the U.S. media is that the U.N. system is horribly corrupt and ineffectual and no one cares about it do anything or what have you. But China has invested very significant resources in developing its relationships and its ability to operate within the UN framework. It’s becoming one of the largest funders of the UN framework. Meanwhile, Beijing is also investing in its own initiatives.

I mean, Joe, you can speak to this maybe better than I can, but the Global Governance Initiative, the Global Security Initiative, the Global Development Initiative, this slew of kind of frameworks for conversation that appear to kind of point toward what could be stood up as a replacement international rules-based order. So, it seems like there’s at least some kind of an interest in these frameworks and institutions and rules continuing to exist in some format.

The question is just like, without the U.S. sort of economic heft and military backing, who’s going to show up and who’s going to follow these rules, or who’s going to get involved in these initiatives? And I don’t know the answer to that.

Joe: Yeah, I think that’s exactly correct, Even, is that there’s these initiatives, they put out kind of a way of viewing the world. But I think there’s two problems, you know, if you want to think of them as an alternative to post-war economic and security architecture. The first is that they’re kind of predicated on the idea that everybody should do what they want and leave everybody else alone. Which say what you want about NATO and the post-war system, it was a lot more, I mean, robust in the sense that this is what we believe in. This is what we support. Everybody do what they want is not really a global governance strategy.

And I’m being maybe a little bit glib, but I think that’s sort of the foundation of Chinese foreign policy is that sovereignty to the max. And if you, again, yeah, just like you were saying, if you don’t have the institutional backing, either in economic or defense terms, there’s really only so far that those are a system as opposed to a series of kind of aspirational statements.

Andrew: Great observations. I think we could probably do a whole nother podcast on this. So, we won’t do that now. But maybe in the future, I will say, well, first I will say, Joe, I looked it up — the withdrawal from Afghanistan was 2021. So, for those...

Joe: I looked it up as well. Yeah, sorry.

Andrew: Well, no, yeah, I’m just putting that out there so that the listeners who were typing that email to you can stop because we’ve already acknowledged, trying to save your inbox.

Joe: Thank you.

Andrew: No, I’m kidding. We really appreciate our listeners engaging with us on all this content and pointing out when we make silly mistakes. But I just wanted to get that on the record. But I also wanted to say, I love these conversations. These debates around these big picture issues, again, for listeners a little bit behind the curtain, in Trivium, we don’t always get to debate these big picture issues, but Trivium always has these internal kind of dialogues and discussions and back and forth on how we think China views various things, how we think the world is evolving.

And that’s one thing for me, at least, that makes this job so much fun is to have those debates and discussions. And we try to bring a flavor of that to the podcast each week so that the listeners get the benefit as well. So, just want to say, Joe and Even, thanks so much for the interesting conversation today. As always, I really appreciate both of your time.

Joe: Yeah, it’s our pleasure. Thanks, Andrew.

Even: Yeah, it’s a pleasure to be here. Please have us back sometime when there’s not a war on.

Andrew: Well, that might be a while, but yeah, I’ll do my best. Really appreciate it. Yeah, and we’ll see you guys again soon. Thanks, everybody, for listening. Bye, everybody.